May 2008

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Action Needed for ERS Retirees, Pay Raises, and Health Insurance

By Andy Homer,
Director of Government Relations

At their April 5th meeting, the TPEA Board of Directors unanimously approved the proposed Legislative Agenda for the 2009 legislative session. This proposal will next be voted on by TPEA’s membership at this year’s Annual Conference in Houston on Saturday, June 28. As has been the custom for a number of years, TPEA’s Legislative Agenda focuses on the core economic issues affecting state employees and retirees—making the ERS retirement fund actuarially sound and thereby allowing for issuance of a 13th check for state retirees; working for adequate pay raises and other needed compensation increases for active employees; and maintaining current health insurance benefits for both active and retired employees. All the elements of TPEA’s Legislative Agenda are equally important, but there is an added urgency to getting a 13th check for ERS retirees. This is unfinished business from the last legislative session, and it is a gross inequity that TRS retirees received a 13th check in January of 2008 while ERS retirees have not received any type of benefit enhancement since January of 2002.

13th Check Overdue, ERS Needs Additional Contributions

While retirees under the Teacher Retirement System (TRS) were granted a 13th check in January of 2008, ERS retirees have not received any type of benefit enhancement since January of 2002. Based on our review of TPEA records, it appears that this is already the longest continuous period of time that retirees have gone without some type of benefit enhancement since the creation of the Employees Retirement System in 1947. To make matters worse, even if TPEA is successful during the 2009 session in getting legislation enacted that will enable ERS to grant a 13th check, actual payment of this benefit may not occur until January of 2010. Given the prolonged absence of any ERS benefit increase, and the gross inequity resulting from the fact that TRS retirees were granted a 13th check this year, state retirees are both deserving and long overdue for a 13th check or other benefit enhancement.

There is nothing automatic or guaranteed about benefit enhancements for retirees. Employees are guaranteed a lifetime annuity based on the formula in place when they retire. Unlike Social Security and some other pension plans, there is no automatic cost of living adjustment (COLA) for any state-funded retirement plan under either ERS or TRS. Furthermore, state law prohibits any type of benefit enhancement when the retirement fund is not “actuarially sound”. Under current law, actuarial soundness means that ERS can pay off, or amortize, all of its unfunded accrued liabilities within the statutorily defined funding period of 31 years.

TPEA has analyzed the actuarial status of the ERS Trust and it is apparent that unless the aggregate (employer and employee) contribution rate is permanently increased the prospects for benefit enhancements now and in the future are pretty dismal. So, it is not just current retirees who will benefit from increased retirement contributions, current employees also substantially improve the likelihood that they will be able to receive benefit enhancements during their retirement.

Simply stated, the current combined state (6.45 percent) and employee (6 percent) retirement contribution rate of 12.45 percent is not sufficient to make ERS actuarially sound. While the ERS funding ratio of 95.6 percent is excellent relative to comparable retirement funds nationwide, ERS has a roughly $1 billion unfunded accrued liability (UAL). The 12.45 percent combined contribution rate covers the “normal cost” of paying for benefit accruals for active employees, but it is not sufficient to pay off the unfunded accrued liability, which would continue to grow. As a result, with current contribution rates, no benefit enhancements for retirees will be legally possible unless either ERS has abnormally high investment returns, or benefits are reduced by imposing changes such as a “rule of 85” or other benefit reductions.

Dickie Travis, a retired state employee and member of TPEA’s Board of Directors, who served as Executive Director of ERS during his career commented, “If you look closely at the numbers, current contribution rates simply won’t get the job done. And we can’t expect investment returns to dig us out of the hole we’re in. ERS already assumes an 8 percent annual return, so we have to earn 8 percent every year just so we don’t fall further behind. TPEA came close to working this out last session, and I’m hopeful we’ll be successful in 2009, but it won’t be easy.

After careful study and discussion, the TPEA Board of Directors and staff have concluded that the best course of action is to work with legislators to seek enhanced retirement contributions from both active employees and the state, at a level that will enable the issuance of a 13th check and assure the long term actuarial soundness of the fund.

Figure 1 - TPEA's Proposed Benefit Contribution Increases

Based on the most recent estimates from ERS a combined state and employee contribution rate of 13.1 percent would be necessary to make the fund actuarially sound. TPEA believes it would be appropriate to increase the active employee contribution rate from its current rate of 6 percent to 6.4 percent, which is the rate that TRS participants already pay. The state would then need to increase its contribution from 6.45 percent to 6.7 percent [see fig. 1]. In addition, TPEA is committed to gaining support for pay raises for all employees that will more than offset the increased cost of employee contributions. The .4 percent increase in the employee contribution rate would cost $8.33 monthly at $25,000 pay, $10 monthly at $30,000 pay, and $13.33 monthly at $40,000 pay. Employees should get this money back in the longer term in the form of retirement benefit enhancements that would not otherwise occur.

