The TRS Board met Dec. 13 and 14 in Austin with a few key items on the agenda. The board received a briefing on the actuarial status of the pension fund, learning that, as expected, recent board action resulted in lowered financial indicators. Trustees were also provided with TRS staff's update of a 2013 study that reaffirms the cost-effectiveness of the current structure of the pension plan.

Actuarial health downgraded

As of Aug. 31, 2018, the date on which the actuarial valuation is based, the TRS pension fund held $154 billion dollars. Although the fund is stable, the newly adopted rate of return assumption for TRS investments (7.25%, down from the previous 8% assumption) drove down several important figures. The unfunded liability grew to $46 billion, from last year's $35 billion, and the time it would take to pay off current obligations jumped from 33 years to 87 years. Under state law, that period would have to be well under 30 years in order for TRS to provide a benefit increase to retirees.

This lowered financial status of the TRS pension fund will be important to legislative deliberations. On one hand, a fund that appears unhealthy could lend ammunition to those who would like to restructure TRS as a 401(k)-style retirement plan. But lawmakers may instead take the fund's status as a warning that the state needs to enhance contributions and shore up the basic funding for the plan, so there will likely be proposals to increase the state's contribution. It is possible that contributions by districts and/or active employees could be on the table as well, although no such proposals are currently being discussed.

Pension structure study released

TRS staff updated a study that was first published in 2013, examining the pension fund's current defined benefit status in comparison to alternatives such as defined contribution or hybrid plans. (Note: a defined benefit plan guarantees a certain level of benefits and contributions are adjusted to achieve that level. A defined contribution plan only guarantees a certain level of contributions, and benefits are based in large part on investment returns — a 401(k) structure.)

The updated study reaffirms the conclusions of the original: that the current defined benefit model provides the best and most effective retirement benefits to Texas educators. The study emphasizes that the lack of Social Security benefits for 96 percent of Texas school employees means that the TRS lifetime benefit is for many the only source of retirement income.

The study concludes that participating in TRS instead of Social Security saves public school employers more than $1.5 billion per year. In addition, alternative structures would cost considerably more to provide the same level of benefits to retirees. This information will be very helpful in countering the arguments of policymakers who would like to convert TRS to a defined contribution plan.