The Teacher Retirement System of Texas Is in Need of Serious Reform
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The Teacher Retirement System of Texas Is in Need of Serious Reform

After prudent reforms to the Employee Retirement System, the Texas legislature is considering bills that ignore the need to reform the Teacher Retirement System.

Just weeks after the Texas legislature took a gigantic step towards tackling the state’s growing unfunded pension liabilities and ensuring it can deliver on the retirement promises made to state government employees, policymakers are considering taking a very different approach with the pension system serving Texas educators. In the state’s special legislative session, leaders are considering legislation that would grant retired school workers a one-time supplemental benefit payment. This one-time payment, at best, ignores the systemic challenges facing the Teacher Retirement System of Texas and, at worst, runs the risk of harming the solvency of the already underfunded pension plan in the long-run.

Dueling versions of the proposed one-time retiree payment took only hours to receive their first vote after Texas Gov. Greg Abbott released his special session agenda and the state legislature began the first of what is expected to be two special sessions in 2021. House Bill 85 and Senate Bill 7 would both give retired educators and support staff in the Teacher Retirement System of Texas (TRS) an ad hoc, one-time supplemental payment in lieu of a cost-of-living adjustment (COLA). This payment can be colloquially referred to as a 13th check. It is calculated the extra benefit payment would cost the state nearly $700 million, but notably, only Senate Bill 7 would require the payment actually be funded in advance—before being handed out to retirees (instead of just being paid out of the pension fund directly out of the asset pool).

This distinction is critical to note because if there is no accompanying legislative appropriation to cover the full cost of this 13th check. Plan actuaries estimate the initial $700 million costs of House Bill 85 would add more than $4.3 billion to the Teacher Retirement System’s already sizable $50 billion in unfunded liabilities because the cost of the 13th check would effectively be financed, with brutal compounding interest, over many decades. At least Senate Bill 7 avoids those long-term financing costs by requiring the exact cost of the 13th check to be appropriated before any of the checks are sent out to retirees.

That said, both state bills ultimately ignore the systemic issues that require COLAs to be issued under such extraordinary circumstances as a legislative special session in the first place.

Texas legislators may have been surprised last week when, in testimony before the Senate Finance Committee, several TRS retirees characterized the one-time benefit increase as underwhelming and instead urged the state legislature to establish a permanent and predictable COLA.

The frustration felt by a committee room filled with union members and their representatives is a sign that Texas TRS has a flawed benefit design. TRS is sub-optimizing teacher benefits and doesn’t offer members a path to a retirement benefit adjustment without the state legislature making a special appropriation.

Fiscal hawks in Texas would be right to question the financial wisdom of granting a supplemental benefit payment in a broken, structurally underfunded teacher pension system without officially addressing the pension system’s declining health and exposure to volatile global investment markets. While this is likely to be a great year for investment returns, one good year will not make up for decades of structural underfunding of public pension systems like TRS.

If a 13th check sounds familiar to legislators, it might be because just two years ago during the 2019 legislative session, TRS retirees were given the 13th check after not seeing a benefit increase for over a decade. The reason for the wait was because, prior to Senate Bill 12 of 2019, TRS did not have the funds on hand at the time, nor did it expect future contributions to be sufficient enough to return the TRS system to full funding over the next 30 years, as required under Texas law. The 2019 legislation increased how much both teachers and employers (read: taxpayers) are required to contribute to TRS—allowing the plan to technically meet the threshold for granting a 13th check. However, the bill did nothing to address the systemic issues that sunk TRS into debt in the first place and made the 13th check threshold unachievable for so long.

In short, the 2019 session’s efforts to make TRS “actuarially sound” began and ended with meeting the requirements to issue retirees a long-awaited 13th check. To call this an unhealthy way to handle retiree benefit adjustments in a large pension system would be an understatement. Retirees are forced to ask for benefit increases every legislative session—inevitably politicizing something that in many pension systems is automated, built-in and routine. This in turn leads to increased risk of legislative decisions that drive bad fiscal outcomes for taxpayers through unanticipated costs in the future.

Both the 2019 process and the current special session discussion highlight the opportunity to reform the Teacher Retirement System further to allow for regular, predictable, and properly-funded cost-of-living adjustments. It is possible to implement a COLA in a way that doesn’t expose the system to the kinds of financial risks inherent in ad hoc benefit increases granted arbitrarily by legislators.

In most years since 2000, on an actuarial basis, the costs to service TRS benefits have exceeded the contributions made annually by the state. This has driven a large portion of TRS’s structural underfunding since 2000. This same dynamic was driving the Employees Retirement System of Texas (ERS) to insolvency until Senate Bill 321 was enacted in June 2021. That public pension reform promises to address structural underfunding and finally moves the state to a rational funding policy.

By contrast, analysis of SB 12 from 2019 revealed the contribution rate increases contained within the measure would result in improvements—assuming the plan’s investments perform 100 percent in line with expectations. However, if the plan averaged just 100 basis points lower than assumed—a 6.25 percent average return instead of the assumed 7.25 percent return—then TRS’s current $50 billion in unfunded liabilities would more than double to over $100 billion, according to actuarial models. This demonstrates strongly that TRS is a fragile pension plan that cannot handle stress.

Despite the contribution increases SB 12 requires over the next few years, TRS lacks a sustainable funding policy that will tackle unfunded liabilities and prevent future debt. Given the significant lingering risks facing TRS, Texas legislators should continue to seek out solutions for issues not addressed in SB 12 or any of the bills introduced so far during this current special session. Paying off the system’s pension debt quicker, adopting an actuarially determined contribution rate to avoid future underpayments into the system, and adopting alternative benefit packages to better address the retirement security needs of a shifting workforce would be significant steps to addressing the ongoing challenges to TRS.

Until SB 321 was signed into law earlier this year, the Employees Retirement System of Texas suffered from many of the same issues driving TRS’s unfunded liabilities. Texas stakeholders and lawmakers would be wise to use the momentum of the recent ERS reforms to build more effective, affordable, and sustainable retirement solutions that work for the state’s educators and taxpayers.

Appropriating more funding for another ad hoc 13th check, while certainly important to retirees, does not address the $50 billion in TRS debt, and depending on the legislature’s commitment to pre-funding this particular 13th check, may in fact make it worse.

A non-negotiable reality is that the longer the Teacher Retirement System’s $50 billion in pension debt is left unaddressed, the more long-term costs for TRS will continue to grow. As the recent experience with ERS shows—along with similar experiences in other states like Michigan, Arizona, and New Mexico,—public pension systems like TRS can be reformed in a cost-controlled way that conforms to a range of designs stakeholders choose, while also providing a sustainable and predictable COLA.

From the employee and retiree perspective, one thing should be clear: ad hoc pension benefit increases subject to the whims of politicians are not optimal for ensuring a secure retirement. Prior to 2019, retired educators went a decade without a benefit adjustment, which highlights one of a number of suboptimal aspects of the current TRS pension design. And for future teachers, it would be far better to offer them an updated, sustainable retirement plan design that incorporates a predictable cost-of-living adjustment instead of continuing to place them in a flawed and massively underfunded pension system lacking such a mechanism.

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