moody's investors service - texas report jan. 2015

U.S. PUBLIC FINANCE

SECTOR IN-DEPTH20 JANUARY 2015

ANALYST CONTACTS

Thomas Aaron [email protected]

Timothy Blake 212-553-4524MD-Public [email protected]

Moody's Public Pension Landscape Series

Cost Deferrals Drive Rising PensionChallenges for Texas and Some LocalsThis is one of a series of reports analyzing state and local government pension risks across theUS states.

Texas (Aaa stable) and some of its local governments' record of contributions belowactuarial levels will drive rising pension costs for those entities. The state has greaterflexibility to address these challenges than most of its local governments, which facegreater legal constraints and procedural hurdles (see Exhibit 1).

» Legal Framework and Reform Outcomes: The state has substantially more legalflexibility to reduce benefits than its local governments. Unlike state pensions, aconstitutional protection extends to most local government pension plans in Texas.The state has undertaken some reform efforts, such as increasing retirement agesand employee contribution requirements. Following a 2013 victory by the city instate court, litigation over the City of Fort Worth’s (Aa1 stable) pension benefitchanges is scheduled for trial in federal court in August 2015. The dispute centerson whether the state constitutional protection of local pensions locks in benefitformulas for the future service of current employees or alternatively allows forprospective benefit reductions.

» Distribution and Control of Plans: Pensions are widely disbursed among Texasand its local governments, and the amount of local control varies considerably. Forsome local plans, state statute guides benefits and contribution requirements, butin other cases, local governments and/or local pension boards of trustees have morecontrol.

» Cost Trends: The state and some local governments face rising pension costs drivenby years of contribution shortfalls. For example, the Employee Retirement System(ERS) has requested a 59% increase in the state’s contribution rate for fiscals 2016and 2017 in order to meaningfully reduce the growth rate of the plan's unfundedliability. Some local governments, but not all, face similar rising cost and unfundedliability challenges.

» Plan Demographics: Statewide, the ratio of active employees to retirees trackswell above national norms, although some plans are weighted more heavily towardretirees. This mix provides an additional time cushion to build plan assets comparedto plans with older demographics, where accrued benefit payments will draw on planassets sooner.

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2 20 JANUARY 2015 MOODY'S PUBLIC PENSION LANDSCAPE SERIES : COST DEFERRALS DRIVE RISING PENSION CHALLENGES FOR TEXAS AND SOME LOCALS

Exhibit 1

Texas and Some of its Local Governments Face Rising Pension Challenges



Legal framework and reform outcomes: The state has substantially more flexibility to reduce benefitsthan local governments» Ability to adjust benefits: Ranges from very flexible (state) to moderately flexible (most local governments).

State and local government pensions in Texas historically received very little legal protection, stemming from a 1937 courtcase, Dallas v. Trammell. The state's high court ruled that a more than 60% reduction in a retired police officer’s monthlypension due to benefit changes enacted by the City of Dallas (Aa1 stable) were legally allowable. The court opined that thecity’s legislative authority to amend benefit provisions exceeded the pensioner’s right to continue to receive accrued benefits, orany whatsoever.1

The precedent set by Trammell was altered in 2003, when voters approved a state constitutional amendment that prohibitedthe reduction or impairment of already accrued benefits for members of non-statewide retirement systems.2 As part of thestate constitutional amendment, local jurisdictions were given a one-time opportunity to opt-out with local voter approval.The cities of Denison (A1), Galveston (Aa3 stable), Houston (Aa2 stable), Marshall (A1), McAllen, Paris (Aa3) and PortArthur (A1) opted out, preserving their flexibility.3 The constitutional amendment also excluded the City of San Antonio’s (Aaa negative) police and fire plan because the state statute governing the city’s plan already provided an explicit contractualprotection, limiting the city's flexibility.

» Reforms and Litigation: Many state and local plans have implemented reforms that impact future employees, and increaseall employee contributions. The City of Fort Worth’s prospective benefit formula reforms that impacted current employeeswere legally challenged, with a trial in federal court scheduled for 2015.

