IN THE UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF FLORIDA 

Pensacola Division 

STATE OF FLORIDA, by and through 

Bill McCollum, et al., 

 Plaintiffs, 

v. Case No.: 3:10-cv-91-RV/EMT 

UNITED STATES DEPARTMENT OF 

HEALTH AND HUMAN SERVICES, 

et al., 

 Defendants. 

___________________________________________/ 

APPENDIX OF EXHIBITS IN SUPPORT OF

PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT

VOLUME IV 

(Exhibits 21-34) 

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 Plaintiffs hereby submit Volume IV of their Appendix of Exhibits in Support of their 

Motion for Summary Judgment. 

Respectfully submitted, 

 BILL MCCOLLUM 

 ATTORNEY GENERAL OF FLORIDA 

 /s/ Blaine H. Winship

 Blaine H. Winship (Fla. Bar No. 0356913) 

 Special Counsel 

 Joseph W. Jacquot (Fla. Bar No. 189715) 

 Deputy Attorney General 

 Scott D. Makar (Fla. Bar No. 709697) 

 Solicitor General 

 Louis F. Hubener (Fla. Bar No. 0140084) 

 Timothy D. Osterhaus (Fla. Bar No. 

0133728) 

 Deputy Solicitors General 

 Office of the Attorney General of Florida 

 The Capitol, Suite PL-01 

 Tallahassee, Florida 32399-1050 

 Telephone: (850) 414-3300 

 Facsimile: (850) 488-4872 

 Email: blaine.winship@myfloridalegal.com 

 Attorneys for Plaintiff States

 David B. Rivkin (D.C. Bar No. 394446) 

 Lee A. Casey (D.C. Bar No. 447443) 

 Baker & Hostetler LLP 

 1050 Connecticut Avenue, N.W., Ste. 1100 

 Washington, DC 20036 

 Telephone: (202) 861-1731 

 Facsimile: (202) 861-1783 

 Attorneys for Plaintiff States, National

Federation of Independent Business, Mary

Brown, and Kaj Ahlburg

 Katherine J. Spohn 

 Special Counsel to the Attorney General 

 Office of the Attorney General of Nebraska 

 2115 State Capitol Building 

 Lincoln, Nebraska 68508 

 Telephone: (402) 471-2834 

 Facsimile: (402) 471-1929 

 Email: katie.spohn@nebraska.gov 

2 

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3 

 Attorneys for Plaintiff the State of Nebraska

Karen R. Harned Bill Cobb 

Executive Director Deputy Attorney General 

National Federation of Independent for Civil Litigation 

Business Office of the Attorney General of Texas 

Small Business Legal Center P.O. Box 12548, Capitol Station 

1201 F Street, N.W., Suite 200 Austin, Texas 78711-2548 

Washington, DC 20004 Telephone: (512) 475-0131 

Telephone: (202) 314-2061 Facsimile: (512) 936-0545 

Facsimile: (202) 554-5572 Email: bill.cobb@oag.state.tx.us 

Of counsel for Plaintiff National Attorneys for Plaintiff the State of Texas

Federation of Independent Business 

 

CERTIFICATE OF SERVICE

 I hereby certify that, on this 4th day of November, 2010, a copy of the foregoing Volume 

IV of Appendix of Exhibits in Support of Plaintiffs’ Motion for Summary Judgment was served 

on counsel of record for all Defendants through the Court’s Notice of Electronic Filing system. 

 /s/ Blaine H. Winship

 Blaine H. Winship 

 Special Counsel 

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TABLE OF EXHIBITS 

Exhibit No. 

1 Dudek Declaration 

2 Lange Declaration 

3 Watkins Declaration 

4 Leznoff Declaration 

5 Robleto Declaration 

6 Shier Declaration 

7 Ashmore Declaration 

8 Battilana Declaration 

9 Betlach Declaration 

10 Casanova Declaration 

11 Damler Declaration 

12 Phillips Declaration 

13 Anderson Declaration 

14 Chaumont Declaration 

15 Wells Declaration 

16 Willden Declaration 

17 Van Camp Declaration 

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18 Bowman Declaration 

19 Zinter Declaration 

20 Millwee Declaration 

21 Dial Declaration 

22 Kukla Declaration 

23 Gooch Declaration 

24 Sundwall Declaration 

25 Brown Declaration 

26 Ahlburg Declaration 

27 Danner Declaration 

28 Grimes Declaration 

29 Klemencic Declaration 

30 McClain Declaration 

31 Thompson Declaration 

32 CMS Letter from Acting Director Barbara K. Richards to Monica Curry, AZ Off. of 

Intergovernmental Relations, April 1, 2010 

33 Second CMS Letter from Acting Director Barbara K. Richards to Monica Curry, AZ 

Off. of Intergovernmental Relations, June 24, 2010 

34 Chairman Ben S. Bernanke, Bd. of Governors of the Federal Reserve System, 

Challenges for the Economy and State Governments, Aug. 2, 2010 

35 Policies for Increasing Economic Growth and Employment in 2010 and 2011, Cong. 

Budget Off., Jan. 2010 

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36 Variation in Analyses of PPACA’s Fiscal Impact on States, Cong. Res.Serv., 

Sept. 8, 2010 

37 State and Local Governments’ Fiscal Outlook (GAO-10-358), Gov’t Accountability 

Off, March 2010 

38 State and Local Governments: Fiscal Pressures Could Have Implications for Future 

Delivery of Intergovernmental Programs (GAO-10-899), Gov’t Accountability Off., 

July 2010 

39 Richard S. Foster, Estimated Financial Effects of the “Patient Protection and Affordable 

Care Act,” Centers for Medicare & Medicaid Service, April 22, 2010 

40 Dubberly Declaration 

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ATTCHMENT 1

Philip S. Dial 

Mr. Dial is a graduate of the University of Texas at Austin with a Bachelor’s degree in 

Business Administration. He also has a Master’s degree in Actuarial Science from the 

University of Michigan. He is a Fellow of the Society of Actuaries and a member of the 

American Academy of Actuaries. Mr. Dial has been a consulting actuary with Rudd and 

Wisdom, Inc. since 1971 and is the firm’s specialist in the group and health benefits field. 

He has seven years experience working with public pension plans. He is a Senior 

Principal and Secretary of the firm. 

His experience includes:

• Service as consultant to large group and health benefits programs of large public 

employers, including that of the State of Texas, the University of Texas System, 

the Texas Medicaid Program and group benefits programs of several of the largest 

trade and professional associations in Texas. These consulting activities include:

o Health and welfare plan design and financing

o Risk evaluation

o Evaluation and selection of insurance, reinsurance, managed care 

arrangements ,and administrative contracts

o Valuation of other post employment benefits under GASB 43 and 45

o Design of alternate funding mechanisms

o Actuarial cost projections/statistical modeling

o Preparation of budgets and legislative appropriation requests

o Legislative impact evaluation and testimony before legislative committees

o Provision of technical advise to boards of trustees

o Assistance with and provision of testimony before legislative committees

o Communication of complex actuarial and risk-related issues to nontechnical personnel

• Extensive consulting activities with professional associations in the design, 

creation, implementation and operation of captive insurance companies designed 

to meet the individual insurance needs of their members. These consulting 

services have included strategic planning, financial analysis, policy design, 

premium rate determination, assistance in regulatory matters, procurement of 

reinsurance and general advice and counsel to staffs and boards of directors.

