Senate committee approves major changes to state employee retirement system

A bill significantly revising the state employees’ retirement system was heard and passed out of the Senate Finance Committee Monday. SB 321 does not directly affect TRS or school employees, but as the other major statewide retirement system in Texas it is important to note substantial changes in the structure or benefits of the Employees Retirement System (ERS).

SB 321, authored by Sen. Joan Huffman, would enroll newly-hired state employees in a “cash balance” retirement plan instead of the traditional defined benefit plan, similar to TRS, that is currently offered to state employees. Legislators have been working to address ERS’s poor fiscal health for the last few sessions. While higher investment returns and increases in contributions have stabilized TRS and made the pension fund actuarially sound, ERS has mounting unfunded liabilities that are crippling the system.

The proposed cash balance plan has some elements similar to a 401(k) investment, but is considered a “hybrid” plan that also includes some features of a defined benefit plan, including the option of a lifetime annuity. But a cash balance plan only promises a specified amount of money in the employee’s account upon retirement, not a specific monthly payment.

With TRS currently in sound financial shape, and with legislators aware that the vast majority of school employees do not have the safety net of Social Security, it is unlikely that similar changes would be made to TRS in the near future. However, if SB 321 passes, it would be a seismic shift in the state’s approach to employee retirement, and it is worth monitoring closely for that reason.

SB 321 will now head to the full Senate for consideration, and then to the House, where similar legislation authored by House Appropriations Chair Greg Bonnen is in the works.