Reforms

The bulk of the state’s pension costs are associated with the ERS, for which the state is the only government plan sponsor,and the Teachers Retirement System (TRS), where the state assumes responsibility for approximately three-quarters of planliabilities, including a substantial portion for local districts. The state implemented changes to TRS in 2005 that increased thefinal average salary (FAS) for pension benefits, impacting employees more than five years from retirement eligibility. At the sametime, the state increased the minimum retirement age for unreduced benefits for future hires. In 2013, the state implementedsimilar reforms, again increasing the minimum retirement age for future and certain non-vested, current employees.4

The state enacted similar changes to ERS benefits for future hires in 2009, when it raised the minimum retirement age,increased the number of number of years considered in FAS for pension benefits, and increased the minimum age for anunreduced retirement benefit. Then in 2013, the state again increased the number of years in FAS and increased the minimumretirement age for new ERS participants. The state also phased-in employee contribution increases, raising the employee rateto 7.5% from 6.5% of payroll incrementally from fiscal 2013-17. Despite these changes, the state will need to either increaseits contributions, enact additional benefit changes, or both in order to address plan funding challenges, according to planactuaries.5

At the local level, the City of Forth Worth enacted a number of benefit changes to the Forth Worth Retirement System in 2012that were applied to future service of current employees, such as reduced service multipliers and an increased number of yearsincluded in FAS. The changes were first recognized in the plan’s 2014 actuarial valuation, and reduced the reported unfundedactuarial accrued liability (UAAL) by $68.2 million, or approximately 6%.6 The prospective changes were originally appliedonly to general and police employees in the system because of an outstanding labor agreement with city firefighters. Followingthe expiration of that agreement in October 2014, the city applied the same changes to firefighters as well.Litigation

Given that the City of Fort Worth’s pension changes were enacted after the state constitutional amendment to protect accruedpension benefits, the litigation surrounding the reforms centers on whether that protection extends to benefit formulas thatapply to the future service of current employees.

https://www.moodys.com/credit-ratings/Dallas-City-of-TX-credit-rating-600007717

https://www.moodys.com/credit-ratings/Denison-City-of-TX-credit-rating-600026433

https://www.moodys.com/credit-ratings/Galveston-City-of-TX-credit-rating-600002034

https://www.moodys.com/credit-ratings/Houston-City-of-TX-credit-rating-600026473

https://www.moodys.com/credit-ratings/Marshall-City-of-TX-credit-rating-600026505

https://www.moodys.com/credit-ratings/Paris-City-of-TX-credit-rating-600027031

https://www.moodys.com/credit-ratings/Port-Arthur-City-of-TX-credit-rating-600026539

https://www.moodys.com/credit-ratings/Port-Arthur-City-of-TX-credit-rating-600026539

https://www.moodys.com/credit-ratings/San-Antonio-City-of-TX-credit-rating-600005236



The city preemptively sued its retirement system in order to obtain a determination related to its reforms’ compliance withArticle 16, Section 66 of the state constitution. In September 2013, a state lower court ruled that the city’s changes did notviolate the state constitution. However, two police officers sued the city in federal court over the constitutionality of the changes,and while the federal court stayed the proceedings until the state court case was completed, the trial is now scheduled for August2015 and city firefighters have announced their intention to join the suit. While the legal arguments center on whether currentemployees’ benefit formulas can be changed for future years of service, the plaintiffs also argue that the state court ruling shouldnot influence the federal court decision because the “city sued itself seeking a nominal defendant” and the city’s retirement funddid not “fully and vigorously” defend the impacted employees.7

In a separate case, the City of Houston filed a challenge to the state statute governing its firefighters' pension plan, seeking acourt decision declaring it unconstitutional. Among other items, the city asserted that the state law illegally delegates legislativepower to the pension fund and illegally regulates the affairs of a municipality because the city has little control over contributionrequirements and pension benefit levels for its firefighters.8 The city’s effort was unsuccessful, as the lower court rejected itspetition in May 2014.

Distribution and control of plans: Pensions are widely dispersed among Texas and its localgovernments, and the amount of local control varies considerablyDespite a large number of pension plans between the state and local governments in Texas, the bulk of Moody’s Adjusted NetPension Liabilities (ANPLs) are concentrated in one of the state’s single-employer plans, ERS, the multi-employer cost-sharingTRS, and individual employer accounts of two multi-employer agent plans, the Texas Municipal Retirement System (TMRS)and the Texas County and District Retirement System (TCDRS) (see Exhibits 2 and 3).

