Given the current climate of legislative distrust, other Texas municipal funds likely will start rehabbing their governance, lowering their assumed return rates and cleaning up their investment processes to avoid legislative interference in their governance processes, industry sources said.
Massive participant withdrawals from the Dallas system's deferred retirement option plan and poor investment decisions brought the system's funded status to 36% and required legislative changes to prevent the plan's collapse.
Gov. Greg Abbott signed reform legislation for the uniformed employees' system on May 31 that addresses severe underfunding issues and increases board oversight of investment staff actions, but a bad taste remained in the mouths of state legislators, insiders stressed.
"There's always an overreaction to a black swan event like the Dallas situation," said one source who asked not to be identified, adding "with the international spotlight on Dallas, legislators felt like they had to act to rein in the investment oversight when it came to the ERS legislation, even if ERS' situation was nothing like that of Dallas."
Like other public pension plans of larger Texas municipalities and entities, including the $139.7 billion Teacher Retirement System of the State of Texas and the $736 million City of Austin Police Retirement System, the Employees Retirement System is governed by state statute.
The state's Sunset Advisory Commission is required to conduct a complete review of each state agency every 12 years; ERS was reviewed in 2016 and the Legislature received the commission's recommendations in January.
Most of the commission's recommendations focus on changes to ERS' administrative processes and benefits issues, with the addition of the limits on investment discretion as well as a requirement that ERS develop a consistent way to publicly report the profit share, including the performance fee, incentive fee and carried interest, earned by each investment manager of an alternative investment.
Mr. Abbott signed the bill containing the ERS statute changes on June 9, leaving the system's staff and board of trustees less than three months to effect the new investment and administrative requirements.
"While the Employees Retirement System of Texas believes the current delegation process is prudent and represents best practice standards, ERS fully respects the Texas Sunset review process and our staff is already working to implement the bill's recommendations and requirements in a manner that appropriately supports the benefit programs all state employees rely on for financial and health security," said Charles Thomas "Tom" Tull, ERS' chief investment officer, in an email.
"The requirement limiting staff delegation of alternative investments to no more than 0.6% of the trust's value is not materially different from the existing board-approved delegation policy of 0.75% and will be easily implemented by the legislation's effective date on Sept. 1," Mr. Tull added.