TRTA Against Defined Contribution Bill

TRTA Testifies Against Bill Creating Defined Contribution Plan

The House Pensions, Investments, and Financial Services (PIFS) Committee received public testimony on HB 2506 by Representative Warren Chisum. This legislation would eliminate the defined contribution for the future TRS employees, it would allow current active TRS members the ability to withdraw from the current defined benefit plan to participate in a privatized 401 (k) style program and it would exacerbate the current unfunded liability situation with the TRS trust fund. It would do all this and at the same time would save the state no money in budgetary appropriation, potentially open the state up to a new cost for federally mandated Social Security contributions, and jeopardize the retirement security for over 1.3 million current retired and active TRS employees.

The preservation of the TRS defined benefit retirement plan is TRTA’s core legislative value. Many TRTA members appeared to testify against the bill and many others registered witness cards against this legislation. These members stayed at the Capitol and participated in the legislative process many hours during the day and we appreciate their commitment to this organization and the cause of preserving the TRS defined benefit plan.

In addition, we want to thank all of our TRTA members that sent letters encouraging the members to vote against this legislation. Your phone calls, emails, and personal visits have helped define this issue for our legislative members and we know they are listening to your position on this legislation.

A copy of the testimony by Tim Lee, TRTA Executive Director, is provided below for your information.

HB 2506 was left “pending” in the House Pensions, Investments, and Financial Services Committee with no vote taken on the bill.

TRTA will follow this legislation throughout the entire session. In the event that it moves through the committee process, we will launch a new email advocacy campaign for you to issue your opposition to HB 2506.

Thank you for your continued support and hard work. Your membership in TRTA is making a big difference on our issues this session. If you are not a member and would like to join TRTA in our efforts to protect TRS pension and health care benefits, please contact our office at 1.800.880.1650 and we will be happy to answer any questions you may have.

Copy of Testimony by Tim Lee, TRTA Executive Director

April 26, 2011

Honorable Vicki Truitt
House Pensions, Investments, and Financial Services Committee

Public Testimony on HB 2506

Chairwoman Truitt and Members of the House Pensions, Investments, and Financial Services Committee:

Thank you for the opportunity to testify on HB 2506. The Texas Retired Teachers Association (TRTA) opposes this legislation on the basis that the adoption of this proposal would effectively eliminate retirement security for public education employees in Texas.

As has already been discussed in various capacities this session, and are principles that TRTA agrees with and endorses, retirement plans that are designed with certain core values promote retirement security. Those core values are:

  • Mandatory participation;

  • Mandatory employee contributions;

  • Pooled assets invested by professionals, and;

  • Benefits that cannot be outlived, i.e., paid as an annuity.

A retirement plan featuring pooled assets that are professionally managed, and requiring mandatory annuitization of benefits is a more efficient method for delivering retirement benefits. Administrative and investment costs are lower, and investment earnings are greater. These plans, also known as defined benefit plan, such a plan is similar to retirement insurance, as it pools various risks, particularly investment and longevity risk, to ensure a benefit that cannot be outlived.

By contrast, individual accounts, which are the central feature of defined contribution plans, have higher administrative costs; lower investment earnings; and higher rates of leakage, which occurs when employees cash out or withdraw their assets prior to retirement. DC plans also provide no assurance that the assets will endure the life of the participant. In a retirement sense, a DC plan is analogous to insuring one’s auto or home individually, rather than taking advantage of the efficiencies generated by pooling assets and risks.

TRTA supports the plan design that is used for Texas TRS members. This plan design promotes important policy outcomes for our state public education employees that include retirement security for workers, enabling employers to attract and retain qualified workers to perform essential public services, and providing a retirement benefit that is cost-effective and whose cost is reasonably stable and predictable.

The Texas Legislature has done an excellent job of achieving these objectives through our TRS pension trust fund. The fund is well-managed, well-funded, and provides a life-long benefit at a low cost.

