State Employee Legislative Update

State Employee Legislative Update - February 2007

This is the initial TPEA Legislative Update since the start of the 2007 legislative session. TPEA has been sending legislative updates as a free service to state employees since 2003. TPEA provides current information on issues of importance to state employees and retirees. In addition to specific information about the core issues of employee pay, health insurance and retirement, TPEA attempts to provide background and context to help readers understand the complexity of issues and the competitive nature of funding decisions.

In This Issue

80th Texas Legislature Convenes, Committees Appointed
Comptroller Releases Biennial Revenue Estimate, Fiscal Picture Complicated
TPEA Pay Raise Proposal
Health Care Issues
Retirement Issues
Don Green Running for Re-election to ERS Board of Trustees
State Employee Events in Austin March 6

The 80th Texas Legislature convened on Tuesday, January 9 for its 140-day Regular Session. Some of the major issues the legislature is expected to address include fulfilling promises to lower local school property taxes, efforts to increase accountability and graduation rates at state institutions of higher education, criminal justice reforms, statewide water management, and enactment of the next two-year budget for the State of Texas.

Lieutenant Governor David Dewhurst appointed committees in the 31 member Texas Senate, while Speaker Tom Craddick named committees in the 150 member Texas House of Representatives. Committee hearings have now begun on legislation and the state budget. General information about legislation, membership of committees, or scheduled hearings can be found at the Texas Legislature Online.

The committees of greatest importance to state employees are the budget writing committees, the 29-member House Appropriations Committee and the 13-member Senate Finance Committee. State Representative Warren Chisum (R-Pampa) has been newly appointed as Chairman of the House Appropriations Committee, while Senator Steve Ogden (R-Bryan) will again chair the Senate Finance Committee. By longstanding tradition, the Senate and the House take turns originating the state budget bill, the General Appropriations Act (GAA), which this session will be a House bill, HB 1.

Both the House and Senate will also continue to utilize smaller sub-groups of the budget committees to oversee particular issues and decisions. Of interest to state employees and retirees, in the Senate the working group overseeing state employee pay, health insurance and retirement issues will be led by Senator Robert Duncan (R-Lubbock), and includes Finance Chairman Steve Ogden (R-Bryan) and Senator Judith Zaffirini (D-Laredo). In the House Appropriations Committee, the Subcommittee on General Government chaired by Rep. Carl Isett (R-Lubbock) will consider health insurance and retirement issues under the Employees Retirement System (ERS), while the Subcommittee on Special Topics chaired by Rep. Dawnna Dukes (D-Austin)will oversee state employee pay and other related compensation issues.

State Comptroller Susan Combs issued her Biennial Revenue Estimate (BRE) for the upcoming FY 2008-09 biennium, which effectively sets limits on available revenue for budget purposes. Comptroller Combs’ first BRE projects that there will be $14.3 billion in available new revenue. Of this $14.3 billion, roughly half, $7 billion, is “surplus” revenue from the current biennium, and the Comptroller projects $7.3 billion in other new revenues over the course of the next biennium.

While the Comptroller’s revenue estimate might suggest the state is awash in cash, the Texas Constitution limits the rate of growth in spending from one biennium to the next. To implement this provision, the Legislative Budget Board has adopted a spending growth limit of 13.11 percent. However, the situation is even further complicated by the impact of the actions that the last Legislature took in resolving the public education finance issue. As part of that effort the Legislature committed to lower school property taxes by roughly one third. In order to achieve lower local school taxes, the Legislature instituted new and expanded state taxes that will be used to “buy down” school tax rates. Currently, funds used to lower local school taxes will count against the constitutional spending cap. The net effect of all these complications is that if the Legislature is to avoid draconian cuts in state spending it will either have to vote to exceed the constitutional spending cap, which may be politically difficult, or it may ask voters to redefine that cap by specifying that state funds used to lower local property taxes do not count against the limit. Stay tuned to see which course the Legislature takes.

Given the fiscal realities the Legislature faces, TPEA has developed a detailed pay raise proposal that is affordable but designed to protect and preserve the efficient functioning of the state workforce. TPEA’s two-pronged approach recommends “maintenance” raises of 2.5 percent in each year of the next biennium, with $75 a month minimum increases each year. These across-the-board pay raises are intended to maintain the value of state salaries relative to employee pay in the general economy. According to the State Auditor, average state employee pay lags average pay in the private sector by $4300 annually. Previous research suggests state employees are paid, on average, 15 to 20 percent less than other private and public employees for comparable work.

