On the first day of the TRS Board of Trustees’ three-day retreat in Edinburg, the board faced what some referred to as possibly the most important decision it would make this year — whether to lower the pension fund's assumed return rate for TRS investments. The result — to delay making a decision until April — was at least a temporary win for educators, with more work to be done.

The facts and figures are dry, but the policy and political issues surrounding the matter are extremely important to TRS members. These are the quick takeaways from the meeting, but read below for a more thorough explanation.

Takeaways

  • The TRS Board considered whether to change some financial figures used by actuaries in a way that would give the appearance of a less healthy pension fund.
  • The key figure in question is the assumed return rate for TRS investments. That rate is currently 8 percent, but the actuarial firm recommended a 7.25 percent rate.
  • TCTA and other groups from the education community spoke against the actuary’s recommendation, urging instead that the rate be adjusted either to a more moderate figure, or incrementally over a period of time rather than all at once.
  • We are concerned that the dramatic drop from 8 percent to 7.25 percent provides an inaccurately bleak picture of the fund’s health to legislators. This will give ammunition to those who wish to restructure TRS to be a 401(k)-style benefit, and/or make it more difficult to provide a cost-of-living increase to retirees in the near future.
  • After hearing the input of TCTA and others, and upon a recommendation from the employee representatives on the Board (led by TCTA members Nanette Sissney and Dolores Ramirez, along with Schertz-Cibolo-Universal City ISD superintendent Greg Gibson), the board chose to delay the decision until its April meeting.

When the actuaries estimate the financial health of the pension fund, they look at income over the long term (contributions from the state/districts/members, plus investment returns) versus the benefits that must be paid out over that same period. The information they consider includes projections of factors like teacher pay, inflation, mortality rates, and investment returns.

For many years, the assumption has been that the pension fund investments will earn at least 8 percent. With a volatile economy over the last couple of decades and an uncertain future, many policymakers and financial experts have suggested that 8 percent is no longer a reasonable assumption, and have encouraged the board to revise that figure downward.

When the return rate is lowered, it makes the system appear less healthy, even though in reality the same amount of money is coming in and the benefits have not changed. But the assumption is that less money is being earned on investments to help pay for those benefits, so all of the related figures (such as the funding period, the funded ratio, and the amount the state would have to contribute to make the fund actuarially sound) look worse.

This can be dangerous going into a legislative session. At a 7.25 percent rate, TRS would have to ask for state contributions of more than $700 million per year to keep the funding period within statutory requirements. It is important to note that the state will not necessarily increase its contributions to meet that need. And instead, some lawmakers could argue that the fund is not sustainable, and benefits (or the benefit structure) should be changed.

TCTA will continue our work advocating for our members and the security of their retirement benefits, and will renew our request to not accept the 7.25 percent recommendation at the board’s April meeting.