TPEA also looked at the cost and likelihood of getting an annuity increase approved by the legislature. This option is more beneficial for retirees over the long term, since it would permanently increase retirees’ annuities by, for example, 5 percent. However, a permanent annuity increase is much more expensive in actuarial terms and would require a significantly higher contribution rate than a 13th check. For example, while a 13th check might cost the retirement fund $90 to $100 million, a 5 percent annuity increase could cost in the neighborhood of $575 million. Consequently, TPEA does not believe the legislative prospects for an annuity increase are good at this time, but such an increase will remain a goal of TPEA.

All active and retired state employees, whether TPEA members or not, should communicate with legislators about the importance of getting an equitable benefit enhancement for ERS retirees, just as TRS retirees received in January. A sample letter to legislators is available on page 5, or can be downloaded from the TPEA website. TPEA encourages our members to communicate with your local State Representative and State Senator. TPEA has also met with the leadership of the Department of Public Safety Officers Association (DPSOA) and we have agreed to work together on this issue next session.

State Employee Pay—Major Problems Need Legislative Attention

The state workforce faces several serious problems that all stem from inadequate employee compensation. On average, state pay lags behind that paid by other public and private employers for comparable work by 15 to 20 percent. Because of this low pay, state agencies have difficulty attracting and retaining well qualified employees. High turnover among employees, 17.8 percent in the most recent year, is an expensive and wasteful problem across all of state government. But particular agencies and certain occupational categories are experiencing critical levels of turnover, 20, 30 and even 40 percent annually. Turnover at these levels may threaten the ability of agencies to adequately provide necessary public services. Finally, state agencies lack discretionary merit pay funding to motivate and reward their more productive employees; this has increased morale problems and lead to the current situation where most employee pay is clustered at or near the bottom of their pay range.

TPEA developed a three-part legislative proposal to deal with these problems head on. Inadequate employee compensation, low pay, is the primary culprit in excessive turnover and other identified workforce problems. The results of the state’s employee exit survey show that inadequate compensation is by far the largest cause of employees leaving state employment. Results of TPEA’s 2007 Employee Survey provide further evidence of the primacy of low pay in causing turnover and other workforce problems.

Gary Anderson, TPEA’s Executive Director, said “If you look at the past decade or more in state government, it’s been like a rolling crisis, with excessive turnover affecting different agencies and occupational groups. At the beginning of the decade, during the high tech boom, we couldn’t keep information technology employees in state government. We’ve had persistent turnover problems among correctional staff at TDCJ. HHSC, staffing at State Schools and Hospitals, Child Protective Services, all of these agencies have had serious turnover problems. And we recently experienced what is probably close to a melt down at the Texas Youth Commission, where turnover among juvenile correctional staff exceeded 40 percent. The simple fact is, state government has been chronically underfunded and state employee pay is inadequate. Legislators need to invest in the state workforce to begin getting ahead of these problems.”

TPEA’s proposed Legislative Agenda for 2009 is intended to help stabilize the state workforce generally by providing cost of living raises for all employees in both years of the next biennium—3.50 percent in FY 2010 and 4 percent in FY 2011. TPEA supports appropriate monthly minimum dollar increases in both years, so that lower paid employees will receive meaningful raises. These pay increases are intended to prevent further slippage in the competitive position of state compensation relative to the overall employment market and, hopefully, to help prevent or mitigate a turnover crisis at yet another state agency or occupational group. TPEA believes it is important that the legislature again authorize pay raises in both years of the next biennium, as this is the most cost effective way to try to maintain or improve the competitive status of state compensation.

In addition to general pay raises, TPEA believes a second tier of pay raises, of 2 percent each year, is needed for occupational groups that are experiencing ultrahigh turnover. For analytical purposes, TPEA pegged excessive turnover at over 20 percent annually. Figures from the most recent report on turnover from the State Auditor’s Office (SAO) show that roughly a third of the state workforce is in occupational categories with annual turnover rates exceeding 20 percent (see www.sao.state.tx.us/reports/main/08-703.pdf).

These proposed larger pay raises for occupational groups with ultra-high turnover are a recognition that a greater investment of resources is needed to better stabilize those areas of the workforce.