State: The state participates in four single-employer plans, the largest of which is the ERS. The state is also responsible for thelargest statewide system, the TRS, where it covers a substantial portion of local school district, public university and communitycollege district pension costs. The fund's most recently available estimate, based on fiscal 2013 data, calculates that the state isresponsible for 77% of TRS plan Net Pension Liabilities under new GASB 67 accounting standards.

School Districts, Public Universities and Community Colleges: Entities from each of these sectors in Texas participate inthe TRS. Given the prevalence of state pension payments on behalf of local participants in TRS, local entities are only allocatedthe portion of their ANPL, if any, corresponding to proportionate payment of contributions. In the case of community collegedistricts, the state reduced its support for TRS contributions in 2013 by passing Senate Bill 1812. The state capped its supportfor community college district pension costs at half of total contributions for instructional and administrative personnel,generating a budget savings for the state and increased costs for community college districts.

Cities: Cities have either one or more single-employer plans, and/or participate in the TMRS, a multi-employer agent plan.

Counties: Counties participate in the TCDRS, a multi-employer agent plan.

https://www.moodys.com/research/Moodys-US-Public-Pension-Analysis-Largely-Unchanged-By-New-GASB--PBM_PBM171874



Exhibit 2

Rated Texas State and Local Pension Participation Spread Among Many PlansEach circle represents one plan. The size of the circle is proportionate to the number of participating issuers in each plan.

Exhibit 3

Despite Presence of Many Plans, Texas State and Local Government Adjusted Net Pension Liabilities (ANPLs) Concentrated in Only a FewEach circle represents one plan. The size of a circle represents a plan's proportion of all ANPLs in Texas in Moody's database.

Exhibit 2 and 3 Note: Excludes entities that we do not rate. Some entities have more than one plan.

Exhibit 2 and 3 Source: Moody's pension database



Control of large city plan benefits and contributions varies among state statute, pension boards and city legislativeauthorityState statute governs state-only plans, TRS and the statewide multi-employer agent plans TMRS and TCDRS. Conversely,control of benefits and contributions for local single-employer plans varies between state and local control. In some cases statestatute solely governs local single-employer plans, while in other cases state law delegates authority to a combination of localgovernments and their pension boards. In this fashion, “local control” of a pension system does not necessarily mean that a localgovernment can enact benefit changes unilaterally. Instead, the local authority in some cases is granted to pension boards, or acombination of a city and its pension board through periodically negotiated agreements.

For example, twelve relatively large local single-employer retirement systems called “Title 109 plans” have contribution rates,benefits and the composition of their board set by state statute. However, the authority and procedures by which changes maybe enacted varies even amongst those twelve. The City of Houston, which has three Title 109 plans, negotiates “meet & confer”agreements with two of its pension boards that govern employer and employee contributions, benefits and retirement eligibility.In this fashion, the city’s police and municipal employee plans are governed locally, but that control is split between the city andpension board.

In contrast, benefits and contribution rates for Houston’s firefighter pension fund or San Antonio’s fire and police fund cannotbe modified by local agreements, and are instead defined in state statute. Completely opposite, the ability of the City of FortWorth to procedurally reduce benefits with only a notice to its retirement system board of trustees is uniquely flexible amongthe Title 109 plans.

Cost trends: The state and some local governments face rising cost pressure driven by contributionshortfallsThe state faces rising pension contribution requirements and unfunded liabilities stemming from its two largest plans, ERS andits share of TRS.

In the case of TRS, plan actuaries project employer contributions will grow, albeit at a moderate 3% annual pace through2024. These projections assume that the plan achieves its 8% investment return target each year, among other economic anddemographic assumptions. However, even if plan assumptions hold, projected contributions will not be sufficient to prevent theUAAL from growing by approximately 10% above its 2014 baseline level by 2019 (see Exhibit 4).Exhibit 4

Texas TRS Projects Moderate Growth in Employer Costs and Unfunded Liabilities

Projections assume 8% annual investment target and other assumptions are met.

Source: Texas TRS actuarial valuation.



