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27 Jul
0

Teacher Retirement System of Texas Votes 5-4 to Lower Rate of Return Assumption

All eyes turn to next session as pension and health care programs both need higher contribution levels.

Executive Summary:

  • TRS lowers rate of return assumption to 7.25 percent.
  • Change to rate of return assumption doesn’t impact current retiree benefits.
  • However, it will require the Legislature to provide additional funding for retirees to receive a cost-of living increase.
  • Look forward to a special message from Tim Lee on Monday, July 30.

The Teacher Retirement System of Texas (TRS) Board of Trustees voted 5-4 today to lower its investment rate of return assumption to 7.25 percent. Previously, the rate of return assumption was 8 percent. The change creates a potential $1.6 billion biennial cost for the next Texas Legislature.

The decrease in the investment rate of return assumption is highly significant as TRS operates a $147 billion pension fund, the seventh largest in the nation. A change to the investment rate of return assumption impacts potential cost-of-living increases for more than 400,000 retired educators who receive an annuity from TRS, as well as impacts the overall affordability of these promised pension benefits for future TRS retirees.

TRS released this fact sheet about the new rate of return assumption.

The TRS Board of Trustees had a lengthy conversation before taking a vote on the rate of return assumption.

The board discussed taking a stair-step approach to reducing the rate of return assumption. This would involve lowering the rate of return assumption then reevaluating it in a “year or two” to decide whether to lower it again.

TRS Executive Director, Brian Guthrie, cautioned against this approach. He said the stair-step approach “creates more issues with the Legislature,” as it could require TRS to come back multiple times asking for money from the Legislature.

Guthrie was asked by another Trustee, Nanette Sissney, about his prediction of how the Legislature would react to the rate of return assumption dropping to 7.25 percent.

“Every time I’ve gone over to the committee… there’s a general consensus that 8 percent is too high,” Guthrie said. He said that the Legislature “will appreciate” that the lower rate of return assumption is more in line with their views.

The board first voted to adopt a rate of return assumption of 7.35 percent, but that measure didn’t pass. The board passed a rate of return assumption of 7.25 percent on a vote of 5-4.

Cost-of-living increases for TRS retirees are not guaranteed and may only occur if the Texas Legislature approves them. Many TRS retirees have NEVER received a cost-of-living increase. Pension increases can only occur when the fund is able to amortize the cost within a 31-year period.

In order to reach the 31-year funding period, the TRS fund will require a 1.82 percent increase in contributions, which equates to an additional $786 million per year. The fund must be below this 31-year funding period to provide annuity increases.

The average TRS annuity is $2,060 per month. Ninety-five percent of Texas school districts don’t contribute to Social Security. Many TRS members rely on the annuity as the sole source of income.

The Texas Retired Teachers Association (TRTA) is strongly encouraging TRS to pursue the necessary funding from the Texas Legislature to make the fund actuarially sound. TRTA feels that a cost-of-living increase for retirees is vital and necessary, and that a healthy TRS pension fund is an enormous benefit to the state.

TRS accepted testimony from stakeholders during the board meeting.

A common theme among the testimony was a concern about the potential for groups who oppose the TRS defined benefit plan to use the change in the assumed rate of return to advocate for defined contribution plans.

Tim Lee, TRTA’s Executive Director, had a warning for those groups who would angle to remove the defined benefit pension plan.

“We will be ready. You better be as well,” Lee said. He went on to explain that retirees would sound the alarm if any attempt was made to privatize the TRS pension fund.

TRTA is looking to the next legislative session to make a case for higher contributions to the TRS fund.

“We will approach the Legislature with a list of priorities that ask for higher contributions being made to TRS pension fund, a measure that provides a pension increase to TRS retirees, and more money for the TRS-Care program that is expected to have another shortfall of $400-600 million,” Lee said. “The longer we wait to see these issues resolved, the more difficult they will be to achieve in future legislative sessions.”

Additionally, during the meeting, TRTA’s Immediate Past President, Nancy Byler, was appointed to the TRS Retiree Advisory Committee.

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24 Jul
0

TRS Board of Trustees Set to Meet July 26-27, Likely to Adopt Changes to Rate of Return Assumption

Executive Summary:

  • Watch the TRS Board of Trustees Meeting on July 27.
  • TRS Board is likely to reduce rate of return assumption.
  • Texas will need to increase its contribution to TRS to ensure retirees can receive a cost-of-living increase.

The Teacher Retirement System of Texas (TRS) Board of Trustees are scheduled to meet on July 26-27. The most pressing issue for the board to vote on is the rate of return assumption. The agenda for the meeting is available here. There will be live webcasts for July 26 and July 27.

The Texas Retired Teachers Association (TRTA) believes it is likely that the board will vote to lower the rate of return assumption from 8 percent to 7.5 or, more likely, 7.25 percent.

