The Teacher Retirement System of Texas (TRS) Board of Trustees met this week on December 1 to discuss topics such as the actuarial valuation of the pension fund, the current state of the TRS-Care retiree health insurance program, and the conclusions provided by the Legislative Interim Study Group regarding retiree health care.
Board Chairman David Kelly took a moment to recognize several Texas Retired Teachers Association (TRTA) members, including many officers serving on TRTA’s Board of Directors. He thanked them for their public service as educators, and also expressed appreciation for their steadfast dedication to partnering with TRS to provide the best possible retirement benefits for public school employees.
Actuarial Condition of the Pension Fund
During the meeting, Gabriel, Roeder, Smith & Company (GRS), a national actuarial and benefits consulting firm, presented actuarial valuations of the TRS pension fund as of August 31, 2016. The valuation’s purpose is to measure the fund’s actuarial liabilities, determine the adequacy of current statutory contributions, explain any changes in the actuarial condition of TRS, and discuss any potential future problems and issues.
2016 is the first year that changes from the 2013 Legislative Session made through Senate Bill 1458 have been fully implemented, which has an impact on the fund’s liabilities, funded ratio and funding period.
GRS’s forecast is mostly unchanged from their previous valuation. Market assets returns for 2016 are 7.3 percent, net of investment expenses. A small liability loss continues to occur primarily due to active employee salary increases being larger than expected. A 2.3 percent population growth has held the funding period down. The 34-year funding period is based on smoothed assets. All figures assume that all current statutory contribution levels continue and that there are no further benefit enhancements, such as cost-of-living adjustments (COLAs).
The 2016 unfunded actuarial accrued liability (UAAL) of the pension fund is $35.45 billion, up from $32.97 billion in 2015.The funded ratio is 79.7 percent, down from 80.2 percent in 2015. The funding period in years is 33.9, up from 33.3 in 2015. In order to achieve a 30-year funding period, meaning the fund would be actuarially sound, an increase of 0.26 percent in contribution rates would be needed.
The UAAL is slightly higher due to more than expected liability growth. The funded ratio, according to GRS, is essentially right on target. The funded ratio of TRS ranks in the 64th percentile in a comparison with other large public employee retirement systems. The funding period is better than expected due to a 2 percent growth in active membership, meaning more public school employees were hired in 2016 and are now contributing to the fund.
The pension fund has a 5.88 percent average compound return (on market value) over last 10 years. That figure is 7.48 percent over last 20 years, and 8.78 percent since 1989.
GRS anticipates that the UAAL will grow each year, because current contributions are not enough to cover both normal costs plus interest. They estimate that this will continue until the funding period decreases to approximately 20 years. These figures assume there is no increase in contributions from any revenue source (the state, school districts, or active employees).
GRS stated that it will take better than anticipated investment experience (higher market returns), better than anticipated demographic experience (more active employees, for example), increased contributions, time, or a combination of these factors to attain a funding period at or below 30 years and make the fund actuarially sound again.
Absent those factors, projections show that the UAAL will increase over the next 15-25 years before beginning to decrease again. GRS warned that the ride is likely to be volatile, and recommended that any future benefit enhancements (COLAs, for example) need to be supported by an increase in revenue.
TRTA believes it is vital that the Legislature make a plan to help retirees by working with TRS to improve funding, as a cost-of-living increase is a top priority for many of our TRTA members.
Update on TRS-Care, TRS Board Discussion of Legislative Interim Study Group Report
The TRS-Care retiree health insurance program is a vital retirement benefit for our public school employees. TRS-Care is facing growing financial distress. This week, the TRS Board of Trustees was provided with an overview of the program, its costs, projected funding shortfalls for the next several fiscal years, and the recommendations provided in the recently released legislative study group report.
In 2016, $1.3 billion was provided by multiple funding sources to pay for TRS-Care. Of this, retiree contributions (premiums) accounted for 28.9 percent, state contributions for 24.7 percent, active employee contributions for 16.1 percent, school district contributions for 14.6 percent, and federal programs for 15.3 percent.
State, district and active employee contributions are based on a percentage of active employee payroll rather than medical trends. TRTA has criticized the funding mechanism for many years, as medical and pharmacy costs continue to skyrocket, while payroll growth is slow or stagnant.
The average medical cost per TRS-Care participant is $3,248. Breaking this down into medical claims, non-Medicare participants cost the most, anywhere between $7,531 for TRS-Care 1 to $10,273 for TRS-Care 3. By comparison, participants with both Medicare A and B medical claims are between $678 for TRS-Care 1 and $967 for TRS-Care 3.
Average pharmacy claims per member also continue to rise year over year, at $3,132 in 2016. This is up $130 over 2015, and up $500 over 2014.