• Extensive consulting activities with large, public retirement systems in Texas 

including actuarial valuations, special studies and investigations of experience. 

These services have also included consultation with respect to policy matters, 

administrative methodology, benefit design and the drafting of legislation.

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ATTACHMENT 2

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ATTACHMENT 3

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Legislative Appropriations Request

FISCAL YEARS 2012 - 2013 

Submitted to

The Governor’s Office of Budget, Planning and Policy 

and the Legislative Budget Board

by

The Employees Retirement System of Texas

August 30, 2010

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Employees Retirement System of Texas

Legislative Appropriation Request

For Fiscal Years 2012 and 2013

TABLE OF CONTENTS

Description Administrator’s Statement ...............................................................................................................................................................Organizational Chart........................................................................................................................................................................Summary of Base Request by Strategy ..........................................................................................................................................Summary of Base Request by Method of Finance ..........................................................................................................................Summary of Base Request by Object of Expense ..........................................................................................................................Summary of Base Request Objective Outcomes ............................................................................................................................Summary of Exceptional Items Request .........................................................................................................................................Summary of Total Request by Strategy ...........................................................................................................................................Summary of Total Request Objective Outcomes .............................................................................................................................Strategy Request .............................................................................................................................................................................Rider Revisions and Additions Request ..........................................................................................................................................Exceptional Item Request Schedule................................................................................................................................................Exceptional Items Strategy Allocation Schedule .............................................................................................................................Exceptional Items Strategy Request ...............................................................................................................................................Historically Underutilized Business Supporting Schedule ...............................................................................................................Federal Funds Supporting Schedule ...............................................................................................................................................Estimated Total of All Funds Outside the General Appropriations Act Bill Pattern Schedule ...........................................................Budgetary Impacts Related to Federal Health Care Reform ...........................................................................................................

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Page 1

Administrator’s Statement

82nd Regular Session, Fiscal Years 2012-2013

Agency Code: 327Agency Name: Employees Retirement System of TexasAnn S. Fuelberg, Executive DirectorI am pleased to present the Legislative Appropriations Request (LAR) for the Employees Retirement System of Texas. The LAR provide retirement and insurance benefi ts to more than 500,000 State of Texas employees, retirees and their eligible family me

support the State’s goal to recruit, retain, and reward the high-quality workforce Texas needs to make government work for all oprovide fi nancial security for more than 76,000 retired Texans and health care for one of every 46 Texans, including 118,387 ch18. The programs benefi t Texas through the impact of pension payments spent in Texas and medical claim payments to Texas pharmacies.This request supports: Four retirement plans: service retirement for state employees (ERS); elected state offi cials and district attorneys (ESO), law 

offi cers (LECOS), and two judicial plans including state district and appellate judges (JRS I and JRS II). Disability retirement and non-occupational -- are a part of each plan.

 Two death benefi t programs: $5,000 lump sum death benefi t paid to survivors of state retirees; $250,000 special death bene

certain Texas public safety offi cers killed in the line of duty.

 Three insurance programs: employee and retiree health insurance, the State Kids Insurance Program (SKIP)and employee 

insurance.

AccomplishmentsThe continued commitment and careful stewardship of the State, combined with active contract and investment management bmodel benefi ts program. Over 200 employers rely on these benefi ts to attract the employees they need. Texas is a large and g

workforce needs ranging from professors to prison guards. The benefi ts program must compete with the private sector and otha cost that Texas taxpayers can reasonably support. To earn that support, ERS manages the programs to lower costs without s

This past biennium, ERS worked with the Legislature to modify both the retirement and insurance programs to address rising caddressed the sustainability of the state pension program by modifying key components of the program, such as retirement eligcontribution rates, and return to work employment rules. The new provisions, which went into effect for all employees hired on o2009, are similar to provisions now being considered by states across the country. Texas already prohibits many other pension automatic retiree cost of living adjustments and increasing or “spiking” retirement benefi ts by manipulating fi nal salary fi gures. Atheir own retirement security.In the insurance plan, ERS took a multi-pronged approach to address a funding shortfall accelerated by higher than expected h

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provider discounts shaved $2.7 billion from provider-billed charges. When hospitals requested unreasonable price increases, Ethe provider network. Unlike many plan sponsors, ERS enforced a court settlement in the pharmacy program, holding our pharhonor contractual discounts based on a court ordered price rollback, saving the program an estimated $15 million a year.Despite these cost-cutting successes, the health insurance plan faced a funding gap. Working with insurance plan participants, to share costs with participants. The plan, which goes into effect on September 1, 2010, targets high cost services, while allowibudgets. The new benefi t design is sensitive to members’ preferences and feedback, which ERS received through a series of sand a survey that drew a 26 percent response rate. Following these changes, participants will be responsible for about 21% of program. External ChallengesAmong the many external challenges ERS faced during the past biennium, the most signifi cant was the downturn in the U.S. econ the investment market. While ERS was not immune to the market decline, the trust fund’s long-term horizon, conservative ainvestment portfolio makes it well suited to withstand such short-term market volatility. Another challenge will be the impact and implementation of federal health care reform. While some provisions could have a poscertainly increase some short-term costs. Having depleted the insurance contingency reserve fund to cover previous funding shnot have reserves to deal with these cost increases.A continuing challenge for the health care program is the rising costs associated with health care delivery. The costs continue t

infl ation. Rising costs are due to continuing increases in the price and utilization of health care services because of several factpopulation, an increase in chronic health conditions, the introduction of costly new procedures and medications, and cost shiftinExternal budget pressure could also affect the retirement program. If Texas reduces the workforce through layoffs or retirement could skyrocket. Currently 13% of the state workforce is eligible to retire. Even employment practices such as furloughs or salathe number of retirements. Retirement rates that exceed current assumptions and experience increase the cost of providing beincentive was a signifi cant factor in increasing system costs by accelerating retirement rates above the system’s funding assumRetirement Appropriation RequestThe state starts funding retirement benefi ts as soon as a worker enters the system. This funds the benefi ts throughout an empl

normal cost is calculated by determining the current rate of employer and employee contributions needed to pay for future retirethat retirement rates and investment earnings match expectations. The current normal cost is 12.38%. System members contriThe unfunded liability of a system is adversely affected when the system does not consistently receive enough contributions to providing benefi ts and pay down any unfunded liability. To cover this unfunded liability, contributions must increase to an actuarrate. The current actuarially sound contribution rate for the ERS employee retirement trust fund is 15.84% based on the valuatiBoth the normal and the actuarially sound contribution rate will change based on the fi scal year end actuarial valuation of the trfi scal year update, a special mid-year actuarial updated valuation of the fund will be done as of February 28, 2011 in order to pthe most current estimates.

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Baseline requests for the retirement program: Employee and elected class retirement $814 million to fund the state retirement contribution at the base line of 6.95%. The member contribution is assumed to remain at 6.5% for the biennium. This baseline request (13.45%) slightly exceeds 

of 12.38%. This amount does not equal the actuarially sound contribution rate as set by state law and accounting standardenough to amortize the unfunded accrued liability, or even pay the interest on the liability. 