A change to the rate of return assumption will not impact the current annuity amount retired educators are receiving from the pension fund.

However, a change to the rate of return assumption will alter the trajectory for potential cost-of-living increases for retired educators. The fund’s long-term financial health will also be weakened by a change to the rate of return assumption without action taken during the legislative session.

If the rate of return assumption is lowered to 7.25 percent, it would require the Texas Legislature to increase state contributions by 1.83 percent, which equates to $790 million per year, to put the pension fund within a 31-year funding period.

Once the TRS fund is within a 31-year funding period, it meets the state requirement for providing a cost-of-living increase for retired educators.

Additionally, Texas has a provision that precludes benefit increases from occurring for TRS retirees. The pension system cannot go above a 31-year funding period if or when a benefit increase is approved by the Legislature. If the benefit increase pushes the TRS fund above a 31-year funding period, the proposed increase may not be allowed.

TRS has to have a funding period considerably less than 31-years in order for the Legislature to authorize the fund to provide a permanent increase for retirees.

All of this is purely theoretical as the Legislature has not authorized any pension increases for retirees since 2013. In 2013, the Legislature provided a pension increase for retirees that had retired on 8-31-2004 or before. Those retirees received a 3 percent increase in their annuity capped at $100 per month.

Any retiree who retired 9-1-2004 or after has never received a pension increase. Thousands of retired school employees have seen reduced Social Security benefits (if they receive them at all), increased health care costs, and no pension increases for as long as 14-years in their retirement.

TRS Texas currently receives a 6.8 percent contribution rate from the employer, which is about half as much as the next highest state among its peers. Ninety-five percent of Texas school districts don’t contribute to Social Security. As compared to other state pensions that don’t contribute to Social Security, Texas is receiving a bargain. The average contribution into those other pension systems is 19 percent. The contribution from Texas to TRS is 6.8 percent.

The employer contribution to TRS is comprised of two parts, a 2.8 percent contribution from school districts and a 4 percent contribution provided by the Texas Legislature out of the general revenue fund.

The pure state budget general revenue contribution to Texas TRS is the absolute lowest percentage of payroll contribution to a state TRS pension plan in the nation.

(Click images to enlarge.)

While it may be the lowest contribution as a percentage of payroll in the country, Texas legislators have done far better by our Texas TRS than any other state in the nation has for its TRS public pension plan. The Texas Legislature has NEVER taken a pension funding “holiday,” or the action of not making the employer contribution to the pension fund. Many states are suffering as their elected officials regularly withheld necessary contributions to the pension fund. However, Texas legislators have always made at least the constitutional minimum level of contribution to the pension system in its now 81-year history.

The TRS board has met twice to consider changing the rate of return assumption, once in April and once in February. The April meeting featured a pair of votes by the board to change the rate of return assumption. However, neither vote reached the necessary five votes to pass. The board has been divided on how far to lower the rate of return assumption.

The board has received recommendations from the actuary firm of Gabriel, Roeder, Smith & Co. to lower its rate of return assumption below 8 percent, as the majority of pension funds have moved below this mark.

If the TRS board does lower its rate of return assumption, TRTA is strongly encouraging TRS to pursue additional funds from the Texas Legislature. While state law prohibits TRS from lobbying the Texas Legislature, it is still TRS’s fiduciary duty to ensure that the pension fund is actuarially sound so that members may receive cost-of-living increases.

TRTA is strongly encouraging its members to tune into the live webcast on Friday, July 27. This TRS board meeting will be critical to the future health of the pension fund. Be sure to share this and upcoming editions of the Inside Linewith your fellow retirees!

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11 May
0

Texas House Pensions Committee Meets, Discusses Funding For TRS-Care and TRS Pension Plan

The Texas House Pensions Committee met yesterday in Dallas to discuss the status of the Teacher Retirement System’s (TRS) pension plan and TRS-Care. The committee reviewed the changes that occurred last session to TRS-Care and discussed the funding issues surrounding the retiree health care program, which is expected to have a shortfall in excess of $400 million during the 2019 biennium.

TRS Executive Director Brian Guthrie provided testimony about the funding needs of TRS-Care. He discussed how the program had undergone significant changes since the end of the Legislature’s Special Session. However, the changes made last session will still leave the plan in a significant funding shortfall when the Legislature reconvenes in 2019.

Guthrie informed the committee that TRS-Care would continue to require additional funding into the future as the program’s funding is based on active teacher payroll, not health care costs.

Rep. Dan Huberty (R – Houston) recounted how a previous proposal during the 2017 legislative session would have covered the pending shortfall. He also brought to the attention of the other legislators how much money the state continued to put into both TRS-Care and the TRS pension fund.

