State lawmakers have been given the starkest warning to date about the health of the pension system for state government employees: The fund faces a “strong possibility” of running out of money in 30 to 40 years if left unchanged, according to the latest annual evaluation of the fund’s health.

The report, authored by third-party consultants and released last month, determined that the financial outlook for the Employees Retirement System of Texas pension is “very poor.”

A comparable report in 2018 had concluded the fund could become insolvent — having obligations greater than assets — by 2096 if contributions were to remain the same. But the new report moved that date up to 2075, but warned the fund’s depletion could come sooner.

There are 257,000 nonretired and retired state employees and beneficiaries receiving pension benefits or paying into the system. About 18,000 of the retirees live in the Austin area.

“In the most recent actuarial valuation presentation, our consulting actuaries have made it clear that the failure to address the unfunded liability is not an option,” Employees Retirement System of Texas spokeswoman Mary Jane Wardlow said. “Addressing the pension liabilities now will cost the state much less than if it waits to do it later.”

Wardlow attributes “past market volatility and insufficient contributions to the fund” for the pension system’s declining health.

The report comes as state lawmakers and retirees have been asking the Legislative Budget Board to intervene with emergency funding to shore up the pension system. The sooner the state adds money to the pension fund, the sooner it can be invested and generate returns to whittle away at the pension liabilities, proponents say. (About two thirds of retirees’ pension checks are funded by investment earnings.)

The board, of which Lt. Gov. Dan Patrick and House Speaker Dennis Bonnen, R-Lake Jackson, are members, has not responded. However, Bonnen has asked a House panel to examine the fund ahead of next year’s legislative session.

“We do think that they need to fund it as soon as possible, even if they were able to do it with emergency appropriations,” said Tyler Sheldon, legislative director for the Texas State Employees Union. “It can be more expensive to taxpayers the longer they wait.”

Unfunded liability

The Texas House last year proposed injecting $150 million into the retired state employee pension system, but the money was removed during bill negotiations with the Senate. The Legislature instead prioritized new spending for public education, property tax relief, Hurricane Harvey relief and the much larger Teacher Retirement System.

The state contributes 9.5% of gross payroll, agencies contribute 0.5%, and system members contribute 9.5% of their salaries toward the Employees Retirement System of Texas pension.

If contributions remain the same, liabilities will grow by $1 billion over the two-year budget cycle. The unfunded liability was $11.7 billion as of Aug. 31, the latest data available.

Upon depletion of the fund, the state would “pay-as-you-go” — a very expensive worst-case scenario in which pension checks are funded from the state’s general revenue.

Rod Bordelon, senior fellow with the conservative Texas Public Policy Foundation, said it’s important that state lawmakers address the pension fund sooner than later. The group long has supported a policy in which state employees are no longer promised a pension, but instead have the option to contribute to a 401(k) fund, as is common in the private sector.

“The fairest way to do that would perhaps be for new employees, or, at the very least, employees that have not been vested yet ... set up a defined contribution plan for them,” Bordelon said. “A defined contribution plan like a 401(k) would be better because there would be obviously less risk or no risk for the state.”

Sheldon said he would not support a 401(k) because it places too much risk on the employee.

Lawmakers last year shored up the Teacher Retirement System partly by not only increasing contributions by the state and school districts but also the employees’ contributions.

Sheldon said current state employees would not support an increase to their contributions.

“Employees are also putting into Social Security ... so you’re talking about, once taxes are taken out, 15% to 20% of their check is immediately coming out,” Sheldon said. “When they already are working with a base salary that’s not as much as the private sector, take-home pay will not be enough for them to stay employees of the state.”

High turnover

The turnover rate of state employees was 19.3% in 2018, the highest in at least a dozen years. The most common reason nonretiring employees cite for leaving is seeking better pay and benefits, according to the State Auditor’s Office.

Diana Spain, a retired social worker who lives in Central Austin, fears the pension system’s lackluster condition will deter people from working for the state government. During her 26-year career mainly working at state psychiatric hospitals, she had tried a higher paying private sector job but returned to the state hospital largely for the pension, she said.

“You can’t get people to work at these incredibly difficult, often heart-wrenching jobs without at least promising them that at the end of it, they are going to have some stability — a comfortable, stable, safe retirement,” Spain said. “If you can’t get people to work in these jobs, those services are going to go away.”

She also would like the state to boost spending on the pension because state law requires the pension system to be fully funded within a 31-year period — considered actuarially sound — for lawmakers to give retirees a monthly pension check increase. Retirees haven’t seen an increase to their pension payments since 2001. The average monthly pension check was $1,690 last year, according to the retirement system.

Spain earned about $40,000 a year by the end of her career and her pension check is about three-fourths of what she brought home while working. She periodically works part time to pad her savings.

“Those of us who have already retired are worried about the fact that our pensions could be taken away or could at least stagnate to the point that we can’t survive with dignity anymore,” Spain said.

A previous version of the story incorrectly identified Gov. Greg Abbott as a member of the Legislative Budget Board.