The state faces a more rapidly growing cost and liability challenge from the ERS, where employer contributions haveconsistently fallen below actuarial requirements. According to the ERS 2014 actuarial valuation, 2002 is the last time that theplan “actuarially sound contribution” (ASC) was met. Further, the amortization is calculated as a level percent of payroll and iscalculated each year on a “rolling” or “open” basis. As a result, the number of years remaining to retire the UAAL under the ASCrequirement never decreases, even if the state were paying the ASC. Further, the UAAL will continue to grow infinitely barringbetter-than-expected actuarial performance (e.g. investment returns) each year. Assuming the plan achieves its annual investmentreturn target of 8% and without further changes to scheduled contribution rates, plan actuaries project that the reported ERSunfunded liability will grow by nearly 30% from 2014-19, double the 2010 level (see Exhibit 5).Exhibit 5

Contribution Shortfalls Drive More Rapid Growth in Unfunded Liabilities for Texas' ERSIf plan hits investment targets, doubling of unfunded liabilities from 2010-19 still projected

Source: Texas ERS actuarial valuation.

According to the ERS 2014 actuarial valuation, the state’s current employer contribution rate of 7.5% of payroll, whencombined with employee contributions and expected investment earnings, will not generate assets sufficient to cover all accruedbenefits payable in the future. As a result, the plan reports a projected “depletion date” of 2041 in its 2014 financial statements,which comply with the new GASB 67 pension accounting standards.

Under the new standards, the plan discounts all accrued, projected benefit payments after the depletion date using a municipalbond rate as of the measurement date. This rate was 4.17% for the ERS’s 2014 reporting. The plan continues to discountaccrued, projected benefit payments prior to the depletion date using the 8% assumed rate of investment return. The resultingsingle-equivalent discount rate that drives the plan’s GASB 67 reporting for fiscal 2014 is 6.07%, nearly 200 basis points lowerthan the discount rate under the previous GASB 25 accounting standards. Thus, the new accounting brings the reported NetPension Liability of ERS closer to Moody’s Adjusted Net Pension Liability, which in comparison is based entirely on a 4.11%discount rate for ERS’s 2014 reporting (see Exhibit 6).



Exhibit 6

ERS Reported Net Pension Liability Moves Closer to Moody's ANPL Under New Accounting StandardsSame plan economic condition, but projected asset depletion drives down “single-equivalent” discount rate for financial reporting, increases reportedliabilities

Source: ERS actuarial valuations and Comprehensive Annual Financial Reports (CAFRs)

In order to prevent the ERS from having a projected depletion date and thus using an 8% rate to discount all liabilities, thestate would have to increase its current contribution rate by 59% according to plan actuaries, from 7.5% of payroll to 11.94%of payroll. The ERS system is seeking a state increase to the 11.94% level as part of its legislative appropriations request for thefiscal 2016-2017 biennium.

Beyond the state’s largest plans, contribution shortfalls like those described above are not the norm for all public pension plansin Texas. Only 8 out of the 81 public pension plans throughout the state that are both pre-funded and remain active havereceived less than 80% of the ARC over the past seven years. Many plans have received the entire ARC, or more, over the sametime period (see Exhibit 7).Exhibit 7

Most Public Pension Plans in Texas Collected at Least 80% of the ARC Over Past Seven Yearsn = 81

Source: Texas Pension Review Board, “Study of the Financial Health of Texas Public Retirement Systems.” December 2014

TMRS contribution rates to remain stable for most9

The Texas Municipal Retirement System (TMRS) is a multi-employer agent plan covering nearly 850 municipalitiesthroughout the state, though it is treated in Exhibit 7 as one aggregated data point with 95% of the ARC contributed from allemployers combined (which arguably understates the preponderance of contributions at or very close to the ARC). State law



requires participating employers in TMRS to fully fund the ARC as determined by the TMRS board. However, when changesto actuarial assumptions were adopted in 2007, participating employers could elect to phase-in the increases through 2016.Those that chose the phase-in option pay less than the ARC until the full rate is reached. The system is also allowing certainparticipating employers to phase-in the rate impact of additional changes to actuarial assumptions that were adopted in 2013.9

