Texas is preparing to publish, fund by fund, whether its public pension systems beat what a plain index fund would have earned — and the first time the state’s own staff ran that arithmetic, six of 96 funds did.
The comparison would land on roughly 100 retirement plans holding about $430 billion for some 3.5 million working and retired Texans — city firefighters and police officers, municipal and county employees, teachers, state workers — by the Pension Review Board’s own count. The state publishes no such comparison now: its investment data report measures each fund only against the return the fund itself says it needs, a bar the fund sets and can move.
Measured that way, Texas pensions are having a good decade: staff told the board’s investment committee Sept. 30 that “70 of 99 systems met or exceeded their actuarial target for the 10-year period”, against 27 in the previous reading. Measured against a generic mix of 60 percent US stocks and 40 percent bonds, sold as one index fund for seven hundredths of a percent a year, six of 96 cleared it.
A second new measure is less flattering still. Staff call it the drift benefit: how much of a fund’s apparent success comes from lowering its own target rather than earning more. Cut an assumed return from 8 percent to 7, and an unchanged decade looks a point better every year. Of the 87 systems with a comparable ten-year history, 82 showed one. Strip it out and the average fund goes from 5.2 percent ahead of target over the decade to 1.5 percent behind. Nineteen cleared the current bar only, in staff’s phrasing, because the “assumption was lowered”.
Which yardstick gets printed is the live question, and the three members present settled it in about fifteen minutes. Staff offered a blended passive portfolio, the plain 60/40, or a benchmark rebuilt from each fund’s own holdings. A member argued for the simplest, because what a fund gets judged on by “most of people that are in the you know generic investment world is did you beat what you could do with literally no effort”.
The committee took neither option staff recommended. It settled on a 50/50 split of stocks and bonds, a lower hurdle than the 60/40 only six funds beat and one that appears nowhere on the slide. The case for it was fairness to older funds with modest targets, and a reluctance to sit as “a judge and a jury without you know due process”. Its proposer did not pretend it was demanding: “50/50 should be easy to beat”.
The numbers that settled it did not come from the agency. Asked whether staff had tested the two mixes fund by fund, the analyst said they had not: “we didn’t look at to that level”. A member said he could “pull it up on chat and get an answer in about 45 seconds”, and minutes later read half a century of index returns into the record. He thanked a chat assistant by name, which the captions render as Claude and which is not verified, and said it was “amazing what statistics can be found in 30 seconds”.
A plain American 60/40 has been an unusually hard decade to beat, and the agency’s own figures say as much: on the blended benchmark 34 of 96 funds came out ahead, and on one built from each fund’s own holdings 27 of 86 did. The association representing Texas local retirement systems has long made that case: in April 2022 TEXPERS reported of the 40 member funds it surveyed that “For the trailing 10-year period their 8.86 percent return outperformed the Global 60/40 portfolio return of 7.99 percent.” That was a different test, against a global index for a period ending in 2021, and TEXPERS has taken no position on what the board now proposes. Its board president argued then that the funds had delivered even as they lowered their targets. The finding staff put to the committee is that the lowering is much of why they appear to have.
The draft table staff showed makes the stakes plain. The Texas Municipal Retirement System, which holds $49.4 billion for the employees of hundreds of Texas cities, reported a 7.96 percent net return over ten years; the passive 60/40 for its reporting group returned 9.3 percent. The Texas County and District Retirement System, at $56.5 billion, returned 9.47 percent and cleared it.
Nothing was put to a vote, the 50/50 has not been run across the 96 systems, and what reaches print is not fixed; staff bring the redrawn report to the full board Dec. 10. No date was set for the committee’s next meeting. The minutes it approved at the start of this one were dated May 2, 2024.
The funds the law exempts are the ones in trouble. Staff reviewed the 24 systems holding under $30 million, which state law excuses from the independent investment review larger funds must commission. Using mid-range advisor forecasts, a first tier came up short of its own assumed return even on optimistic inputs; the captions name small-city firefighter funds among them, off a slide not obtained, and the names are not used here. Staff also reported that 17 of the 24 are running on investment policy statements more than eight years old, some dating to 2006 and 2008. A member asked for a standing list at every board meeting. What the funds pay. Texas systems reported $4.33 billion in investment expense for fiscal 2024, of which $1.86 billion, or 43 percent, was carried interest and performance fees, concentrated in about one plan in four. Staff flagged six systems paying at least half a percentage point more than size-and-return peers in two or more of four years, and one in all four. None was named aloud.