Next week, at its July 26-27 meeting, the TRS Board is scheduled to take action on a key financial issue that will affect the TRS pension fund and the future of retiree benefits — a recommendation to lower the fund’s assumed rate of investment returns from 8 percent to 7.25 percent. TCTA opposes this major shift. We have advocated a more moderate change as well as a phase-in of any significant reduction. We encourage educators to contact the TRS Board to express your concerns by emailing them via Katherine.farrell@trs.texas.gov.

TCTA has reported on this issue repeatedly, as the matter has come before the Board in February (action was postponed) and in April (with one Board member absent, the Board was deadlocked and could not agree on whether to change the rate to 7.5 percent or 7.25 percent). The below explanation is excerpted from our April story:

Background

The TRS actuary has recommended a change in the assumed return rate for TRS investments. That rate is currently 8 percent, but the actuarial firm recommended a 7.25 percent rate. The direct impact of changing the return rate assumption — essentially saying “We don’t think the fund can earn as much on its investments as it used to” — is that the pension fund will appear to be less financially stable. This has a few consequences: it will give ammunition to those who wish to restructure TRS to be a 401(k)-style plan, and it will make it much more difficult to provide a cost-of-living increase to retirees in the near future. (See a more detailed explanation here.)

How will this affect me?

This kind of financial information can seem remote from the classroom or the pocketbook, so teachers might wonder whether they should be concerned, or how the decision might affect them. In one sense, the answer is reassuring: Although there have been rumors through the teacher grapevine that retiree benefits would be reduced, there is no immediate effect on either active or retired teachers. But as noted in the above paragraph, the consequences down the road are potentially harmful.

What else should I know?

  • To be clear — this is not a change in the amount the legislature contributes to TRS. That rate is currently 6.8 percent, and only the legislature can revise it. This change is to one of the factors used in determining how healthy the fund is considered to be.
  • The TRS Board can take action on this financial assumption, but cannot change benefits. Only the legislature can make adjustments — upward or downward — to how benefits are calculated.
  • The legislature does not have to take any action based on this change. But there may be pressure to act in order to improve the fund’s financial outlook. This could mean an increase in state funding, a decrease in benefits, or a combination of the two. A decrease is unlikely to involve lowering current retirees’ benefits (although we have gone far beyond the point where we can safely say “that would never happen”) and would more likely involve changing benefits for future retirees.
  • TRS is considering this change both in response to legislative pressure and in response to advice from its actuarial firm based on trends seen in pension plans across the country. (TRS’s current 8 percent return assumption used to be the norm among the country’s large public pensions, but is now an outlier, as other funds have reduced their assumed rate in recent years.) However, there is no requirement that the assumption be changed at this time.
  • While a change in the assumed rate might be justified, TCTA and other groups from the education community have opposed the actuary’s recommendation to drop to a 7.25 percent rate, 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.
  • It is important that legislators feel continued pressure from teachers to fully fund TRS, even if that requires an increase in the state’s contribution. Some lawmakers complain that the pension fund is a drain on the state budget, but in fact Texas is getting off cheap compared to other states, where either the contribution rate is considerably higher or the state pays into both the retirement system and Social Security.