While varied on an individual basis, contribution rates for TMRS employers in aggregate have remained relatively stable overthe past decade. For example, a typical employer paid 10.8% of payroll in 2003 and will pay 12.8% of payroll in 2015. Planactuaries also project that rates will remain near 2015 levels over the next decade if the plan meets its 7% investment returntarget and other assumptions. Finally, the average amortization period for a TMRS plan has fallen to approximately 23 years.As a result, plan actuaries project that within approximately the next two years, the average employer's contributions will besufficient to begin reducing plan unfunded liabilities.10

Varied contribution records and trajectories for single-employer plans11

The relation of past contributions to actuarial requirements varies for single-employer plans throughout the state, as does anyresulting upward pressure on future costs resulting from cost deferrals. The contribution history for the single-employer plans ofthe four most populous cities in Texas not only highlights this variation, but underscores the variation in state and local controlover public pension systems previously discussed.

City of AustinAustin (Aaa stable) participates in three single-employer plans, one for general employees, and one each for police andfirefighters. The provisions governing contributions to Austin's three plans are similar, in that state law sets benefits andminimum employee and employer contributions. However, the city can authorize additional contributions to address planfunding needs at its discretion, a step it has taken.

Employees in the city's general employee plan, the City of Austin Employees' Retirement System (COAERS), contribute 8%of payroll. While the city must also contribute at least 8%, it implemented an “Amended Supplemental Funding Plan” in2010, which phased-in additional city contribution increases and concurrently sought state legislation implementing a lowerbenefit tier for employees hired after January 1, 2012. As a result, the city has increased its contribution rates over time, reachingthe current 18% of payroll in 2013. The employer contribution rate increase has brought the city's contributions in line withplan actuarial requirements following years of shortfalls. From 2003 to 2011, the city only contributed between 58% and82% of the ARC, while in 2012 and 2013, its contributions slightly exceeded the GASB ARC funding benchmark. Despitethis improvement, plan actuaries project the fund's unfunded liability will grow until at least 2024, assuming no changes tocontribution rates and annual investment returns of 7.75%.

Contributions to both of Austin's public safety plans are not locally determined, but instead are set by state law. For example,the state statute governing the city's firefighter plan sets the city's contributions at 18% of payroll. The state has increasedthe city's contribution rate steadily for police, from 17.9% of payroll in 2008 to the current rate of 21.6% of pay. Over thesame time period, however, the plan's reported unfunded liability has grown from $229 million to $306 million. The currentcontribution rates are projected to amortize the unfunded liability in approximately 29 years on a level percent of pay, openbasis. While this suggests that current contributions are inadequate to prevent the reported unfunded liability from growing forthe forseeable future, the plan's GASB 67 analysis does not project a depletion date.

City of DallasDallas has two main single-employer plans, its Police and Fire plan and the Employees’ Retirement Fund. State statute governsthe basic parameters of the public safety plan, setting rules for the determination of benefits and contribution requirements.For example, the members of the pension plan can vote to amend future benefits. The city’s contribution rate is determinedaccording to a schedule within the statute and is a direct function of employee contributions. Since the highest employeecontribution into the system is currently 8.5% of payroll, the city must contribute 27.5% of payroll unless it elects to contributemore. However, the statute also limits the city’s contribution to a maximum of 28.5%, unless voters authorize a higher rate orthe legislature changes the statute. In recent years, the city’s 27.5% contribution rate has resulted in slight ARC underfunding

https://www.moodys.com/credit-ratings/Austin-City-of-TX-credit-rating-600026395



for the public safety plan, suggesting that the reported unfunded liability will continue to grow without contribution rateincreases, benefit changes or better than expected plan experience (e.g. investment performance).

Conversely, city ordinance governs the city’s plan covering general employees, the Employees’ Retirement Fund. A voterapproved funding procedure began in 2005, when the city (63%) and employees (37%) split the cost of a “current adjustedtotal obligation rate”. This rate includes debt service associated with 2005 pension obligation bonds plus the total plan ARC,with the UAAL amortized as a level percentage of payroll on a 30-year, open basis. An increase in contribution rates can onlybe triggered if the updated adjusted total obligation rate differs from the previous year by more than 3% of payroll. While thisframework limits contribution rate changes to years with material changes in plan funding needs, it has also resulted in thecity’s contribution tracking consistently below actuarial requirements. The plan's actuarial valuation illustrates that the city'scontribution tracked near 65% of the employer ARC from 2009 to 2013.