In addition, the majority of Texas school employees do not participate in the federal Social Security program. For these school district employees, their TRS benefit will be their only assured source of retirement income. Texas taxpayers save an estimated $1.5 billion annually by not participating in Social Security; an amount equal almost to the entire amount the state contributes each year to TRS.

When considering HB 2506, there are several questions that should be asked about how this bill will impact millions of Texans.

Will this legislation save the State of Texas any money?

No, the legislation will still provide for the same biennial fiscal impact for active member and state contributions, but to a less secure and more costly retirement benefit program. In addition, the bill will cost the TRS pension trust fund tens of billions of dollars, as these assets will be transferred away from the trust fund and into private retirement accounts. The result will be a weakened retirement fund that must still provide benefits to hundreds of thousands of Texans. This legislation will cost the state considerably more in budget costs that maintaining the current defined benefit structure.

Will this legislation present a new financial burden on the state?

Yes, it is very likely that the federal government will not look favorably on Texas abandoning its 70-plus year-old qualified defined benefit pension plan that has provided retirement security for thousands of Texans who have not participated in Social Security. In the event that Congress forces Texas into mandatory Social Security, the cost could be an additional $1.5 billion annually.

Will this legislation promote the hiring of the best possible employees in Texas schools and will the legislation incentivize the retention of these employees?

No, HB 2506 will discourage people from entering the teaching profession. The lack of retirement security for school district employees will certainly make qualified candidates think twice about entering a career-oriented profession such as education.

Does this legislation protect the retirement security of our current TRS retiree population?

No, HB 2506 jeopardizes the retirement security of current TRS retirees as the measure allows active TRS employees the ability to liquidate their contributions at their full actuarial value. This will result in a drain on the current TRS fund by tens of billions of dollars further worsening the condition of the TRS fund. It will certainly downgrade the TRS present funded status that is now over 80 percent to something far less and far more dangerous for current, and soon-to-be retirees.

Does this legislation help the Texas economy?

No, HB 2506 would have a severe long-term impact on the Texas economy. As many already know, the TRS trust fund is an economic engine for Texas. It pays out $6.6 billion in annual pension payments that residents use to buy goods and services and promote local Texas economies (95 percent of TRS Texas pensioners still reside in the state). In addition, retirement benefits generated an estimated $640 million in state revenues and $260 million in local government revenues in 2010.

Does HB 2506 represent good public policy for all Texans?

No, HB 2506 attempts to “fix” a problem that does not exist and in doing so will diminish the retirement security of all Texas public education retirees and employees. The bill has a large fiscal impact on the Texas budget and it potentially drains the current TRS pension trust fund of tens of billions of dollars while jeopardizing the fund’s ability to meet current obligations and raising the state’s budget commitment to make these payments and keep the system solvent. HB 2506 raises the potential of higher employment costs for Texas taxpayers and the unenviable position of sending more Texas taxpayer dollars to Washington, D.C. at a cost of over $1.5 billion. Where as other states may have mismanaged their public pension funds and the federal government has made defined benefit plans less advantageous for more and more workers due to over regulation, Texas TRS is well funded, well managed, and has been cared for with great regard by many previous legislatures. This has helped Texas TRS become one of the most highly recognized and largest pension funds in America and in the world. We should and must do all we can to protect this system. It is as much a part of Texas as our state constitution and we cannot deny the many benefits it provides to all Texas citizens. Good schools, excellent career personnel serving in those schools, mandatory participation, mandatory employee contributions, pooled assets invested by professionals, benefits that cannot be outlived, pensioners who are an integral component of the state and every local economy, TRS investments holdings in 96 percent of the 100 largest public traded employers in Texas…these are but a few of the major reasons why we MUST maintain our TRS pension trust fund and do as much as possible to keep that system healthy, fiscally stable, and open for business.

Thank you for the opportunity to testify.

Tim Lee
Executive Director
Texas Retired Teachers Association

Cc: House Pensions, Investments, and Financial Services Committee

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