 Law Enforcement and Custodial Officer Supplemental Retirement Trust Fund (LECOS)

 $47.7 million to fund the LECOS program at the base line of 1.59%. LECOS members began contributing to the LECOS retirement fund on September 1, 2009. The LECOS member contribu

at 0.5% of payroll for the biennium. This baseline request (2.09%) slightly exceeds the current normal cost of 2.07%, but it 

the unfunded accrued liability over a measurable period.

 JRS Plan I $54.5 million to fund the Judicial Retirement Plan I at current levels. JRS I is a closed plan that receives appropriations equal to benefi t payments.

 JRS Plan II  $22.7 million to fund the Judicial Retirement Plan II at the base line of 16.83%. Plan II judges contribute 6% of payroll to the plan. The JRS II member contribution is assumed to remain at 6% of payroll 

contribution levels, the plan is considered actuarially sound.

 Chapter 615 $12.1 million to fund public safety offi cer death benefi ts at current levels. Retiree death benefi t

 $16.2 million to fund retiree lump sum death benefi ts at current levels.

Exceptional item requests for the retirement program: Current Actuarially Sound Contribution for Retirement Trust Fund

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 $282.3 million to provide the actuarially sound contribution rate as required in Sec. 811.006 of the Texas Government Cod The current actuarially sound contribution rate is 15.84%, requiring an employer contribution of 9.34%, in addition to the m

The actuarially sound contribution rate is made up of the normal cost of 12.38%, and the contributions needed to erase thyears. The current difference is 3.46% between the normal cost and the actuarially sound contribution rate. The system rein 2003, following years of below normal cost contributions, the impact of retirement incentives and two years of negative liability has continued to grow because the fund has not received enough contributions to cover the normal cost and pay d

 Current Actuarially Required Contribution for Law Enforcement and Custodial Offi cers Supplemental Fund

 $14.9 million for the LECOS fund to provide the actuarially sound contribution rate as required in Sec. 811.006 of the Texa

current actuarially sound contribution rate is 2.58%, requiring an employer contribution of 2.08%, in addition to the membe

Group Benefits (Insurance) Program Appropriations RequestBaseline requests for the Group Benefits Program:

 $2.5 billion to fund the program at the prescribed base level, below the current spending levels The baseline request for the FY2012-2013 biennium provides slightly more funding than the estimated and appropriated s

2011 biennium. Current GBP expenditures are much higher than that appropriated amount. Those higher costs were covethe GBP contingency reserve fund as supplemental funding; i.e., the contingency reserve fund is being used to supplemenERS expects the contingency reserve fund to be almost fully depleted by August 31, 2011, and unavailable to supplement 

FY2012-2013 biennium. 

 Funding the program at this baseline level would require GBP spending cuts of about 17%. This level of cuts cannot be ac

cost-shifting strategies. This level of cuts would drastically alter the current benefi t design and cost sharing structure of the lower funding level, the state would not be able to maintain the current contribution strategy. Since at least 1993, the State of member coverage and 50% of the cost of dependent coverage. At this baseline funding level, it would be necessary for retirees) to pay 20% of the cost of member only coverage and 60% of the dependent coverage cost. For employees coverbe a 41% increase to their premium contributions.

 Alternatively, the State could choose to restructure the plan design, shifting to a high deductible health plan with an associ

for employees, or a catastrophic health plan. 

Exceptional item requests for the Group Benefits Program:

 Funding to maintain health plan benefi ts at FY2011 levels In addition to the baseline funding request, the program needs $575.6 million to fund the program at a level suffi cient to co

FY2012-2013 biennium, including projected increases in health plan costs. The baseline funding level is based on an averprogram costs and not the actual costs as of August 31, 2011. This lower fi gure was then reduced by 5%. To make up for 

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any cost increases, this exceptional item, together with the baseline, requests annual increases in per capita funding of 18.89% for FY2013. ERS expects the contingency reserve fund to be almost fully depleted at the start of the biennium and program funding. 

 Per capita health plan benefi t costs are projected to increase based on a number of factors including:

 how many and what type of health care services and medications will be used by program participants,  how much service and drug costs are expected to increase,  how much plan costs will be lowered through cost containment and members’ cost share and behavior, and  the impact of legislative changes, such as expanded coverage required by federal health care reform. 

 The FY2012 percentage increase is larger than the FY2013 percentage increase. The FY2012 request includes replacing 

spend down (4.89%), plus the projected costs related to health care reform (1.74%) in addition to the plan cost trend of 8.9capita funding increase is equal to the per capita increase in GBP cost. Note that this item does not re-establish the contiestablishment of the contingency reserve fund is in a separate exceptional item request. 

 State appropriations are only part of the GBP funding. Other funding comes from:

 Member contributions for dependent premiums, Contributions from higher education institutions, and other employers, and Supplemental funding from the contingency reserve fund (when available). 

 Funding to meet statutory requirement for the GBP contingency reserve fund: $311.2 million to re-establish the contingency reserve fund as required under Section 1551.211 of the Texas Insurance Co The statute requires ERS to request funding necessary to maintain a contingency reserve fund adequate to cover self-fun

average 60-day period in the next biennium, or a balance of about $569 million as of August 31, 2013. This funding requefunding from (a) higher education institutions, (b) other employers participating in the program, and (c) members who elecexpected to be suffi cient to meet the statutory minimum. 

Estimated Budgetary Impacts Related to Federal Health Care ReformThis LAR includes an estimate of the budgetary impact to the Group Benefi ts Program (GBP) of the federal HR 3590, Patient PCare Act of 2010 (PPACA), and HR 4872, the Health Care and Education Reconciliation Act of 2010, collectively referred to as We appreciate the recognition that there is considerable uncertainty surrounding state implementation. The PPACA, as amende

to existing statutes, regulations, and to other provisions of the PPACA itself, and many requirements and references are not clecross-referenced and/or are vague and ambiguous. It is unclear whether some of the provisions will apply to the GBP, as noted schedule. ERS anticipates that legislative guidance will be issued that will affect these estimated costs. Some regulations are not yet pubrecently issued, without suffi cient opportunity for ERS to consider all of the possible impacts and costs. ERS is prepared to rev

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additional information, such as newly issued or revised statutes, regulations, interpretations or other guidance and/or any court There is the possibility that the GBP could qualify for revenue from the Early Retiree Reinsurance Program. The ERRP provideplan sponsors providing health insurance coverage to retirees who are over age 55 and who are not yet eligible for Medicare. Preimbursed for 80 percent of claims between $15,000 and $90,000 for eligible retirees and their spouses and dependent childreparticipation in the ERRP on behalf of the GBP. If the application is accepted, ERS will submit periodic requests for the GBP’s appropriation for the program. However, it is unclear if the funding is suffi cient to respond to all applications, if the GBP applicatthe State would agree to accept any funding provided to the program. With all of these variables, any possible cost savings are the Part 6.J. schedule.GASB standards relating to Other Post Employment Benefits (OPEB)As reported in the last LAR, the Governmental Accounting Standards Board (GASB) now requires governmental employers to vprojected cost of providing current and future retirees with other post-employment benefi ts (OPEB), primarily health care benefi pay-as-you-go basis and does not have a continuing, or constitutional, obligation to provide insurance benefi ts to employees or 

year. ERS reports the information required under GASB Statement No. 43, Financial Reporting for Postemployment Benefi t PlaPlans, to the Texas Comptroller of Public Accounts. This LAR requests funding for the cost of providing life and health benefi ts 