City of HoustonHouston’s three single-employer plans each have a unique employer contribution history and framework. An annual actuarialvaluation generally determines the city’s contribution rate for its police plan with the unfunded liability being amortized overa 30-year, open period. However, the city negotiated with the pension board in 2011 to determine employer contributions forfiscals 2012 through 2015 that have fallen short of the ARC. For example, the city’s fiscal 2014 payment was approximately71% of the actuarially determined amount. The agreement also calls for the city’s payment to grow by only $10 millionannually, which is projected to result in a 78% increase in the plan's reported UAAL from 2013-23 if the plan hits itsinvestment return target of 8.5%.

Historical contributions to the city’s municipal plan are similar, in that contributions negotiated with the pension board havefallen below actuarial requirements. Aside from 2005 when the city used debt proceeds to bolster its contribution, it has notcontributed at an actuarially required level since 2003, according to the plan actuarial valuation. Future city contributionincreases will be the greater of a 2% of payroll increase or $10 million until the city meets the actuarially determined rate, atwhich time the plan’s amortization method will switch to a closed basis. Plan actuaries projected this will occur in 2015 andforecast that the city’s contributions (in dollars) will increase by an average of 8% through 2018, and by a more moderateaverage of 3% for the five years thereafter. These projected contribution increases will not prevent the plan’s unfunded liabilityfrom growing, even if the plan’s 8.5% annual investment return target is hit. Under this baseline scenario, the plan’s unfundedliability will grow to $2.3 billion by 2023 from $1.7 billion in 2013, an increase of 30%.

Unlike its other plans, the governing provisions of Houston’s firefighter pension plan cannot be modified through agreementswith the pension board, but instead are governed by state statute. This difference was the focus of the city’s lawsuit mentionedin the previous section of this report. As a result, the city’s recent contribution history matches up with the actuarial requirementof the plan every three years, the most often the board can reset the city’s contribution rate under state law. While the city’scontribution must be at least double the employee contribution rate of 9%, the board can add to the requirement in order tomatch with actuarial requirements. For example, the actuarially determined rate for 2007 was 29.4% of payroll, a rate which thecity paid for fiscals 2007 through 2009. For fiscal 2015, the city’s contribution rate is approximately 34% of payroll, accordingto the city’s court filing.

City of San AntonioState law sets the city’s employer contribution to its Police and Fire pension fund at 24.64% of payroll. As a result, the city’scontribution rate will remain stable at that rate going forward unless state law changes. Currently, the city’s rate is sufficientto cover the city’s normal cost and amortize the unfunded liability as a level percentage of pay very rapidly. The results of thelast plan valuation indicate that the unfunded liability is on schedule to be fully amortized in less than eight years using theactuarial value of assets, or approximately 12 years using the market value of assets. San Antonio also has a TMRS agent plan forits general employees.

The wide variation in plan funding described above translates into a similarly dispersed impact of pensions on the credit profileof the largest Texas cities. For example, San Antonio not only paid its actuarial costs in fiscal 2013, but also exhibits the smallestMoody's ANPL compared to its operating revenues among the four cities. Conversely, 2013 financial results for both Dallas and



Houston included the underfunding of actuarial costs. These two cities with multi-year trends of contribution shortfalls alsounsurprisingly exhibit the higher Moody's ANPLs compared to their large city peers (see Exhibit 8).Exhibit 8

Pensions Have a Broad Credit Impact on the Largest Cities in Texas, as Indicated by Several Key MetricsData based on fiscal 2013 reporting

CityReported Actuarial Costs as % ofOperating Revenue

Reported Contributions as %Operating Revenue

% of Total Actuarial CostsContributed (Fiscal 2013)

3 Year Avg. Moody's ANPL(2011-13) / Operating Revenue

Austin (Aaa) 10.8% 11.9% 111% 2.9 timesDallas (Aa1) 11.9% 10.3% 84% 4.2 timesHouston (Aa2) 14.0% 10.1% 74% 3.5 timesSan Antonio (Aaa) 6.7% 6.7% 99% 1.3 times

Note: Moody's has netted out support from utility funds and non-operating funds to generate all of the above data points.