Guthrie said that the combined amount TRS will ask for in its Legislative Appropriations Request (LAR), provided that it moves the rate of return assumption to 7.5 percent, will be approximately $2 billion.

The audience reacted to Guthrie’s testimony twice with applause. One round of applause occurred when Guthrie mentioned how other states have combined the public education personnel into the state workers’ retirement plans. Another round of applause occurred when Phil Stephenson (R – Wharton) said that the state needed to do a better job funding TRS and its programs.

Guthrie’s testimony was not a reflection of a TRS position on combining Texas TRS retirees and ERS retirees; it was, though mentioned as a way that other states with smaller populations combine worker and retiree pools to have a larger purchasing pool when procuring group coverage.

As TRTA members know, Texas has a separate health care system for its state workers. Both TRS (teachers) and ERS (state workers and legislators) are large enough pools on their own to negotiate lower rates without combining the two groups.

The TRS-Care plan has twice as many covered lives as the ERS retiree health care plan. However, the ERS health care plan’s base funding for retirees is higher than TRS-Care’s. In 2017, the state funded $930 million for state retirees. Whereas, TRS-Care’s base funding is $660 million, so TRS-Care receives less funding for twice as many participants.

The funding for retired state workers allows the state ERS health care program to be offered at no cost to state employee retirees. Dependent coverage is subsidized at 50 percent.

TRTA has never suggested, and never would suggest, that retired state employees, judges, legislators or other ERS retires should see a reduction in their health care benefits. On the contrary, we believe all public workers should receive access to affordable and reasonable health care as part of their retirement security.

Tim Lee, TRTA Executive Director, testified that the benchmark for retired educator health care is the ERS health care plan.

“We know many may have an issue with calling a retired educator a retired state worker. Our view does not validate that argument as either right or wrong; however, the bottom line is that the Legislature is in absolute control over the funding levels for TRS-Care. Using teacher payroll as a basis for funding is a broken system,” Lee said. “In order to keep TRS-Care viable and solvent, we need to work with legislators on increasing the base funding for TRS-Care. If we do not raise base funding, TRS-Care will continue to have ongoing shortfalls and retirees will not be able to cover the increased costs.”

Retired educators are aware that our dedicated state employees and state retirees receive much higher health care appropriations. The biggest differentiator between TRS and ERS is that the amount of money appropriated to ERS health care is based on COST, and TRS health care funding is based on a percentage of active teacher payroll. Teacher payroll is in no way tied to health care cost increases. TRS-Care cannot be “fixed” unless the base funding is increased, or if the legislature ties TRS-Care appropriations to the cost of care like it does for ERS.

Lee’s invited testimony focused on how only by working as a team could the Legislature and stakeholders address the funding concerns for TRS-Care.

Lee reviewed how the costs for health care didn’t go away after last session but were simply paid for by increasing the financial burden on the retirees, the legislature, and the school districts.

“The rising cost of health care is a big problem. The cost of health care is the enemy, and virtually nothing is left to be done to truly reduce costs” Lee said. “Our members have taken on as much as they can afford.”

More than 100 people were in attendance for the Pensions Committee meeting. Much of the audience was comprised of TRTA members from District 10 and 11. There were even some TRTA members from Brownsville, Texas, which is 544 miles away.

A common theme among the TRTA members in attendance was a desire to work with the legislators to be a part of the solution.

One of the public commenters who provided testimony was Pat Enlow. Enlow serves as the local president for TRTA’s Carrolton-Farmers Branch Retired School Personnel Association. Enlow testified about how vital it is for the Texas Legislature to provide additional funding for the TRS pension, as the TRS Board of Trustees makes its decision on whether to lower the rate of return assumption.

The TRS Board of Trustees is expected to make a decision on changing its rate of return assumption during its July meeting, and it will likely result in lowering the rate of return assumption from its current state, 8 percent.

Statement from Tim Lee to TRTA Members:

Thank you for reading this update. If you had the chance to watch yesterday’s hearing, you may have seen how frustrating this subject matter can be for our members and for the decision makers.

We have many legislator friends who want to help us. Our communication efforts will be most effective if we encourage positive communication.

What I want to assure each of you is this, we are being made a part of the process to help improve these situations. House Pensions Chair Dan Flynn (R – Canton) and Senate State Affairs Chair Joan Huffman (R – Houston) both allowed TRTA to have a seat at the table and bring invited testimony to important committee hearings. We appreciate their interest and leadership in working on these difficult issues.

We are always going to work for you. We know many of you are struggling to afford your health care. Many elected officials are contacting TRTA and learning more about what else we can do to improve the situation. You are not forgotten, and your struggle is very real to TRTA and to the people we are working with to make this better.

The road ahead of us is long and difficult, but I know you are helping us make a difference. Thank you for your support! Your communication and membership are vital. Our strength is our member support. Please know, we will never stop working for you!

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