2013, as detailed in the request, but does not request funding for any future costs associated with OPEB. GASB is also considering changing the reporting method for pension liabilities that would change how the unfunded liability is rwould report the unfunded liability (or net pension liability) on the State’s balance sheet. This shifts the reporting to a total obligdetermine if an employer is meeting its short-term obligations to the plan. If approved, these proposed accounting standards coas 2012. The standards would initially be implemented for pension plan reporting and then could affect OPEB calculations. GAproposed standards are for accounting and fi nancial reporting only and are separate from funding standards.Agency Authority and Policy on Criminal Background ChecksIn accordance with Texas Government Code, Chapter 411.1402, ERS may obtain criminal history record information maintaine

of Public Safety (DPS) for all job applicants. The criminal history information may be used to evaluate an applicant for employmwill state that the agency conducts a criminal history check on the primary and secondary candidate(s) recommended for the pCriminal history checks may also be conducted on current or former employees when circumstances necessitate such checks. Director or designee may approve a request for a criminal history check on current or former employees. ERS will conduct an FBI fingerprint check on all applicants, including internal candidates, selected to fi ll “covered person” posit

defi ned in the ERS Investments Policy as all ERS Investments staff, Investment Accounting staff, the Investment Compliance AOffi cer, and Executive Director.A conviction is not an automatic cause for an adverse personnel action. However, failure to report a conviction may result in coincluding termination of employment.

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The ERS will review all criminal convictions on a case-by-case basis based on several factors including:

 The nature and seriousness of each offense and its relationship to the duties of the position. The number of offenses committed by the individual. The length of time since the offense, The individual’s work performance and/or history, The accuracy of the information on the individual’s employment application, and The explanation the candidate provides in the event of a criminal conviction.

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Employees Retirement System of Texas

 Board Members Dates of Terms Hometo

I. Craig Hester, Chair November 1, 2005 – August 31, 2010 Austin, Te

Cydney Donnell, Vice-Chair June 20, 2007 – August 31, 2012 FredricksbYolanda “Yoly” Griego August 31, 2009 – August 31, 2015 El Paso, TOwen Whitworth September 1, 2005 – August 31, 2011 Austin, TeDonald Wood January 8, 2009 – August 31, 2014 Odessa, TCheryl MacBride October 19, 2009 – August 31, 2013 Austin, Te

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Employees Retirement System of Texas

Agency Organization Chart

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Employees Retirement System of Texas

Organizational Chart Supplementary Information

1) Board of Trustees The board is composed of six members and headed by the Chairperson. It is responsible for formulating the basic policie

consistent with the purposes, policies, principles and standards stated in the statutes. The board members serve as fi duc

administered by the ERS. The Executive Director and Internal Audit report to the Board of Trustees.

2) Executive Director

 The Executive Director, who manages a staff of four, is appointed by the Board of Trustees. The Executive Director advis

the board what will be needed to transact the business of the ERS. The Executive Director is responsible for the preparabudget indicating the amount needed to pay the retirement system’s expenses for the following fi scal year. This budget is for review and adoption. Governmental Relations, Investments, Communications and Research, and Legal Services staff Director.

3) Internal Audit The Director of Internal Audit directs a staff of four. Internal Audit provides independent, objective assurance and advisory 4) Legal Services The General Counsel directs a staff of 15. The Legal Services division advises the Board of Trustees, the Executive Dire

regarding all legal matters affecting ERS and the programs it administers. Division staff represents ERS and the Board of appeals related to members and retirees claims for insurance benefi ts and disability retirement.

5) Governmental Relations

The Director of Governmental Relations directs a staff of two. Governmental Relations serves as the key contact and liaisinquiries from the Governor’s offi ce, Legislature, and legislative agencies, and external communications with the media. IERS related legislation, legislative studies, and studies or reports conducted by other state agencies.

6) Communications and Research

 The Director of Communications and Research directs a staff of 14. The Division manages communications with ERS me

including employees, retirees and human resources staff of the employers served by ERS. Writers, graphic designers, traeducate these audiences through print publications, the ERS website, face-to-face presentations, webcasts and benefi ts f

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7) Investments The Deputy Executive Director of Investments directs a staff of 58. The Investments Division is responsible for managing 

a suffi cient return on investments to insure the payments due to members of the retirement plan.

8) Chief Operating Officer

 The Chief Operating Offi cer, who directs a staff of six, is responsible for the daily operations of the ERS. Benefi t Contract

Benefi ts, Human Resources, Information Systems, and Operations Support staff report to the Chief Operating Offi cer.

9) Human Resources

 The Human Resources Manager directs a staff of three. Human Resources is responsible for administering the personne

responsible for hiring and retaining a competent, quality work force.

10) Benefit Contracts The Director of Benefi t Contracts directs a staff of 20. The Benefi t Contracts division is responsible for the administration 

that provide benefi ts related products and services to ERS customers.

11) Finance

 The Chief Financial Offi cer directs a staff of 35. The Finance division includes Budget, General Accounting, Purchasing, 

Revenue Processing. Finance performs the accounting and budgeting functions for the agency.

12) Customer Benefits

 The Director of Customer Benefi ts directs a staff of 97. The Customer Benefi ts division communicates, counsels and resp

inquiries from ERS customers. Division staff calculates and pays annuity and survivor benefi ts, processes insurance tranfl exible benefits and deferred compensation program.

13) Information Systems The Chief Technology Offi cer directs a staff of 63. The Information Systems division is responsible for the development a

automated systems in support of the agency’s mission.

14) Operations Support The Operations Support Manager directs a staff of 15. The Operations Support division provides support services such a

printing, mail and building maintenance.

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Case 3:10-cv-00091-RV-EMT Document 80-6 Filed 11/04/10 Page 68 of 164
	
 

	 	 
	 
    

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Case 3:10-cv-00091-RV-EMT Document 80-6 Filed 11/04/10 Page 70 of 164
3.B. Page 1 of 2

3.B. Rider Revisions and Additions Request

Agency Code:

327

Agency Name:

Employees Retirement System 

Prepared By:

Michael C. Wheeler

Date:

August 30, 2010

Req

Current 

Rider 

Number

Page Number in 2010-2011

GAA Proposed Rider Language

4 I-33 State Contribution to Employees Retirement Program. The amount specified a

Retirement Contributions, is based on a state contribution of 6.45 6.95 percent of pmembership fees of $3 for contributing members for each fiscal year.

6 I 3233 State Contribution to Group Insurance for General State Employees. Funds id

group insurance are intended to fund:

a. the total cost of the basic life and health coverage for all active and retired b. fifty percent of the total cost of health coverage for the spouses and depen

active and retired employees who enroll in coverage categories which incldependent children; 

c. the additional cost of providing a premium structure comparable to the Ch

Insurance Program (CHIP) for dependent children of state employees enroInsurance Program (SKIP); and

d. the incentive program to waive participation in the Group Benefit Plan (O

In no event shall the total amount of state contributions allocated to fund coverage plan exceed the actuarially determined total amount of state contributions that woubasic health coverage for those active employees and retirees who have elected to poptional health plan.During each fiscal year, the state’s monthly contribution shall be determined by mucapita monthly contribution as certified herein by (2) the total number of full-time employees enrolled for coverage during that month.

