The Impact of Public Retirement in Texas

Current and upcoming rulings are changing public retirement for Texans. Two laws in particular—Senate Bill 321 and House Bill 3898—have significant implications for Texas citizens with public retirement plans. Learn more about this retirement legislation to determine whether or not you need to make changes to your retirement planning.

Current and upcoming rulings are changing public retirement for Texans. Two laws in particular—Senate Bill 321 and House Bill 3898—have significant implications for Texas citizens with public retirement plans. Learn more about this retirement legislation to determine whether or not you need to make changes to your retirement planning.

What Is Texas HB 3898?

HB 3898 went into effect on September 1, 2021, making several revisions to the Texas Government Code regarding public defined benefit pension plans. The rationale behind this bill stems from the fact that these pension plans are not subject to federal funding rules, nor do they have protection under the U.S. Pension Benefit Guaranty Corporation. In other words, their ability to pay beneficiaries depends on the supervision of state and local governing bodies and the groups managing the plans.

In the state of Texas, retirement rules dictate that plans for public sector workers be subject to multiple U.S. Internal Revenue Code stipulations, such as Sections 401(a), 403(b), and 457(b). These conditions excuse these plans from Employee Retirement Income Security Act (ERISA) requirements. As a result, these retirement plans are beholden to numerous state laws and the direction of the Pension Review Board (PRB) in Texas. The state considers various plans as designated for public sector employees, such as:

• Individually sponsored plans developed by state law or local ruling
• Statewide systems plans
• Plans created independent of a specific statute

Since this legislation only applies to public retirement benefits in Texas, it does not impact private employer plans or defined contribution plans sponsored by government groups.

What Does HB 3898 Entail?

The primary objective of HB 3898 is to encourage the groups managing retirement plans to collaborate with government bodies sponsoring them on funding matters. In general, fiduciary boards of trustees from separate government entities like the city council supervise public plans. Either public officials appoint these trustees, or plan members elect them to act in their best interest.

In Texas, public pension trusts hold over $250 billion in combined assets. Additionally, the tenure of plan trustees can cross various state or local administrations, and these pensions are often a point of discussion during political campaigns. When it comes to funding public employee pensions, these factors cause tension between plans and sponsoring organizations. By prompting plans and government bodies to work together to plan funding, HB 3898 hopes to protect retirement income.

Besides funding planning, the bill also contains provisions about the following aspects of public retirement:

• Written funding policies: Plans and sponsoring entities must create and adopt a written funding policy that features a strategy for attaining a funded ratio equal to or greater than 100%. It also details steps the plan must take after adoption.
• Funding Soundness Restoration Plans (FSRP): These plans provide steps for making an underfunded plan actuarially sound. For plans with amortization periods exceeding 30 years during three consecutive annual actuarial valuations, the plan and sponsoring groups must form an FSRP. The law also includes compliance standards for FSRPs.
• Review of investment practices:The bill adds ethical conditions to amendments made during the 86^th Legislative Session regarding independent investigations into investment practices. Additionally, it tells these review firms how to proceed after conducting the evaluation.

What Is Texas SB 321?

SB 321 goes into effect on September 1, 2022, to create a cash balance retirement for new state employees. The current state Employee Retirement System (ERS) pension fund is not actuarially sound and generates substantial debt regularly. Under this new retirement legislation, the ERS will gain an additional $510 million every year to develop a new plan to address this debt.

Under the present ERS-defined benefit plan, there is no benefit increase during retirement—13^th check or otherwise. Texas Legislature offered several benefit increases in the 1980s and 90s when the debt was lower, but no increases have occurred since 2002. When SB 321 passes, the ERS retirement trust fund will become sound quicker, and pensions may rise for current retirees.

While SB 321 does not affect current state employees directly, the Texas Public Employee Association (TPEA) response to ERS funding issues enables the Legislature to focus on pay increases and other benefits for state personnel.

What Does SB 321 Entail?

According to SB 321, new state employees will experience a vesting period of five years and be eligible for retirement at 65, with five years of service. Stipulations regarding Law Enforcement and Custodial Officer (LECO) service, Rule 80, and the Proportionate Retirement Program will remain under the new law. The defined benefit is the lifetime annuity based on the account balance and employer match.

In terms of the plan design, the member account balance will include 6% of their contribution (an extra 2% for LECOS), 4% guaranteed annual interest, and 50% gain sharing of surplus investment returns less than 3% in five years. Employers will make a 150% match. Employees with LECO service will obtain the 150% match on their ERS account balance, plus a 300% match on the LECOS account balance.

Under this new plan design, the annuity is determined using account balance, employer match, and age. Additionally, the annuity will attain gain sharing during retirement.

Seek Retirement Planning Services from Park Place Financial

If you are unsure what these laws mean for your retirement plans, turn to Park Place Financial for trustworthy solutions. Our team of certified financial planners (CFPs) uses a well-constructed process to examine your financials and make the most informed recommendations. We also can assist with necessary adjustments following updates in retirement legislation or changes in your goals.

As fiduciaries, we hold ourselves to a high standard of ethics and continually put our clients’ needs and wishes above our interests. Contact us today for help navigating retirement benefits in Texas or to schedule your complimentary financial checkup.