State and local pension plans face huge challenges: costs have skyrocketed, debt is at historic levels, and investments are riskier than ever. While it is convenient to blame unexpected economic events for public pensions’ current problems, the real culprit is shortsighted policy decisions made by plans and their government sponsors. For public pensions to be sustainable, governments must improve decision making around pension funding, benefits, and investments. Unfortunately, the current governance model does not encourage prudent policy decisions. […]

Given the budgetary risk that public pensions create, states should pursue solutions that constrain pension decision makers so that the bad incentives inherent in the current system do not lead to catastrophic policy results.

Texas provides an example of how to exercise oversight of, and check poor decision making by, public pension plans. The Texas Pension Review Board (PRB) is a state agency tasked with overseeing the state’s 90-plus defined-benefit public pension plans. PRB’s core responsibilities include: 1) collecting, analyzing, and publicly disseminating comparative data that include the fiscal health, governance, and benefits of state pension plans; 2) providing technical assistance, education, and advice to pension systems and their government sponsors; and 3) advising and making recommendations to the governor’s office and legislature.

In short, PRB provides local government sponsors, state policymakers, and taxpayers with independent, unbiased support on all issues related to public pensions. While PRB does not have regulatory authority, its oversight has had a substantial impact in several ways. The agency’s transparency efforts (such as the Texas Public Pension Data Center) and reports have deepened stakeholder understanding of pensions, leading to a more data-informed policy debate.

PRB’s intensive plan reviews and best-practice guides have resulted in meaningful positive changes to many of Texas’s pension plans, including the Galveston police retirement plan. PRB’s technical assistance and policy recommendations have directly informed pension-reform legislation—most recently, for Dallas and Houston. These examples, which will be discussed in more detail below, are why a leading credit-rating agency has cited PRB oversight as a positive factor for the state’s financial stability. Other states should consider adopting PRB-like models to mitigate the risk that underfunded pensions pose to their budgets.

PRB Structure and Responsibilities

The Texas PRB was created in 1979 because the legislature saw the need for a single entity that was charged with “appraising and making recommendations with respect to the State’s public pension laws.”[3] Chapter 801 of the Texas Government Code establishes the agency and lays out its governance structure and duties.[4] States that wish to implement their own pension review board can use the Texas statute as a model guide. It is well structured and would be relatively easy to modify to fit the local context (see also the Appendix).

The agency has seven board members, all of whom are appointed by the governor and confirmed by the state senate. PRB board positions have specific experience/expertise requirements that cover a range of areas, and five of the seven are required to have specific technical expertise related to pensions.

The legislation that established PRB requires that the board include:

  • Three persons who have experience in the fields of securities investment, pension administration, or pension law but who are not members or retirees of a public retirement system
  • One person who is a fellow of the Society of Actuaries, a member of the American Academy of Actuaries, or an enrolled actuary under the federal Employee Retirement Income Security Act of 1974 (ERISA)
  • One person who has experience in the field of government finance
  • One person who is a contributing member of a public retirement system
  • One person who is receiving retirement benefits from a public retirement system
  • PRB’s enabling statute clearly establishes the agency’s oversight role and responsibilities. The legislation lays out eight specific responsibilities.

PRB’s enabling statute clearly establishes the agency’s oversight role and responsibilities. The legislation lays out eight specific responsibilities. The paragraphs below describe each of these responsibilities and provide concrete examples of how PRB fulfills them. […]

Read the rest of this report here.

_______________
This article republishes selections from “The Texas Pension Review Board: A Model for Nationwide Reform,” a report by Josh B. McGee for Manhattan Institute, January 14, 2020.