Case 3:10-cv-00091-RV-EMT Document 80-6 Filed 11/04/10 Page 71 of 164
3.B. Page 2 of 2

3.B. Rider Revisions and Additions Request

Agency Code:

327

Agency Name:

Employees Retirement System 

Prepared By:

Michael C. Wheeler

Date:

August 30, 2010

Req

Current 

Rider 

Number

Page Number in 2010-2011

GAA Proposed Rider Language

For each employee or retiree that waives participation in the Group Benefit Plan anoptional coverage, the Employees Retirement System shall receive $60 per month only” state contribution amount. The waived participant may apply up to $60 per mof the optional coverage.Each year, upon adoption of group insurance rates by the Board of Trustees, the EmSystem must notify the Comptroller, the Legislative Budget Board, and the Governmonthly contribution required in accordance with this rider for each full-time activenrolled for coverage during the fiscal year.It is the intent of the Legislature that the Employees Retirement System control the insurance program by not providing rate increases to health care providers participduring the 2010 11 2012-13 biennium.

12 I 34 Online Health Risk Assessment. Out of funds appropriated above in Strategy B.

Retirement System shall use an amount not to exceed $100,000 in fiscal year 2010 purchasing access to an online health risk assessment for state employees that do none.

13 I-34 Appropriation for the Deferred Compensation Trust Fund and the TexaSaver 

money deposited into the Deferred Compensation Trust Fund, Employees Retiremthe TexaSaver Trust Fund No. 0946 pursuant to § 609.512 Government Code are hthe system for the 2010 11 2012-2013 biennium for the purposes authorized by law

Case 3:10-cv-00091-RV-EMT Document 80-6 Filed 11/04/10 Page 72 of 164


 	



  

 

 	
  




 
 

	 	 	     

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Case 3:10-cv-00091-RV-EMT Document 80-6 Filed 11/04/10 Page 75 of 164


 	



  

 

 	
  




 
 

	 	 	     

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Case 3:10-cv-00091-RV-EMT Document 80-6 Filed 11/04/10 Page 87 of 164
6.H. Page 1 of 4

ESTIMATED GRAND TOTAL OF AGENCY FUNDS OUTSIDE THE 2012-13 GAA BILL PATTERN $ 

Retirement Trust Fund (0955)

Estimated Beginning Balance in FY 2010 $ 19,097,775,053Estimated Revenues FY 2010 $ 1,385,387,056

Estimated Revenues FY 2011 $ 2,692,929,633

FY 2010-11 Total $ 23,176,091,742

Estimated Beginning Balance in FY 2012 $ 20,002,387,404Estimated Revenues FY 2012 $ 2,523,630,658

Estimated Revenues FY 2013 $ 2,667,739,696

FY 2012-13 Total $ 25,193,757,758

Constitutional or Statutory Creation and Use of Funds:Method of Calculation and Revenue Assumptions:

Employees Retirement System of Texas

6.H. Estimated Total of All Agency Funds Outside the GAA Bill Pattern

The ERS Retirement Trust Fund is created by Government Code, Section 815.310. Funds in the account are used to pay retirement annuities and to operate the retiremeRevenues to the trust fund include member contributions, state contributions, investment income, and other revenues. Investment income can vary widely from year to yare dependent upon legislative action. For this document, other revenue is assumed to remain constant at the FY 2010 level for FY 2011-13. Investment Income is calcuassumption used in the ERS actuarial valuation report for August 31, 2009. State contributions are estimated at the LAR Base Level of 6.95%. Zero payroll growth is as

Case 3:10-cv-00091-RV-EMT Document 80-6 Filed 11/04/10 Page 88 of 164
6.H. Page 2 of 4

 Insurance Fund (0973)

Estimated Beginning Balance in FY 2010 $ 282,483,838Estimated Revenues FY 2010 $ 2,180,927,771

Estimated Revenues FY 2011 $ 2,329,215,694

FY 2010-11 Total $ 4,792,627,303

Estimated Beginning Balance in FY 2012 $ 20,855,627

Estimated Revenues FY 2012 $ 2,692,107,499

Estimated Revenues FY 2013 $ 2,931,435,856

FY 2012-13 Total $ 5,644,398,982

Constitutional or Statutory Creation and Use of Funds:Method of Calculation and Revenue Assumptions:

Employees Retirement System of Texas

6.H. Estimated Total of All Agency Funds Outside the GAA Bill Pattern

The Insurance Fund is created by Insurance Code, Section 1551.401. Funds in the account are used for all payments of any coverages provided for under the Group Benpayment of expenses of administering the program.Revenues to the trust fund include member contributions, state contributions, investment income, and other revenues. It is assumed that contributions from the state and 2012 and FY 2013 will be established at the actuarial assumption levels of 15.58% in FY 2012 and 8.89% for FY 2013. Contribution increases are estimated at 6.5 and 

Case 3:10-cv-00091-RV-EMT Document 80-6 Filed 11/04/10 Page 89 of 164
6.H. Page 3 of 4

 LECOS Trust Fund (0977)

Estimated Beginning Balance in FY 2010 $ 634,778,749Estimated Revenues FY 2010 $ 52,483,738

Estimated Revenues FY 2011 $ 62,402,787

FY 2010-11 Total $ 749,665,274

Estimated Beginning Balance in FY 2012 $ 665,201,845Estimated Revenues FY 2012 $ 76,554,626

Estimated Revenues FY 2013 $ 80,785,024

FY 2012-13 Total $ 822,541,494

Constitutional or Statutory Creation and Use of Funds:Method of Calculation and Revenue Assumptions:

Employees Retirement System of Texas

6.H. Estimated Total of All Agency Funds Outside the GAA Bill Pattern

The LECOS Trust Fund is created by Government Code, Section 815.317. Funds in the account are used to pay law enforcement and custodial officer supplemental reti

benefits to law enforcement and custodial officers and to pay for the administration of the fund.

Revenues to the trust fund include member contributions, state contributions, investment income, and other revenues. Investment income can vary widely from year to y

contributions from the state for FY 2012 and FY 2013 will be established at the current level of 1.59%. Investment income is calculated using the 8% return assumptioactuarial valuation report for August 31, 2009. Enrollment is assumed to remain at the FY 2010 level with no payroll growth for FY 2012-13.

Case 3:10-cv-00091-RV-EMT Document 80-6 Filed 11/04/10 Page 90 of 164
6.H. Page 4 of 4

 JRS II Trust Fund (0993)

Estimated Beginning Balance in FY 2010 $ 205,730,088Estimated Revenues FY 2010 $ 22,096,866

Estimated Revenues FY 2011 $ 36,855,554

FY 2010-11 Total $ 264,682,508

Estimated Beginning Balance in FY 2012 $ 245,417,073Estimated Revenues FY 2012 $ 36,456,353

Estimated Revenues FY 2013 $ 39,842,929

FY 2012-13 Total $ 321,716,355

Constitutional or Statutory Creation and Use of Funds:Method of Calculation and Revenue Assumptions:

Employees Retirement System of Texas

6.H. Estimated Total of All Agency Funds Outside the GAA Bill Pattern

The JRS II Trust Fund is created by Government Code, Section 840.305. Funds in the account are used to pay judicial retirement benefits and administrative expenses.Revenues to the trust fund include member contributions, state contributions, investment income, and other revenues. Investment income can vary widely from year to y

are dependent upon legislative action. Investment income is calculated using the 8% return assumption used in the ERS actuarial valuation report for August 31, 2009. 

estimated at the LAR baseline request level of 16.83%. Enrollment is assumed to remain at the FY 2010 level with no payroll growth for FY 2012-13.