Source: Issuer CAFRs, Moody's Investors Service

Plan demographics: Statewide ratio of actives to retirees tracks well above national normsThis relatively beneficial mix of active employees and retirees for some plans in Texas provides additional time cushion tobuild-up assets and stabilize or reduce contribution burdens. For example, the TRS has approximately 2.4 active employees foreach current retiree, well above the national norm of 1.6. Unfunded liabilities present a shorter-term challenge to participatinggovernments in plans with a greater share of retirees because accrued benefit payments are generally due sooner, and thus willrepresent a draw on plan assets sooner.

The state does not enjoy the same demographic benefit with all of its plans. Whereas the TRS has a very high ratio of actives toretirees, at 1.4 in 2013, the ERS actually falls slightly below the national average (see Exhibits 9 and 10). For all public plans inTexas combined, the ratio of actives to retirees in 2013 was 2.2.Exhibit 9

Large Statewide Plans Show Varying Demographic Mix, Divergent Funding Progress Under New Accounting Standards

Plans ERS TRSSectors Impacted State only State, school districts, community colleges, state universitiesPlan Type Single-Employer Multi-employer cost-sharingParticipants in SocialSecurity?

YesSome

Actuarial Cost Method Entry Age Entry AgeActuarial Valuation Date 8/31/2014 8/31/2014Moody's ANPL (billions) $25.0 $125.8Reported Unfunded Liability $14.5 $31.6As-Reported Funded Ratio 63.4% 83.2%Projected Depletion Date(GASB 67)

2041None

Assumed Discount Rate 6.07% 8.00%Assumed Rate of Return 8.00% 8.00%

Year % of ADC Paid Investment Returns Actives / Retirees % of ADC Paid Investment Returns Actives / Retirees2005 87% 13% 2.0 82% 14% 2.92006 87% 9% 1.9 83% 10% 3.02007 89% 14% 1.9 85% 14% 2.92008 90% -5% 1.8 102% -4% 2.92009 68% -7% 1.9 108% -14% 2.92010 63% 7% 1.8 86% 11% 2.82011 59% 13% 1.7 86% 16% 2.72012 49% 8% 1.5 74% 7% 2.52013 51% 10% 1.5 74% 9% 2.42014 66% 15% 1.4 79% 17% 2.4

Source: Plan CAFRs and actuarial valuations



Exhibit 10

Largest Pension Plan in Texas Heavily Weighted Toward Active Employees Rather Than RetireesProvides demographic cushion more than national norms and comparisons

“CalPERS” is the California Public Employees Retirement System. “MPSERS is the Michigan Public School Employees Retirement System. 2013 US Census data point projected byMoody's.

Source: US Census Annual Survey of Public Pensions, plan CAFRs and actuarial valuations



Endnotes1 Texas Legislative Council. “Analysis of Proposed Constitutional Amendments: Amendment 15” (2003).

2 Texas State Constitution. Article 16, Section 66.

3 State Pension Review Board. “2013 Guide to Public Retirement Systems in Texas.”

4 Employees Retirement System of Texas. “Issue Brief: ERS and TRS.”

5 Employees Retirement System of Texas, 2014 actuarial valuation.

6 Employees' Retirement Fund of the CIty of Fort Worth. January 1, 2014 actuarial valuation and review.

7 Van Houten and Hall v. City of Fort Worth. “Plaintiffs' Brief in Opposition to City's Amended Motion for Summary Judgment.” US District Court for theNorther District of Texas, filed September 19, 2014.

8 City of Houston v. Houston Firefighters' Relief and Retirement Fund. “Plaintiffs Original Petition and Application for Injunction.” District Court of HarrisCounty, Texas, filed January 22, 2014.

9 “Texas Municipal Retirement System Actuarial Valuation Report as of December 31, 2013.” Presentation by Gabriel Roeder Smith & Company, May 15,2014.

10 State Pension Review Board. “Study of the Financial Health of the Texas Public Retirement Systems.” December 2014.

11 Information sources for this section include issuer CAFRs, plan CAFRs and plan actuarial valuations.



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AUTHORTom Aaron

DATA VISUALIZATIONLisa Mahapatra

moody's investors service - texas report jan. 2015

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