State leaders appear to understand that inadequate compensation is the primary cause of turnover and staffing shortages. The Board of the Texas Department of Criminal Justice recently approved interim pay raises for some TDCJ correctional staff to try to deal with the agency’s 3500 correctional officer (CO) shortage. Starting pay for new COs was increased 10 percent, pay for CO II positions was raised 8 percent, and the career ladder was shortened. While TPEA supported these changes, pay for more senior correctional staff was not increased, which will have to be remedied by the next legislature. TDCJ will also begin paying recruitment bonuses to new personnel who agree to serve at severely understaffed prison units. The Texas Health and Human Services Commission similarly increased pay for eligibility workers to try to deal with staffing shortages resulting from the state’s failed privatization effort.

Finally, TPEA is also requesting new funds for all general government state agencies to provide merit salary awards for deserving employees. Merit funds are intended as a management tool to reward employee productivity and efficiency and to change employee expectations. TPEA is requesting one half of one percent of gross agency payroll in FY 2010 and one percent of gross payroll in FY 2011. Merit pay is also necessary to begin distributing employee pay more appropriately throughout state pay ranges. Employee pay is concentrated in the bottom half of pay ranges, largely because of a lack of funding for merit salary awards.

TPEA believes that the three-pronged employee pay package in the proposed Legislative Agenda is the proper framework to help stabilize the state workforce and attack turnover and the other problems afflicting state government.

Maintain Healthcare Benefits, Lower Long Term Health Costs

After all of the changes and cost increases to the state health insurance plan in 2003, state employees and retirees have had a much deserved 5 year period with no increases in copayments, deductibles or other out of pocket costs, as well as fairly minimal increases in insurance premiums for dependent coverage. Ann Fuelberg, the Executive Director of ERS, recently announced that for FY 2009, beginning on September 1, 2008, there should again be no increases in participant costs, and premiums for HealthSelect will remain the same (although HMO premiums may increase).

TPEA’s goal for the 81st legislative session is to maintain current health benefits and the state’s insurance premium contribution policy, for both active and retired employees, for another two years. The state currently pays the full insurance premium for full time active employees and retirees, as well as half the cost of dependent coverage.

The recent stability in health benefits and costs are largely the result of three factors—good work by ERS in controlling health care costs through competitive procurement of medical and drug benefits; a general reduction in the rampant, double-digit health care inflation that plagued employers across America for the first half of this decade; and, decreased medical and drug utilization as a result of the 2003 increases in out of pocket costs for plan members.

This is not to say that it will be easy to get funding approved to maintain current health benefits. TPEA’s best estimates are that it will require somewhere in the neighborhood of $200 to $300 million in new state funding to maintain benefits over the next biennium. ERS has been taking steps to help keep costs low. ERS recently rebid its contract for Pharmacy Benefit Manager (PBM), which has been held by Medco for a number of years. It now appears that a different provider, Caremark, will become the PBM for the ERS health plan for the next four years, beginning on September 1, and with substantial additional cost savings to the state, estimated at $265 million over the four years of the contract. These savings will reduce the amount of additional funds ERS will need to maintain current benefits.

TPEA is also committed to working to expand wellness programs to further slow the growth in health care costs. A majority of health care costs are related to diseases or medical conditions that can be treated or prevented through changes in lifestyle and diet. TPEA encourages all employees and retirees to undergo a simple health risk assessment to determine whether you have particular risk factors and what sort of behavioral changes or medication can help to control these risks. TPEA will also push for the creation of a smoking cessation benefit under the ERS health plan, to help smokers quit and reduce the long term health care costs associated with smoking.

Get Involved, Communicate with Legislators

As is always the case, it is vitally important that employees and retirees communicate with legislators and other state leaders about our issues. TPEA’s Legislative Agenda is focused on the core economic issues affecting active and retired state employees, and this means that our issues require substantial funding by the legislature. Competition for limited funds in the legislative process is fierce. The more involved and vocal employees and retirees are, the better TPEA can compete in the legislative environment.

There are a number of things that you can do to help with TPEA’s advocacy efforts. Share this article with co-workers or fellow retirees and ask them to join TPEA and get involved in our advocacy efforts. Consider writing a letter to the editor for your local newspaper to help raise the visibility of our issues, TPEA staff can help with this. And, most importantly, communicate with your local legislators! If they don’t hear from state employees and retirees, they won’t make efforts on our behalf. Write a letter. Call your State Representative and State Senator and discuss our Legislative Agenda. Go to a campaign event and seek an opportunity to discuss our issues.