TRS is again in the news, and misinformation and rumors abound. There is often a kernel of truth underlying the rumors, so we will examine that bit of truth while making sure that you’re aware of the full story.

Rumor: TRS is in bad shape. The pension system is underfunded, there’s not enough money to pay for a benefit increase for retirees, and it’s very expensive for the state to maintain the plan.

The kernel of truth: TRS actually is underfunded, and there’s not enough money to pay for a benefit increase for retirees. The problems plaguing the U.S. and world economic markets have taken a toll on virtually all pension funds, many of which rely heavily on investment income as a revenue source. Until TRS is fully funded, the system cannot – by law – provide for a retiree benefit increase, though legislators could make an appropriation from the state budget to do so.

The rest of the story: Although TRS is not currently fully funded, it is considered sound. Its 83% funded ratio is above the national average for public pension funds, and above the 80% benchmark considered to be healthy. The system could continue to pay benefits for several decades even if funding were cut off now. The laws that govern the TRS system have ensured that we are not facing many of the problems experienced in other funds, particularly those in states where the government took “contribution holidays” or where cost-of-living increases are guaranteed regardless of the fiscal health of the fund.

Because many experts predict that the economy may not bounce back fully in the near term, it is reasonable to take a look at TRS to see if some of the expectations regarding investment returns, inflation, etc. are still appropriate. But it is important to remember that this is a long-term fund, and there is no need to take quick action to “save the fund.”

Rumor: Legislators want to convert TRS to a 401(k)-style plan. They think the pension fund is a drain on the state and that public employees should be like most private sector employees and not be entitled to monthly pension checks.

The kernel of truth: There are those who would like to eliminate “defined benefit” plans such as TRS, in which a certain level of benefits is guaranteed, in favor of a “defined contribution” plan like a 401(k), in which only the contributions are guaranteed. While this includes some legislators, the most vocal advocates are from the business community. These individuals and groups believe that a defined benefit plan is a drain on state dollars, pointing to other pension funds and other states where the state or local contributions have risen to very high levels in order to cover benefits. They tout the advantages of a 401(k) plan, such as the ability of the employee to manage his/her own investments, and portability from job to job.

The rest of the story: TRS is not “other pension funds and other states.” There is some reason for concern regarding some funds, but those can be attributed more to poor management and investment practices than to the fundamental nature of a defined benefit plan. There are many arguments for why TRS is different, including some already alluded to: employees and the state have always made contributions, even when the system was overfunded; benefits are modest; and there are no provisions for automatic cost-of-living benefit increases. Even more important for lawmakers to understand, though, is that TRS is a great deal – the state and school districts are not required to contribute to Social Security, and instead pay essentially the same amount to TRS, while employees get a better benefit than they would under Social Security. There would be no savings to the state to switch to a defined contribution plan without considerably lowering contributions, which would have devastating effects on retirement benefits.

Fortunately, several key lawmakers are supportive of TRS’s current structure. However, they remain open to all ideas on how to improve the fund, and the Legislature has required TRS to conduct a study that would include information on the effects of moving to a hybrid defined benefit/defined contribution plan. This means that TRS members need to continue to inform policymakers about why TRS is different from the many funds that are in trouble, and why TRS is so important to retired and active school employees.

Rumor: They’re going to change the Rule of 80/multiplier/other benefits. The Legislature is going to lower benefits next session to help shore up the retirement system.

The kernel of truth: The legislatively-mandated study mentioned above also requires that TRS study the effects of other changes to retirement benefits, such as those regarding retirement eligibility (Rule of 80), the multiplier, how final average salary is calculated, etc. If lawmakers are concerned about the system’s fiscal health, the ongoing budget crunch could lead them to reducing benefits as opposed to putting more money in the system. Some have specifically pointed to the Rule of 80 as being overly generous and perhaps having a negative impact on the system by encouraging retirement at a young age.

The rest of the story: Most of our members have been around long enough to remember the changes made to retirement benefits in 2005. While TCTA opposed those changes, the lowering of benefits at that time helped mitigate the subsequent effects of the economic crisis on the pension fund, and TRS benefits are very much in line with those of other pension funds, particularly when accounting for the fact that most members do not participate in Social Security. We will need to be on guard against legislative changes in this area, but for now, nothing has been specifically proposed.

Rumor: TRS-Care (retiree health insurance) is going away. The fund is almost insolvent and because the state doesn’t have enough money to fix it, they’re going to eliminate the program.

The kernel of truth: TRS-Care is, in fact, in bad shape. The funding structure for TRS-Care is fundamentally flawed, and was never intended to last more than about a decade. TRS-Care is projected to last through about 2014 or 2015, so the Legislature will need to take action next session.

The rest of the story: TRS staff have assured members that lawmakers have not at this time considered eliminating TRS-Care. However, the system will either need a quick and significant injection of funds, changes in benefits, or both. Funding comes from the state, school districts, active members and retiree premiums, and it is likely that proposals will be made to increase any or all of those income sources. Other possibilities that have been mentioned include combining the three levels of TRS-Care to only the required Level 1 (the most basic level of coverage), or changing TRS-Care eligibility requirements to something like a Rule of 85. (One of the major issues facing the plan is that younger retirees, who are not yet eligible for Medicare, are more expensive to cover.)

TRS has provided multiple opportunities for members to provide input and ask questions on these issues, and will submit a report to the Legislature by Sept. 1, 2012, regarding the impact to the system and to members of any potential changes to both the pension system and TRS-Care. TCTA has testified at these meetings and will continue to provide feedback on any specific options under consideration, and we are working to educate incumbent legislators and House and Senate candidates about the “rest of the story.”