TPEA is also proposing that all general government state agencies be given additional appropriations of one half percent of gross payroll in FY 2008 and a full 1 percent of gross payroll in FY 2009 to fund merit pay awards and other rewards for productivity and high performance. This level of funding would allow an agency, for example, to give an additional 4 percent raise to a quarter of its workforce in the second year of the biennium.

The total biennial cost for this proposal, including both the maintenance pay raises and the merit funding, is estimated to be $374 million in General Revenue and General Revenue Dedicated funds and $602 million in All Funds. This is a realistic and responsible proposal that is intended to guide the Legislature in again making strategic investments in the state workforce to preserve it as a capable and efficient asset.

The Employees Retirement System (ERS) has initially estimated that it will require an additional $247 million in new appropriations above FY 2006-07 funding levels to maintain current health insurance benefits for employees of non-higher education state agencies. TPEA will actively work to gain adequate funding to maintain current benefits for active and retired state employees, including continuation of the current state health insurance premium contribution policy of full funding for retirees and full time active employees, and half the premium for dependent coverage.

Retiree health insurance is the most threatened state employee benefit. One proposal being discussed by legislators would change the law governing eligibility for retiree health insurance either by changing the length of state service needed to qualify, or by establishing a tiered contribution policy depending on length of service with the state. Current law pays the full insurance premium for retired (full time) employees who meet their full “rule of 80” obligations, or who have ten years service and are 65 years of age. The proposed change could require 15 years of state service to be eligible, or it could specify that, for instance, the state will pay half the premium after 10 years service, three quarters after 15 years, and the full premium after 20 years service. It is unknown how such proposals would apply to current employees, whether they would be grandfathered or whether, for example, such changes might apply to current employees with less than 10 years service. At the time this article was going to press no legislation addressing this issue had been introduced.

The threat to retiree health benefits extends beyond this one possible change. Employer paid health insurance for retirees is a vanishing benefit in the private sector. And, to add fuel to the fire, new national accounting standards (GASB 45) will require states and most other public employers to calculate the long term liability associated with post employment health benefits. Long term liability costs for ERS and TRS will likely be in the tens of billions of dollars. The Legislative Budget Board (LBB) studied this problem in its January 2007 Texas State Government Effectiveness and Efficiency report, and while it doesn’t prescribe a particular solution to this problem it did lay out a series of options that would either cut benefits or shift many costs to retirees. All current employees and retirees should pay close attention as this issue continues to develop.

TPEA expects there will again be a major legislative push to enact health savings accounts (HSAs) as an option under the ERS health plan during the 2007 session. TPEA opposed such legislation last session because of concerns that it would undermine the traditional health insurance plan, it would cause adverse selection that would lead to higher average costs, and it would actually cost the state more than our traditional plan. ERS was required to conduct a study of whether HSAs are a viable option for state employees and how such a plan should be implemented. That report is available on the ERS website.

Another proposal that could have a significant impact on the state employee health plan is an LBB recommendation to create a comprehensive state employee wellness program that would be funded through a surcharge of up to 1 percent of an employee’s salary. Only employees who chose not to take recommended action to reduce their health risks would pay the surcharge, which the report recommends be capped at $35 a month or $420 annually. Wellness programs typically utilize a Health Risk Assessment (HRA) to identify whether an employee is at risk for preventable conditions such as diabetes, heart disease, hypertension or obesity. If the HRA identifies such conditions or related risk factors there would be a recommended course of action, such as taking a prescribed medication, changing dietary or exercise habits, or quitting smoking. Under the LBB proposal employees who fail to take this recommended remedial action would be subject to the wellness surcharge.

TPEA supports the wellness concept. If done correctly employees have longer, healthier, more productive lives and the state has lower health care costs. The difficulty in establishing an effective wellness program lies in the structuring of incentives and disincentives, carrots and sticks, to encourage participation and healthy behaviors. The LBB wellness proposal relies solely on a single financial penalty for failure to take recommended action. A more expansive and balanced array of incentives and disincentives may be warranted. TPEA will continue studying this issue to see if further improvements are possible. The LBB report containing the wellness recommendation is available online.

