With the 86th Legislature getting into full gear, Texas Gov. Greg Abbott has listed school finance reform and increased teacher pay as the first emergency item. Directly related to teacher pay is a teacher’s pension in the Teacher Retirement System (TRS) of Texas. Unfortunately, this pension plan is in dire need of reform.
TRS’s primary issue is its funded ratio, based on benefits paid and future contributions.
In a recent paper authored by TPPF and the Reason Foundation, we note that as of August 2017, TRS was funded at 76.1 percent. Some consider a funded ratio of 80 percent as “actuarially healthy,” but anything below 100 percent isn’t fully funded. At that time, the unfunded obligation was $35.4 billion (with an assumed rate of return of 8 percent).
After the fund underperformed for years, the TRS Board lowered the assumed rate to 7.25 percent late last year. This move by the Board increased transparency, demonstrating to teachers and the public the true health of the plan, while moving closer to the national average for assumed rates of return for public pension plans of 7.38 percent in 2017.
But there are other now other issues.
Lowering the assumed rate of return increased TRS’s unfunded obligation to $46.2 billion and lengthened the amount of time this plan would need to become funded. That’s not all, though, because the average annual return has been only 5.8 percent in the last decade—during a period of otherwise high returns in the markets. Assuming a more realistic rate of 6 percent would put the unfunded obligation at a staggering $85 billion.
Clearly, TRS has a massive problem on its hands, which must be addressed so that teachers don’t have to worry about these retirement funds, and so that current and future teachers don’t begin to avoid the profession because of this uncertainty.
One valiant attempt this session to address TRS’s problems is Senate Bill 393.
The bill requires that the contribution rates for the state, school districts, and active members increase gradually over a six-year period. The state would increase its contribution from 6.8 percent to 8 percent. Districts that don’t contribute to Social Security (most don’t) would increase their contributions from 1.5 percent to 2 percent. And employees would increase theirs from 7.7 percent to 9.5 percent.
Also, to account for the increased out-of-pocket contribution rates of active employees, the bill would increase the salaries of non-teaching staff over time. This complements SB 3, which raises teacher salaries by $5,000 across-the-board at a designated cost in the Senate budget of $3.7 billion in the upcoming budget period.
And SB 500, the Senate’s supplemental bill, increases TRS funding from the Economic Stabilization Fund (ESF) by $300 million.
There’s plenty of taxpayer money being considered to go to teachers in some capacity this session in these Senate bills. For its part, the House has also designated more money for teachers, with an increase in school funding of $9 billion, along with property tax reforms.
While raising salaries across-the-board without performance increases isn’t ideal (it sends poor signals to both effective and ineffective teachers), raising all employees’ pay could place a larger burden on the pension plan, because defined benefits are tied to employee salaries.
SB 393 is a good start to the conversation to get to a fully funded plan that secures current teachers’ and retirees’ funds for retirement. Putting TRS on a path to a cash balance plan with a hybrid system would be better, as noted by the current state of the Texas Municipal Retirement System (TMRS).
For example, additional reforms should be tied to the increase in funding from taxpayers. New teachers, for example, should be given the choice of entering the current system or picking a defined-contribution plan that allows them to set their own course of retirement rather than be dependent on the state.
This doesn’t mean that teachers will need to have a great deal of financial wisdom as financial managers, like those investing current TRS dollars, will work with them. But it will mean that they won’t have to worry about how the state might shortchange their future. Teachers are smart, capable of controlling their own destiny.
By addressing TRS’s solvency problem, the Legislature can secure the retirement for teachers while reducing the likelihood taxpayers will be on the hook to bail out an underperforming pension system.
The Legislature should address this problem this session as part of the school finance discussion so Texas can have the best teachers possible. Besides a child’s parents, teachers are the most important thing to our children’s educational future.