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19 Jan
0

Legislative Budget Board Report on State Budget

TRS Benefit Reductions for Future, No Help in the Present

The Texas Legislative Budget Board (LBB) has released recommendations on how to address the state budget deficit. The entire report can be downloaded by clicking here.

LBB’s report on the Teacher Retirement System of Texas (TRS) and the Employee Retirement System of Texas (ERS) indicates that both funds are not facing a funding crisis like other state pension systems around the country. The report does stress, however, that both TRS and ERS have large, long-term unfunded liabilities that should be addressed by the Texas Legislature.

The report offers three plans on how to resolve the long-term unfunded liabilities:

Plan 1:             Have the legislature fully fund the pension trust funds.

Plan 2:             Maintain the TRS and ERS defined benefit plan, but implement plan design changes for future retirees to make the current funding levels sufficient to pay for benefits.

Plan 3:             Introduce a hybrid plan for new employees (this effectively kills the traditional defined benefit plan for all future TRS retirees).

The LBB report states that the fiscal impact on the current biennial budget crisis will depend on which of the three options (if any) the Texas Legislature chooses to solve this long-term pension funding shortfall.

TRTA Analysis of Recommendations

The LBB recommendations are informative, but lack the specific information that would enable us to know how these plans could impact retired and active TRS members. We can draw some broad conclusions about these suggestions and offer some insight on how TRTA may respond on these varied solvency approaches.

As we provide our thoughts, it is important to state some key facts:

1.    95 percent of all Texas school districts do not pay into Social Security. TRS is the retirement security for hundreds of thousands of public education employees and retirees. Any change to TRS retirement benefits will have a major financial consequence for school employees and all Texans.
2.    The overall contribution for TRS benefits is nearly identical to the contribution required by the Social Security program. Changing TRS into a defined contribution or a “hybrid” plan is not likely to save the state any money in the short-term or the long-term.
3.    TRS has a large unfunded liability, but this is not because the benefit structure is too rich. Ultimately, the unfunded liability is a product of the weak economy (though TRS is recovering quite well with pension assets that now exceed $105 billion), and the lack of adequate state funding to support the benefit structure (for 12 years, the Texas Legislature contributed the absolute minimum allowed under the Texas Constitution even though legislators knew higher contributions were required).
4.    TRS is a major financial engine for the state economy, as well as all Texas local economies. Nearly $6 billion a year is paid out to annuitants who spend these dollars in Texas generating millions in sales tax revenues and creating tens of thousands of jobs in the state.
5.    TRS retirees do not have an automatic cost of living adjustment. In fact, TRS retirees have not had a permanent increase in their pension benefits for 10 years. While Social Security, defined benefit plans in the private sector, and other state pension plans around the country have provided these increases, Texas public education retirees have not received one cost of living increase.

The Legislative Budget Board should be credited for pointing out that Texas is not in a pension funding crisis and is in fact, far from it. Our state pension plans are ailing from the soft economy, and we have suffered losses like all retirement systems. TRS investments have helped the fund recover from a low of around $67 billion in February 2009 to a fund value today estimated at $105 billion. Texas pension funds are dealing with a short-term crisis, which may cause many decision makers hearing too much about the economic woes of public pension funds elsewhere to apply those dire standards to our Texas pension funds. TRTA must continue to educate legislators about the good work and strong financial condition of the TRS fund and remind them that we are not in economic free-fall like other funds around the country.

Overview of LBB Recommendation #1: Fully Fund the TRS and ERS pension trust funds

TRTA fully supports the idea that the Texas Legislature should fully fund these systems. At least, we support the idea as we understand it in this report. If Texas were to “fully fund” the retirement system obligations, that would cost billions of dollars in state budgetary outlay. While this is the most ideal solution, expecting Texas legislators to implement a full-funding solution seems impractical.

Pension funds manage their assets with a long-term perspective. This long-term perspective allows the system to manage its liabilities in a way that it does not need to be fully funded, but it should be “actuarially sound.” Currently, TRS is not actuarially sound (meaning that it cannot amortize its unfunded liability within a 31-year period). The Texas Legislature may make a more significant difference for TRS members by developing a funding plan that ensures the pension system’s actuarial soundness. This is a far more attainable and less costly proposition and allows the system to use time as its ally in making wise management decisions with the pension trust fund’s assets.

Overview of LBB Recommendation #2: Implement plan design changes for future retirees to make the current funding levels sufficient to pay for benefits

In 2005, the Texas Legislature adopted plan design changes to bolster the long-term solvency of the pension trust fund. The Legislature did not address funding issues until 2007 when it increased the state contribution by 0.58 percent (at the time, it was the first increase in TRS funding in 12 years). In 2009, the Legislature reduced its contribution to TRS from 6.58 percent to 6.4 percent. The appropriation went up from 6.4 percent to 6.644 percent after retirees were denied a $500 supplemental payment (the money set aside to make the payment to retirees was put into the fund after a ruling made by the Attorney General denied retirees the payment).

