DALLAS - Texas' triple-A rating will gain support from a recently signed bill that increases contributions to state pension funds, according to Moody's Investor's Service.
Gov. Greg Abbott signed House Bill 9 on June 9. The legislation increases state employee pension contributions to 9.5% from 7.2% of payroll. The state also plans to increase its contributions to the Employees Retirement System of Texas to 10% of payroll from 8% beginning in the fiscal year starting Sept. 1.
"These moves are credit positive and will slow ERS' annually increasing unfunded liabilities," Moody's analysts Thomas Aaron and Nick Samuels wrote in a report issued June 15.
"The flexibility available to Texas contrasts with states such as Illinois (A3, negative) and Oregon (Aa1, stable), where court decisions about constitutional protections for pension benefits recently rendered attempted reforms illegal," the analysts noted.
Texas' unfunded pension liabilities have grown substantially in recent years, driven in part by the state's historical practice of annually contributing below actuarial requirements, analysts said. Texas contributed $482 million to ERS in fiscal 2014, well below the $728 million called for by plan actuaries.
Under the new law, the employee contribution increase to 9.5% of payroll. That combined with the state's expected contribution increase to 10% of pay will bring annual contributions much closer to the actuarially sound contribution benchmark defined in Texas law, Moody's said.
The benchmark is back loaded and would allow reported unfunded pension liabilities for ERS to grow for the foreseeable future, the analysts said.
"However, unfunded plan liabilities will be paid down in 31 years as a result of the contribution increases, marking a significant improvement over the previous ERS trajectory where unfunded liabilities were never paid down," they added.
