TRS Defined Benefit Plan Under Fire

 

Legislators are struggling with how to address the projected $20 billion plus budget deficit. State Representative Jim Pitts (R-District 10) has said the state budget bill will be presented for the first time next Tuesday (January 18), and the House will have a chance to discuss the proposal as early as Wednesday (January 19). Legislators are predicting that everyone will feel the pain, and Representative Pitts has stated that there are no “sacred cows.”

 

State Representative Craig Eiland (D-District 23) spoke at the Texas Public Policy Foundation conference in Austin on January 13, and predicted that the state contribution to the Teacher Retirement System of Texas (TRS) pension trust fund will be lowered from the current 6.644 percent to the Texas Constitutional minimum of 6 percent. Representative Eiland, who has been very involved in helping the pension fund to be financially sound and in securing a supplemental payment for retirees in 2007, said the state simply could not afford the higher contribution level.

 

In 2007, the Texas Legislature passed a bill requiring the state contribution to be equal to or higher than the active member contribution. Active employee contributions are set by statute. Currently, that contribution is 6.4 percent. If the legislature adheres to legislation passed in 2007, the state contribution and active member contribution would both be dropped to an expected 6 percent. This would further worsen the condition of the TRS pension trust fund.

 

It is likely that many legislators do not believe the TRS pension trust fund is in immediate danger, unlike pension funds in Illinois, California, and New Jersey, among others. The more immediate budget crisis may take precedence in their minds on what programs to fund. The reduction in state contribution to TRS comes at a time when the system has made tremendous investment gains and is recovering better than expected from the recession. By reducing the state contribution to TRS fund, it becomes more difficult to develop a plan to provide retirees with a permanent pension increase.

 

The active member contribution has remained consistent at 6.4 percent since 1984. If the state budget calls for a reduction in active employee contributions, it will be the first change in active sector TRS pension trust fund contributions in over 26 years.

 

Lowering pension fund contributions has the short-term impact of reducing revenue for investments and slowing the system’s recovery from the recession. It also has a long-term impact of worsening the financial condition of the fund for future retirees, as well as making it difficult for the legislature to increase contributions again in the future. Keep in mind, the state maintained a 6 percent minimum contribution to the TRS fund from 1995 through 2007. The system desperately needed additional funds to help recover from the market woes after September 11, 2001, and even through the financial hardships of 2003 and 2005. Only after 12 long years of minimum contributions did the state restore funding to TRS at a level that would improve the fund’s actuarial soundness (by 2007, the TRS pension fund investments helped the fund recover most of the losses incurred in the previous years).

 

There is no doubt that TRTA members need to be very vocal about adequately funding the pension plan. Having a consistent funding plan that addresses the need to keep the system actuarially sound is the best way for retirees to receive an increase in their pensions.

 

With budget writers poised to make cuts to the TRS fund, they are also looking at reducing funding for the TRS-Care program. The state legislature is required to contribute 1 percent of the aggregate active teacher payroll to help support the TRS-Care health insurance plan. This contribution may be cut in the proposed budget by as much as half (down to 0.5 percent). The TRS-Care program does have a small surplus, but this surplus will diminish rapidly without proper funding and may lead to premium increases in the coming biennium. TRTA will fight to keep health insurance funding at the 1 percent level, as this will prevent premium increases until 2014. It is uncertain how much premiums may increase if budget cuts on TRS-Care occur, but any increase at a time when retirees have had no cost of living adjustment for 10 years is untenable.

 

While TRTA prepares to work with legislators to do the right thing and keep TRS funding at levels that protect your pension benefits, other interest groups are seizing on these difficult times as a reason to eliminate the defined benefit pension plan for current and future active education employees. Yesterday, at the Texas Public Policy Foundation conference, one group (Arduin, Laffer, & Moore Econometrics) called for the Legislature to adopt a 3-step reform plan. Step one is to freeze the defined benefit plan to all new and unvested public sector employees (including educators). Step 2 of their proposal suggests that all new or current unvested employees should be transferred to a defined contribution plan. Step 3 called on the Texas Legislature to implement a freeze on earning any additional service credit towards a defined benefit plan for all current vested employees.

 

The Arduin, Laffer, & Moore Econometrics proposal allowed retirees to maintain their current benefits with no changes in COLAs. What the speaker failed to realize is that Texas public education employees do not have a COLA, and have not had a cost of living increase for 10 years! Even still, this type of proposal is being promoted in the Texas Legislature and some members are taking these suggestions seriously.

 

The preservation of the defined benefit pension plan is a core value of the TRTA legislative agenda. We are as committed to this today as we have ever been! TRTA members should encourage those they know who are still in the education profession to learn about this issue and prepare to mobilize if the Texas Legislature begins advancing proposals aimed at reducing their access to the traditional retirement plan with TRS. A good start is for active employees to follow these developments on the TRTA Inside Line.

 

TRTA Inside Line subscribers will receive a special email next week recapping the budget proposal when it is released. TRTA will also provide a response that you will be able to send to your legislators with our association suggestions on protecting and improving the livelihood of our state public education retirees.

 

Thank you for supporting the Texas Retired Teachers Association. If you are not a member and are interested in joining our efforts to protect retiree benefits, please contact our office at 1.800.880.1650.