The Teacher Retirement System of Texas may be under attack next session by policymakers, think tanks and organizations opposed to the structure of teacher retirement benefits. These detractors point to the fund’s multi-billion dollar unfunded liability to argue that the benefits promised to school retirees are a huge drain on the state budget, and that TRS should be converted to a defined contribution plan (see box at right). How accurate is this portrayal of the retirement system, and how real is the threat?

In fact, the Teacher Retirement System of Texas is, overall, in reasonably good shape. The fund is stable and is one of the better-funded public pension systems in the country. There is no danger at this time of benefits not being paid to retirees. But there are certainly concerns about its long-term health; the extended downturn of the national and world economies has taken its toll on the pension fund, which relies heavily on investment income for its financial health. 

Highlights of actuarial valuation report

At its November 2011 meeting, the TRS Board of Trustees was briefed on the latest actuarial valuation of the pension fund. Investment returns during this fiscal year (ending Aug. 31, 2011) were strong, at 15%, but heavy losses in recent years are still having a negative impact on the fund’s actuarial status. Highlights of the analysis follow:

  • The market value of the fund increased from $97.7 billion in August 2010 to $107.4 billion in August 2011.
  • The fund is projected to have sufficient assets to pay retirement benefits through 2075, the same projection as last year.
  • Some relatively minor changes could make a substantial difference in the long-term viability of the fund. The actuarial firm reporting to the Board referred to the current issues as a “manageable” problem. 
  • The contribution from the state that would be necessary to make the fund fully sound increased from 7.77% to 8.13%. (The state currently contributes 6.0%.)
  • Investment losses from previous years will continue to affect the fund in the next few years, so substantial and sustained investment earnings (well over 8%) will be necessary for the fund to show any actuarial improvement.
  • The fund will still not be able to afford a benefit increase for retirees in the near future.
Also of interest
  • The funding period - the time it would take the fund to pay off its long-term obligations under the current circumstances - remains at “never.” This is not unprecedented for TRS and other funds during difficult economic times, and this measure could return to a specific number of years after a sustained period of positive returns.
  • The “funded ratio” decreased slightly from 82.9% in 2010 to 82.7%. (The national average for public pension funds was 75.7% in December 2010.) 80% or above is considered “healthy.”

So what about the claim that TRS is a drain on the state?

It’s a tricky question. The state does have an obligation to pay benefits, and under current circumstances, the state would have to make higher contributions in order to meet that obligation. There is growing political pressure to provide a benefit increase for retirees, which would require an additional expenditure from the state.

On the other hand, pension funds operate in the long term, and nothing in statute requires that the state contribute a higher amount right now to bring the fund to immediate full funding; legislators have the option to wait out the investment markets with the expectation that the predicted recovery will come sooner rather than later. As noted earlier, the fund could continue paying benefits for several decades without increased state funding. 

DB vs. DC

Defined benefit plan – TRS is a defined benefit plan, which means that a certain level of benefits calculated by a standard formula is guaranteed (unless revised by law) and the contributions made by members and/or the state can be adjusted to ensure that the promised benefits can be paid.
Defined contribution plan – a specific level of benefit is not guaranteed, only the amount of the contribution is set, and individuals manage their own retirement accounts; structure is similar to a 401(k), 403(b) or IRA.

Key issues to understand

It's important that lawmakers understand some key issues when considering changes to TRS (and these are good talking points when you meet with legislators and candidates):

  1. The vast majority of school employees and retirees do not pay into Social Security and will not be eligible for Social Security benefits, even through a spouse. TRS is the only source of retirement income for most retirees, and reliance on a 401(k)-style plan without the additional security of monthly SS benefits - especially during times of economic stress - is a recipe for disaster.
  2. Texas is already contributing less (by far) toward teacher retirement than any other state - other states that do not also contribute to Social Security average a contribution rate of about 14% to their state/teacher pension plans, compared to Texas’ 6.0-6.4%! 
  3. Proposals to create a defined contribution plan for new hires have been estimated to cost billions of dollars in the short term, because with fewer people contributing to the traditional fund, the state will have to shore up the existing plan in addition to continuing to make promised contributions for the two plans.  
  4. TRS is well-managed and well-funded, and has not experienced the problems that have forced increased spending in other states. As just one example, several states stopped contributing to their pension fund during times of economic growth when plans were “overfunded.” The Texas Constitution requires minimum payments from both the state and members, so even when TRS is operating in the black the funding sources continue to be stable.
  5. The Legislature has already made adjustments to benefits that helped mitigate the effect of the troubled investment climate; in 2005 a number of changes were made that lowered benefits and increased costs to members.

TCTA will report more later on the specific efforts under way to “reform” TRS. High-powered individuals and groups are supporting the effort to convert TRS to a defined contribution plan, and unless legislators are armed with the solid information that supports maintaining the current structure, we’ll be facing a major battle in the next legislative session. We suggest that school employees determine candidates’ stances on retirement issues - specifically whether the candidate supports turning TRS into a defined contribution plan - when preparing for the upcoming primary elections.