Case 3:10-cv-00091-RV-EMT Document 80-6 Filed 11/04/10 Page 91 of 164
6.J PART A BUDGETARY IMPACTS RELATED TO FEDERAL HEALTH CARE REFORM SCHEDULE

Agency code: 327 Agency name: Employees Retirement System 

TIME: 11:38:47AM

DATE: 9/30/2010

Automated Budget and Evaluation System of Texas (ABEST)

82nd Regular Session, Agency Submission, Version 1

CODE DESCRIPTION Est 2010 Bud 2011 BL 2012 BL 2013 Excp 2012 Excp 2013

Item Number: 1 Item Name: Expand Coverage to Dep up to Age 26

Includes Funding for the following Strategy or Strategies: 

0002-0001-0001 Provide Basic Insurance Program to General State Employees. Estimated

OBJECTS OF EXPENSE

2009 OTHER OPERATING EXPENSE $0 $0 $0 $0 $7,693,000 $8,389,000 

TOTAL, OBJECT OF EXPENSE $0 $0 $0 $0 $7,693,000 $8,389,000 

METHOD OF FINANCING

1 General Revenue Fund $0 $0 $0 $0 $4,471,941 $4,876,526 

SUBTOTAL, GENERAL REVENUE FUNDS $0 $0 $0 $0 $4,471,941 $4,876,526 

994 GR Dedicated Accounts $0 $0 $0 $0 $279,256 $304,521 

SUBTOTAL, GR DEDICATED $0 $0 $0 $0 $279,256 $304,521 

6 State Highway Fund $0 $0 $0 $0 $1,383,971 $1,509,181 

998 Other Special State Funds $0 $0 $0 $0 $41,542 $45,300 

SUBTOTAL, OTHER FUNDS $0 $0 $0 $0 $1,425,513 $1,554,481 

555 Federal Funds

00.327.002 ERS Insurance $0 $0 $0 $0 $1,516,290 $1,653,472 

SUBTOTAL, FEDERAL FUNDS $0 $0 $0 $0 $1,516,290 $1,653,472 

TOTAL, METHOD OF FINANCING $0 $0 $0 $0 $7,693,000 $8,389,000 

FULL-TIME-EQUIVALENT POSITIONS (FTE): 0.0 0.0 0.0 0.0 0.0 0.0 

6.J. Page 1 of 8

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For release on delivery

10:15 a.m. EDT

August 2, 2010 

Challenges for the Economy and State Governments

Remarks by

Ben S. Bernanke 

Chairman

Board of Governors of the Federal Reserve System

at the 

Annual Meeting of the Southern Legislative Conference 

of the Council of State Governments 

Charleston, South Carolina 

August 2, 2010

Case 3:10-cv-00091-RV-EMT Document 80-6 Filed 11/04/10 Page 152 of 164
It is a pleasure to be able to address this conference of southern leaders and 

legislators. As some of you may know, I was raised only about 150 miles from here in 

Dillon, South Carolina, and remain connected to this area through family ties. 

Our nation has endured a deep recession that in turn was triggered by the most 

severe financial crisis since the Great Depression. Today, the financial crisis appears to 

be mostly behind us, and the economy seems to have stabilized and is expanding again. 

But we have a considerable way to go to achieve a full recovery in our economy, and 

many Americans are still grappling with unemployment, foreclosure, and lost savings. 

The recession--as all of you know too well--has also battered the budgets of state 

and local governments, primarily because tax revenues have declined sharply. Many

states and localities continue to face difficulties in maintaining essential services and 

have significantly cut their programs and work forces. These cuts have imposed 

hardships in local jurisdictions around the country and are also part of the reason for the 

sluggishness of the national recovery. 

Today, I will touch on current economic and financial conditions and then turn to 

some near-term and longer-term challenges--fiscal and otherwise--facing state 

governments. 

The Economic Outlook 

After a precipitous decline in late 2008 and early 2009, the U.S. economy 

stabilized in the middle of last year and is now expanding at a moderate pace. While the 

support to economic activity from stimulative fiscal policies and firms’ restocking of 

their inventories will diminish over time, rising demand from households and businesses

should help sustain growth. In particular, in the household sector, growth in real 

Case 3:10-cv-00091-RV-EMT Document 80-6 Filed 11/04/10 Page 153 of 164
- 2 -

consumer spending seems likely to pick up in coming quarters from its recent modest 

pace, supported by gains in income and improving credit conditions. In the business 

sector, investment in equipment and software has been increasing rapidly, in part as a 

result of the deferral of capital outlays during the downturn and the need of many 

businesses to replace aging equipment. At the same time, rising U.S. exports, reflecting

the expansion of the global economy and the recovery of world trade, have helped foster 

growth in the U.S. manufacturing sector. 

To be sure, notable restraints on the recovery persist. The housing market has 

remained weak, with the overhang of vacant or foreclosed houses weighing on home 

prices and new construction. Similarly, poor economic fundamentals and tight credit are 

holding back investment in nonresidential structures, such as office buildings, hotels, and 

shopping malls. 

Importantly, the slow recovery in the labor market and the attendant uncertainty 

about job prospects are weighing on household confidence and spending. After two years 

of job losses, private payrolls expanded at an average of about 100,000 per month during 

the first half of this year, an improvement but still a pace insufficient to reduce the 

unemployment rate materially. In all likelihood, significant time will be required to 

restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009. Moreover, nearly 

half of the unemployed have been out of work for longer than six months. Long-term 

unemployment not only imposes exceptional near-term hardships on workers and their 

families, it also erodes skills and may have long-lasting effects on workers’ employment 

and earnings prospects.

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Financial conditions--though much improved since the depth of the financial 

crisis--have become somewhat less supportive of economic growth in recent months. 

Notably, concerns about the ability of Greece and a number of other euro-area countries 

to manage their sizable budget deficits and high levels of public debt roiled global 

financial markets in the spring, including our own. In response to these fiscal pressures, 

European leaders put in place a number of strong measures, including an assistance 

package for Greece and backstop financing for euro-area countries. And, recently, 

European banking supervisors released the results of comprehensive stress tests of their 

banks.1

Like financial conditions generally, the state of the U.S. banking system has also 

improved significantly since the worst of the crisis. Loss rates on most types of loans 

seem to be peaking, and, in the aggregate, bank capital ratios have risen to new highs. 

However, many banks continue to have a large volume of troubled loans, and bank 

lending standards remain tight. With credit demand weak and with banks writing down 

problem credits, bank loans outstanding have continued to decline. Small businesses, 

which depend importantly on bank credit, have been particularly hard hit by restrictive

lending standards. At the Federal Reserve, we have been working to facilitate the flow of

funds to creditworthy small businesses. Along with the other banking supervisors, we 

have emphasized to banks and examiners that lenders should do all they can to meet the 

needs of creditworthy borrowers, including small businesses.

 On net, these measures appear to have reduced concerns in financial markets 

about European prospects. 