This proposal suggests continuing the trend of reduced contributions and deeper cuts in benefits for future retirees. While there can be a healthy debate on plan design costs, it should not be limited to the benefit structure and should include an equally healthy discussion on when the contributions will remain consistently high in order to meet current and future benefit obligations.

Overview of LBB Recommendation #3: Introduce a “hybrid” plan

What is a hybrid plan? While many people will try and answer this question by saying how great hybrid plans are, TRTA answers it by saying what a hybrid plan is not. A hybrid plan is not a traditional defined benefit pension plan like TRS offers now. Hybrid plans are similar to privatized 401(k) plans that allow members to make contributions to a retirement fund and have a degree of self-directed investment planning. Many active educators already have private investment plans that complement their TRS retirement.

There are two major problems with a hybrid initiative in Texas. First, most Texas school employees do not have Social Security. If policy makers believe introducing a hybrid plan will save money, they may not be accounting for the costs of requiring all school employees to enter the federal Social Security program. If Texas were to mandate Social Security coverage in addition to the new “hybrid” TRS plan, the costs would far exceed what the Texas Legislature and school district employees are paying now. If it doesn’t save any money, why do it?

Besides eliminating the current defined benefit plan and really not saving the state or the active employee any money, another glaring problem with some hybrid plan proposals is that they may not include Social Security. This is frightening as few private sector or public sector employees do not pay into either Social Security or some other qualified defined benefit traditional retirement plan.  If the Texas Legislature were to adopt some of these more radical and extreme hybrid plan recommendations, Texas school employees would not pay into Social Security and would not have TRS as their traditional retirement plan. This could leave Texas public education employees to retire on only their savings in the new “hybrid” plan. By not having a bedrock defined benefit retirement plan (either TRS or Social Security), Texas would virtually guarantee the financial and retirement insecurity of its public education employees.

TRTA’s core legislative value is the preservation of the current defined benefit pension plan for all retired and active public education employees.

Concluding Remarks

The LBB study focused on reducing long-term unfunded liability costs for the state sponsored pension plans. TRTA believes it is possible to reduce these costs and ensure financial security for all TRS members, but we need to work together on the details to ensure adequate funding for TRS, a solid defined benefit plan for all public education retirees, the preservation of an affordable health insurance program for those wanting to enroll, and the reality of regular pension adjustments for TRS annuitants. These goals are attainable, but it will take a legislature that is committed to dealing with these problems and developing solutions that last longer than a biennium.

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16 Jan
0

TRS Executive Director Search Update

Last Thursday (January 13), the TRS executive director search committee met to advance names for interview for the TRS Executive Director position. Since the last update on this issue, three of the top five candidates set to interview for the Executive Director position withdrew their names from consideration. The selection committee has now advanced three names for consideration; however, as of Friday, one of the recent three has also withdrawn from consideration. The latest to decline consideration is former Texas State Representative Ashley Smith. Now, the TRS Board will interview one internal TRS employee and one external candidate.

 

Mr. Brian Guthrie, Deputy Director of the Teacher Retirement System of Texas, is one of the finalists for the position. Mr. Brian White, Director of the San Diego Employees Retirement Association, is the other finalist. Interviews are scheduled for February 7.

 

TRTA has had an opportunity to work with Mr. Guthrie since he was hired in 2008. Mr. Guthrie has worked diligently to include TRTA and other constituent groups in information being produced by TRS. He has attended numerous TRTA meetings at the state, district, and local level, and has also been a featured speaker with the Texas Retired Teachers Foundation.

 

TRTA will attend the February 7 meeting and continue to update you on the TRS Executive Director search.

 

Concluding Remarks

 

There is much we must work to protect this session. Next week, TRTA will launch its email advocacy service providing pre-drafted email content you can send to your legislators on the developing budget issues and all TRTA initiatives. We appreciate your willingness to help in these advocacy efforts. Please know that the TRTA Board of Directors, the TRTA State Legislative Committee, and the TRTA staff are all working hard to protect your pension benefits.

 

Many TRTA members have asked how can they help right now. A great first step is to send the Advocacy Guide featured in the latest issue of the VOICE to your elected officials. TRTA has other advocacy handouts and material available for your use on our web site at www.trta.org. Feel free to send this information to your legislators. The more they hear from us, the better chance we have to achieve our goals this session.

 

I appreciate receiving your emails on the issues presented through the Inside Line. Your dedication to TRTA and your support of this great organization is very much appreciated! Please keep sending your comments, suggestions, and concerns as this information is always reviewed and used to help TRTA move forward and continue to be the voice for ALL public education retirees.

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15 Jan
0

Budget Proposal will Likely Cut TRS Funding

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.

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