Based on discussions with knowledgeable parties, TPEA believes there is a reasonable likelihood that legislators may use state dollars to help shore up the retirement
funds at both the Employees Retirement System (ERS) and the Teachers Retirement System (TRS). ERS is the retirement system for state employees, while TRS is the system for local school district employees and employees of state institutions of higher education. Both retirement funds are currently “underfunded” in that they have an accrued actuarial liability that cannot be amortized within their statutorily-defined 31 year funding period. Because of their negative funding status, neither fund has been able to provide a benefit enhancement in over five years.

There are several different options that legislators could take in addressing the needs of the two retirement systems, and they may consider a different approach for each system. The simplest approach would be for the state to contribute additional dollars to the retirement funds, thereby shoring up the funds financially and, presumably, speeding up their ability to provide a benefit enhancement for retirees. Under the Texas Constitution the state is obligated to contribute a minimum of 6 percent of covered employee salaries to both ERS and TRS. The state had been contributing at this minimal rate to both funds for a number of years, until last session, when it increased the contribution rate to ERS to 6.45 percent, which was the actuarially-determined normal cost contribution rate. An effort to similarly increase the state contribution rate at TRS was stymied by the deadlock over reforming public education finance during the Regular Session of the 79th Legislature.

Another variant on the “increase contributions” option that is under consideration would require increased contributions from employees. Employees under ERS make a retirement contribution of 6 percent of their salaries, while employees under TRS contribute 6.4 percent. Increased employee retirement contributions would bring the retirement funds back into actuarial soundness more quickly, particularly when coupled with an increased contribution by the state.

Another option that is also being considered could provide a benefit enhancement through a direct legislative appropriation that would be used to fund a supplemental payment or 13th check for retirees. This approach would provide a one-time benefit enhancement for current retirees, but would not improve the actuarial status of the retirement funds. A full 13th check for ERS (meaning each retiree would get an additional check for their normal monthly annuity payment) would cost roughly $100 million, the cost for TRS would be approximately $500 million. The Legislature could also fund a partial 13th check, paying half of the normal annuity payment, or other variations.

The final option that may be considered is to make statutory changes in the current retirement eligibility rules for ERS. There are a variety of such changes that could be considered. These could include, for instance: a change in the basic retirement “rule of 80” to a “rule of 85”, where an employee is eligible for full retirement benefits when their age and years of service combined equal 80 or 85; changes in the time period for which employees’ earnings are used to calculate their retirement annuity from the current 36 months highest earnings to, say, 60 months; imposing a minimum retirement age; or limiting the use of annual and or sick leave to accelerate retirement. While all of these alternatives have been looked at by legislators, no decisions have been reached about implementing them.

TPEA’s goal with regard to these alternatives is to restore the actuarial soundness of the ERS retirement fund and thereby allow a benefit enhancement for retirees, either in the form of a 13th check or an annuity increase. Our first priority is for enhanced state contributions to help shore up ERS. TPEA also supports a direct appropriation to fund a supplemental payment for retirees. The association opposes any radical change in retirement eligibility rules, such as moving to a “rule of 85”. TPEA would need to examine the specific details of any other proposed changes, including additional employee retirement contributions, to determine the potential benefits and costs.

Friday, February 2 was the deadline for employees to file petitions to run in the election to serve as a member of the Employees Retirement System (ERS) Board of Trustees. Three of the six members of the ERS Board are elected to staggered six year terms on the Board. Current Board Chairman Don Green of Austin has filed petitions to stand for re-election. As many as four other employees may have filed petitions. Candidates who have met the petition and eligibility requirements will be certified on February 14, and voting will begin on March 14 and continue until April 19. Employees, retirees and eligible former employees will have the choice of voting by mail, or online. TPEA encourages all eligible employees and retirees to get informed about the candidates and relevant issues. ERS Trustees oversee an agency that runs the $23 billion dollar ERS retirement fund, the state’s health group health insurance plan, TexFlex, and other benefit programs.

Texas Public Employees Association will host an All State Employee Celebration and legislative reception at historic Scholz Garten on Tuesday March 6 from 5 to 7 pm. Co-sponsored by the Department of Public Safety Officers Association (DPSOA), the All State Employee Celebration will feature complimentary beverages, a live band, snacks and door prizes. All state employees and retirees are invited to join us at Scholz Garten. Earlier that day TPEA will be holding its 4th annual Unsung Hero Awards at a luncheon at the Hilton Austin Hotel.