2

 

1 For information on the 2010 European Union stress testing, see the Committee on European Banking 

Supervisors’ website at www.c-ebs.org/EuWideStressTesting.aspx.

 We also have conducted 

2

 See Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National 

Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, and 

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extensive training of our bank examiners, with the message that lending to viable small 

businesses is good for the safety and soundness of our banking system as well as for our 

economy. We will continue to monitor bank lending and to seek feedback from banks 

and borrowers. 

Inflation has been low, with consumer prices rising at an average annual rate of 

about 1 percent in the first half of this year, and we anticipate it will remain subdued over 

the next couple of years.3

Fiscal Challenges for State Governments 

 Slack in labor and product markets has damped wage and price 

pressures, and rapid productivity increases have helped firms control their production 

costs. Meanwhile, measures of expected inflation generally have remained stable.

 Cuts in state and local programs and employment are also weighing on economic 

activity. These cuts principally reflect the historically large decreases in state tax 

revenues during the recession. Sales tax revenues have declined with household and 

business spending, and income tax revenues have been hit by drops in wages and salaries, 

capital gains, and corporate profits. In contrast, property tax revenues collected by local 

governments generally held up well through the beginning of this year, although 

reappraisals of the values of homes and commercial properties may affect those 

collections in the future. For the 15 states represented in the Southern Legislative 

 Conference of State Bank Supervisors (2010), “Regulators Issue Statement on Lending to Creditworthy 

Small Businesses,” joint press release, February 5, 

www.federalreserve.gov/newsevents/press/bcreg/20100205a htm.

3 The discussion in the text refers to inflation as measured by the price index for personal consumption 

expenditures.

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Conference (SLC), state tax revenues fell roughly 10 percent in 2009, similar to the

average of all states.

4

Medicaid spending is another source of pressure on state budgets. The recession 

and the weak job market have swelled the rolls of Medicaid participants. In 2009, 

caseloads were 11 percent above their 2007 level in the region represented by the SLC, 

again similar to the average in all states. 

With revenues down and Medicaid spending up, other categories of spending by 

state governments have been tightly squeezed. Over the past year, numerous state 

governments have laid off or furloughed employees, decreased capital spending, and 

reduced aid to local governments. Indeed, state and local payrolls have fallen by more 

than 200,000 jobs from their peak near the end of 2008. Some states have also raised 

taxes, but the weak economy has made it difficult to find significant new revenues. 

Assistance from the federal government, especially through the fiscal stimulus 

package, has eased, but certainly not eliminated, the budget difficulties faced by states. 

Although states and localities will continue to receive significant aid this year, that source 

of help will be winding down next year. 

On a more positive note, state and local tax revenues seem set to increase as 

economic activity expands. Indeed, 11 of the 15 states of the SLC reported earlier this 

year that they expect fiscal year 2011 revenues to be at least somewhat higher than the 

previous fiscal year.5

 

4 The Southern Legislative Conference comprises the states of Alabama, Arkansas, Florida, Georgia, 

Kentucky, Louisiana, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, 

Virginia, and West Virginia.

 And improvements in the job market should gradually ease some 

5 See Southern Legislative Conference (2010), “What Are the Revenue Estimates for Fiscal Years 2010 and 

2011 in the SLC States?” Question of the Month, February, 

www.slcatlanta.org/QoM/2010/QuesFeb10 html. 

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of the demands on Medicaid and other social services. Moreover, the municipal bond 

market has remained reasonably receptive this year to most borrowers, with rates low and 

new issuance relatively solid, despite the concerns about the fiscal positions of many state 

and local governments. All that being said, with economic conditions still far from 

normal, state budgets will probably remain under substantial pressure for a while, leaving 

governors and legislatures a difficult juggling act as they try to maintain essential 

services while meeting their budgetary obligations. 

A question for the longer run is whether the vulnerability of state budgets to 

business-cycle downturns can be ameliorated. The pressures that states face during and 

after a recession are the result, in part, of balanced-budget rules in state constitutions that 

prohibit the use of long-term borrowing to cover operating budget shortfalls, a constraint 

not faced by the federal government, as you know. I do not advocate changing the 

balanced-budget rules followed by 49 of the 50 states; they provide important discipline 

and are a key reason that states have not built up long-term debt burdens comparable to 

those of many national governments. However, as is the case today, these rules may 

force significant state cutbacks in bad economic times when services are most needed. 

Moreover, many government programs--in areas such as education or health care, for 

example--are likely to be most effective when funding sources are stable and predictable, 

allowing for longer-term planning. 

Tools exist to help mitigate the effects of the business cycle on state budgets. 

Many states deal with revenue fluctuations by building up reserve--or “rainy day”--funds 

during good economic times. Measured as a percent of general fund expenditures, the 

aggregate reserve fund balances for all state governments stood at a record of about 

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12 percent at the end of 2006; the states represented by the SLC had accumulated aboveaverage reserves of around 16 percent. These high reserve-fund balances were helpful in 

lessening the severity of spending cuts or tax increases in many states. Nevertheless, 

given the depth of the recent recession, even these historically high reserve-fund balances 

proved insufficient to buffer fully the budgets of most states. Thus, state governments 

may wish to revisit their criteria for accumulating fiscal reserves. Building a rainy-day 

fund during good times may not be politically popular, but it can pay off during the bad 

times. 

In principle, some smoothing of state government expenditures over time could 

take place through the capital budget. Maintaining or even increasing the pace of 

infrastructure construction when the economy is weak fosters economic development and 

provides local jobs, and it may even allow the state to get more bang for the buck because 

of increased competition among private contractors when demand is slack. However, 

voters and policymakers may understandably be reluctant to approve new bond issues 

and take on additional costs for debt payments in a period of fiscal and economic stress.

Beyond balanced-budget rules, state government finances also fluctuate because 

of the increasing sensitivity of their revenues to changes in economic conditions. For 

example, capital income, which tends to vary substantially more than wage and salary 

income, has over time become a relatively more important source of state personal 

income taxes.

6

 

6 See Richard Mattoon and Leslie McGranahan (2008), “Revenue Bubbles and Structural Deficits: What’s 

a State to Do?” Working Paper No. 2008-15 (Chicago: Federal Reserve Bank of Chicago, July), available 

at www.chicagofed.org/webpages/publications/working_papers/2008/wp_15.cfm; and David L. Sjoquist 

and Sally Wallace (2003), “Capital Gains: Its Recent, Varied, and Growing (?) Impact on State Revenues,” 

State Tax Notes, August 18, available at www.taxpolicycenter.org/publications/url.cfm?ID=1000613. 

 Also, sales taxes that understandably exempt certain necessities may also 

lead to more cyclicality in collections. As state legislatures review their tax systems, they 

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may wish to consider revenue stability along with other critical features of the tax code 

such as fairness, support for economic growth, and administrative costs.

Of course, healthy economic growth can ease state and local fiscal problems--and

federal fiscal problems, for that matter. Notwithstanding the very difficult near-term 

budget issues you face, I urge you not to take your eye off the important goal of 

promoting growth. 