Growing shortfalls are expected for the program if nothing is done during the coming legislative session to alleviate TRS-Care’s funding woes. By FY 2018, the shortfall is projected to be $335 million, growing to over $1 billion by FY 2019, and to more than $2 billion by FY 2020.
TRS Executive Director Brian Guthrie provided a high-level overview of the legislative interim study group report with the members of the TRS Board, emphasizing that the report is a baseline to consider changes for the program during the legislative session.
“It is important to emphasize that this is a starting point—a lot of work needs to be done and will be done during session.” Guthrie indicated that the bottom line is something needs to be done to address the long-term solvency of TRS-Care. He also emphasized that the legislative group was tasked with looking at recommendations under the assumption that no new funding would be available for TRS-Care, and the report is written from that perspective. TRS will continue to be a resource to the Legislature, as will TRTA, when session begins and other solutions are considered.
Guthrie reviewed the varied cost drivers for TRS-Care mentioned in the report. There have been increases in the cost of medical services, as well as prescription drug costs. Other factors include maintaining access and choice in managing providers, increased utilization of the program due to an aging population, and changes in the number of retirees using the plan–particularly Non-Medicare participants. Non-Medicare retirees cost up to four times more than Medicare-eligible participants. The report states that “in FY 2015, each non-Medicare eligible participant in TRS-Care 3 cost the plan $13,640 versus $2,855 for a retiree enrolled in Medicare Advantage and Medicare Part D plans.”
As TRTA reported last week, the study group presented two plan options to improve TRS-Care solvency while assuming that current funding levels by the state, school districts and active employees would remain the same: provide a $400 monthly stipend to non-Medicare eligible retirees to purchase health insurance, or create a high-deductible plan for non-Medicare eligible retirees.
Each option would require all Medicare eligible participants, retirees who are 65 and older, to go into Medicare Advantage or choose another plan outside of TRS-Care. The Medicare Advantage plan would look much like the current Medicare Advantage plan level 2. If this plan were put into place, the Legislature would “direct TRS to develop a policy to ensure retirees have sufficient provider access by offering alternative providers in those areas.”
If one of the options presented in the report were passed into law through legislation, TRS-Care 1 would be eliminated. Presently, TRS is required by law to make this program available to retirees at no cost. If the recommendations become law, all retirees participating in a TRS-Care plan would pay something.
As Guthrie continued his explanation of the report, he cited the report’s claim that “if drastic measures are not taken during the 85th Legislative Session, the TRS Board of Trustees would have limited flexibility in providing a new plan design to continue any type of health care plan,” and would be “forced to increase retiree premiums to account for the projected $1.3 to $1.5 billion shortfall.”
Guthrie stated that in order to mitigate costs, this would mean “the TRS Board would be required to increase premiums in TRS-Care 2, TRS-Care 3, Medicare Advantage 2, Medicare Advantage 3, and for TRS-Care 1 spousal and dependent premiums and also be forced to administer a combination of increased copayments, deductibles, and out-of-pocket expenses for all plan levels.”
This could result in many participants decreasing coverage to TRS-Care 1, a migration that would create a significant loss of premium revenue, which in turn would cause further increases in premiums for all other TRS-Care plans. The projected cost of coverage for all retirees in TRS-Care 1 would be approximately $1.08 billion in FY 2018.
Under this scenario, where no significant funding and/or benefit changes occur, funding for TRS-Care would be inadequate to pay claims and sustain the plan through the 2018-2019 biennium. Thus, the Board would likely be obligated to close the TRS-Care plan and begin to phase out current participants. “Making no changes (to TRS-Care) is really not an option,” said Guthrie, stressing that something must be done to prevent a situation like this one from occurring.
Members, please know that this report is a STARTING POINT for discussion on how to resolve funding issues with TRS-Care. Our friends in the Texas Legislature have reached out to us, expressing a strong desire to keep the lines of communication open and work with TRTA on other solutions.
TRTA is prepared to champion your interests on this vital health care program and what may come for TRS-Care in the future. We still have time to find more reasonable solutions for TRS-Care. Let’s all come together and do our best to educate our legislators about the need to improve funding for TRS-Care!
The fourth quarter issue of The VOICE is being printed now, and includes a template letter that you may send to your legislators. Be sure to complete this letter and mail it to TRTA. Our legislative team will hand-deliver it to your Representatives and Senators. The VOICE arrives in your mailbox in late December.
Thank you for your membership to TRTA. We will continue to follow the progress on TRS-Care. TRTA will provide you many more opportunities to get involved as we protect your hard earned retirement benefits!
If you are not yet a member, we need you to help us protect your retirement security. Please join TRTA today!