SB 12 Gives TRS Pension Fund a Much-Needed Shot in the Arm
Big changes are ahead for teacher retirement. The Teacher Retirement System (TRS) entered the 2019 legislative session facing two major issues: a large unfunded liability and no ability to give retirees a cost-of-living increase (COLA). The session’s primary legislation affecting TRS, ATPE-supported Senate Bill (SB) 12 by Sen. Joan Huffman (R-Houston) and Rep. Greg Bonnen (R-League City), begins to address both concerns.
When the cost of a pension system’s vested benefits exceeds the money on hand to pay for those benefits, the resulting difference is an unfunded liability. It’s like credit card debt: If you owe more than you have on hand to pay off your debts in full, you have an unfunded liability. Thankfully, you can pay down credit card debt gradually. Pension liabilities are also paid down gradually as benefits are paid over time.
However, though it can be paid over time, carrying debt comes with a cost. The more you owe, the more interest you accrue. Money paid toward interest is not available to purchase other goods and services. If your debt is so large the interest accrues faster than you can pay it off, you might go bankrupt. Pension systems operate similarly. When a pension fund has a large unfunded liability, it pays more toward carrying costs (much like interest) and can’t afford benefit increases such as COLAs. On the other hand, when a pension has no unfunded liability or a manageable unfunded liability, the system is considered “actuarially sound.” By law, TRS must be actuarially sound—defined as having the ability to pay off its unfunded liability within 30 years—before a 13th check can be issued or a COLA provided.
Two sources of money exist to pay for pension benefits: contributions and investment income. The Legislature sets TRS contribution rates, making them a known quantity. Because future investment returns can’t be known, TRS sets a projected or “assumed” rate of return. Last summer, TRS lowered its assumed rate of return, predicting less future investment revenue—a prudent move, as overestimating investment income only masks funding shortfalls.
With less projected income available to pay future benefits, the TRS unfunded liability increased, and the time frame to pay off that liability jumped from just over 30 years to more than 87 years. The increased liability and long payoff window might have resulted in hundreds of billions of dollars in carrying costs that otherwise could have been spent to increase benefits to keep up with inflation.
Fortunately, SB 12 addressed the projected decrease in investment income by providing a much-needed boost in contributions into the pension system. State, school district, and active educator contribution rates will gradually increase over the next six years.
Texas has underfunded TRS contributions for about two decades, and the state’s higher contribution rate under SB 12 still ranks Texas 50th in the country. But it’s enough of an increase to bring the time frame to pay off the TRS unfunded liability below 30 years and back within the standard for actuarial soundness under state law. Because SB 12 made the fund immediately sound, TRS is able to provide a 13th check for retirees of up to $2,000 this year and will likely be in a position to provide a permanent COLA in the next two to four years. (The 13th checks will be issued in September and will be in the amount of the annuitant’s regular monthly check, unless that amount is more than $2,000, in which case it will be capped.)
Learn more about SB 12, TRS, and other issues affecting educator retirement, such as Social Security offsets, on ATPE’s advocacy blog TeachtheVote.org.
When the cost of a pension system’s vested benefits exceeds the money on hand to pay for those benefits, the resulting difference is an unfunded liability. It’s like credit card debt: If you owe more than you have on hand to pay off your debts in full, you have an unfunded liability. Thankfully, you can pay down credit card debt gradually. Pension liabilities are also paid down gradually as benefits are paid over time.
However, though it can be paid over time, carrying debt comes with a cost. The more you owe, the more interest you accrue. Money paid toward interest is not available to purchase other goods and services. If your debt is so large the interest accrues faster than you can pay it off, you might go bankrupt. Pension systems operate similarly. When a pension fund has a large unfunded liability, it pays more toward carrying costs (much like interest) and can’t afford benefit increases such as COLAs. On the other hand, when a pension has no unfunded liability or a manageable unfunded liability, the system is considered “actuarially sound.” By law, TRS must be actuarially sound—defined as having the ability to pay off its unfunded liability within 30 years—before a 13th check can be issued or a COLA provided.
Two sources of money exist to pay for pension benefits: contributions and investment income. The Legislature sets TRS contribution rates, making them a known quantity. Because future investment returns can’t be known, TRS sets a projected or “assumed” rate of return. Last summer, TRS lowered its assumed rate of return, predicting less future investment revenue—a prudent move, as overestimating investment income only masks funding shortfalls.
With less projected income available to pay future benefits, the TRS unfunded liability increased, and the time frame to pay off that liability jumped from just over 30 years to more than 87 years. The increased liability and long payoff window might have resulted in hundreds of billions of dollars in carrying costs that otherwise could have been spent to increase benefits to keep up with inflation.
Fortunately, SB 12 addressed the projected decrease in investment income by providing a much-needed boost in contributions into the pension system. State, school district, and active educator contribution rates will gradually increase over the next six years.
Texas has underfunded TRS contributions for about two decades, and the state’s higher contribution rate under SB 12 still ranks Texas 50th in the country. But it’s enough of an increase to bring the time frame to pay off the TRS unfunded liability below 30 years and back within the standard for actuarial soundness under state law. Because SB 12 made the fund immediately sound, TRS is able to provide a 13th check for retirees of up to $2,000 this year and will likely be in a position to provide a permanent COLA in the next two to four years. (The 13th checks will be issued in September and will be in the amount of the annuitant’s regular monthly check, unless that amount is more than $2,000, in which case it will be capped.)
Learn more about SB 12, TRS, and other issues affecting educator retirement, such as Social Security offsets, on ATPE’s advocacy blog TeachtheVote.org.
Author: Monty Exter, ATPE Senior Lobbyist