A basic economic principle is that growth requires investment. Investment 

includes physical investment such as infrastructure development; surely, adequate 

transportation networks and the like are necessary for economic growth. But for

sustained economic development, investment in people--in their knowledge and skills--is 

even more important. No economy can succeed without a high-quality workforce, 

particularly in an age of globalization and technical change. I think this is a lesson that 

the South, as a region, has learned quite well. When I attended public schools in South 

Carolina in the 1960s, measures of per-pupil spending, years of schooling, and student 

achievement in the South lagged significantly behind other parts of the country. Since 

then, those indicators have changed, very much for the better. Because of the concerted 

efforts of state and local governments, high school completion rates in the South have 

gradually converged to the national average. Southern colleges and universities have 

become more prominent nationally and internationally, and we have seen the emergence 

of leading centers of education and innovation, such as the Research Triangle Park area 

in North Carolina and the high-tech area around Austin, Texas. Economic progress and a 

high quality of life have in turn attracted educated workers and new industries. 

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Doubtless, investment in education and training has been a key source of the remarkable 

economic gains that the South has achieved over the past 50 years or so. 

I am confident that, in light of this experience, your efforts to improve education 

and workforce skills will continue. As you do that, please keep in mind that formal K-12 

and post-secondary education, as important as they are, do not alone build better 

workforces. Research increasingly has shown the importance for both individuals and 

the economy as a whole of both early childhood education as well as efforts to promote 

the lifelong acquisition of skills. The payoffs of early childhood programs can be 

especially high.

7

 For instance, investment in preschool programs for disadvantaged 

children has been shown to increase high school graduation rates. Because high school 

graduates have higher earnings, pay more taxes, and are less likely to need to use public 

health programs, such investments can pay off even from the narrow perspective of state 

budgets; of course, the returns to the overall economy and to the individuals themselves 

are much greater.8

Additionally, in a dynamic economy in which job requirements are constantly 

changing, individuals already in the workforce need opportunities to improve their skills 

throughout their lives. There are many ways to provide such opportunities. For example, 

community colleges and vocational schools play essential roles in training and retraining 

workers, especially if they do so in close collaboration with private employers, and they 

do so at a relatively low cost. State governments can facilitate public-private 

 

 

7 For example, see the work of the Human Capital Research Collaborative, a joint project of the University 

of Minnesota and the Federal Reserve Bank of Minneapolis, at www.humancapitalrc.org. 8 See, for example, Henry M. Levin, Clive Belfield, Peter Muennig, Cecilia Rouse, Barbara Wolfe, and 

Nathan Tefft (2007), “The Public Returns to Public Educational Investments in African American Males,” 

Discussion Paper 112 (Minneapolis: Early Childhood Research Collaborative, April), available at 

www.earlychildhoodrc.org/papers/dp112-abstract.cfm. 

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collaboration to help individuals gain skills that the market demands. Though creating 

opportunities for workers to retrain is always important, it is especially critical now, 

when the high rate of long-term unemployment threatens the longer-term employability 

and productivity of many. 

Providing economic opportunity and rising living standards for as many people as 

possible is, of course, the fundamental rationale for continued economic development. 

From the perspective of government finances, however, healthy local economies will also 

be necessary if state governments are to successfully confront some difficult, longer-term

fiscal issues. As you know, with the retirement of state employees that are part of the 

baby-boom generation and the continued rise in health-care costs, states’ retiree pension 

and health-care obligations will become even more difficult to meet in coming years. 

Estimates of states’ unfunded pension liabilities span a wide range, but some researchers 

put the figure as high as $2 trillion at the end of last year.

9

 States’ unfunded liabilities are 

significantly higher than before the recession and financial crisis because many pension 

fund investments have declined in value, and because many states have found it difficult 

to maintain pension contributions while their budgets are under stress. Indeed, some 

estimates suggest that, on average, states would need to more than double their typical

annual pension contributions over the next decade to avoid collectively exhausting their 

pension funds during the next couple of decades.

10

 

9

See Alicia H. Munnell, Richard W. Kopcke, Jean-Pierre Aubry, and Laura Quinby (2010), Valuing 

Liabilities in State and Local Plans (Chestnut Hill, Mass.: Center for Retirement Research at Boston 

College, June), available at http://crr.bc.edu/briefs/valuing_liabilities_in_state_and_local_plans.html.

 This daunting problem has no easy 

solution; in particular, proposals that include modifications of benefits schedules must 

10 See Joshua Rauh (2010), “Are State Public Pensions Sustainable? Why the Federal Government Should 

Worry About State Pension Liabilities,” Working Paper Series (Evanston, Ill.: Northwestern University, 

May), available at http://ssrn.com/abstract=1596679. 

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take into account that accrued pension benefits of state and local workers in many 

jurisdictions are accorded strong legal protection, including, in some states, constitutional 

protection.11

In addition to pensions, states will have to address the burgeoning cost of retiree 

health benefits. Estimates of these liabilities are subject to significant uncertainty, largely 

because we have little basis on which to project health-care costs decades into the future. 

However, one recent estimate suggests that state governments have a collective liability 

of almost $600 billion for retiree health benefits.

12

Of course, the demographic and health-care trends faced by state governments 

present severe challenges for federal fiscal policymakers as well. Long-term projections

of the federal government’s budget under current policies and plausible economic 

assumptions show a structural budget gap that is both large relative to the size of the 

economy and increasing over time.

 These benefits have traditionally been 

funded on a pay-as-you-go basis and therefore could entail a substantial fiscal burden in 

coming years as large numbers of state workers retire. 

13

 

11 See Jeffrey R. Brown and David W. Wilcox (2009), “Discounting State and Local Pension Liabilities,” 

American Economic Review, vol. 99 (May), 538-42. It should be noted that future pension accruals and 

health benefits generally seem to be accorded a lower level of protection.

 To steer clear of sudden, sharp, and disruptive 

shifts in spending programs and tax policies, and to retain the confidence of the public 

and financial markets, federal policymakers need to develop a credible plan to restore 

fiscal sustainability. 

12See Pew Center on the States (2010), The Trillion Dollar Gap: Underfunded State Retirement Systems 

and the Road to Reform (Washington: PCS, February), available at 

www.pewcenteronthestates.org/report_detail.aspx?id=56695. 13 For example, see the alternative fiscal scenario in the Congressional Budget Office (2010), The LongTerm Budget Outlook (Washington: CBO, June), available at 

www.cbo.gov/doc.cfm?index=11579&zzz=40884. 

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The states have the opportunity to serve as role models for effective long-term 

fiscal planning. Given the size of long-term obligations and the importance of meeting 

commitments to employees and the public, I don’t think these problems can be solved 

simply through across-the-board cuts in existing state programs. Instead, states should 

intensively review the effectiveness of all of their programs and be willing to make 

significant changes to deliver necessary services at lower cost. This willingness to look 

for new solutions seems especially important in the case of health programs, where costs 

are growing the most quickly. 

Conclusion 

Today I have highlighted the challenges that state legislators face, both in the 

South and in other regions. In the past few years, the weak economy has significantly 

reduced state and local government revenues, which in turn has forced difficult decisions 

on spending and taxes. An improving economy should help, but state finances will 

remain under pressure for some time. In the longer term, like the federal government, 

state governments must respond to the aging of the population and the seemingly 

inexorable rise in health-care costs. These are daunting challenges indeed, but I believe 

we can find constructive ways to meet them, and I suspect that many of these solutions 

will be found at the state level. Dealing with the fiscal challenges at all levels of 

government will be essential to ensuring that our resilient and dynamic economy delivers 

rising living standards to the citizens of your states and to our nation as a whole. 

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