In his recent State of the State address, Gov. Greg Abbott scored a standing ovation when he said, “I am declaring school finance reform and increasing teacher pay as emergency items.”
There’s no doubt that fixes to the school finance system are long overdue, but raising teachers’ pay and overhauling the state’s school funding formulas won’t happen in a vacuum. There are hidden issues that will have to be incorporated into those reforms, including evaluating how any changes would impact the state’s unfunded teacher pension obligations.
The Teacher Retirement System of Texas (TRS) currently has $46.7 billion less than actuaries say it needs to pay for the retirement benefits that have already been promised to teachers. In fact, Texas only has about 75 cents for each dollar of benefits it has promised to educators. And given the way pension benefits are accrued, Gov. Abbott’s proposed pay raises for existing teachers could also increase the retirement benefits owed to them. If those new costs exceed TRS’s prior expectations about the long-term rate of teacher salary growth, TRS’ pension debt would further grow.
Not that long ago, TRS was in good shape. Back in 2001, TRS was secure and had $1 billion more than it needed to stay on financial track and ensure 100 percent of the pension benefits earned by teachers could be provided to them. Since then, however, lower-than-expected investment returns and insufficient contributions have driven a massive spike in unfunded liabilities—pension debt, effectively.
This debt has enlarged costs for school districts and the state. Payments to TRS have more than doubled since 2005. Taxpayers and teachers together contributed $6.5 billion to TRS in 2017, of which 35 percent went to pay down the unfunded pension liabilities. That equates to a whopping $2.3 billion diverted from school districts to reduce pension debt, and this scale of contribution is set to continue for decades, if not worsen.
This presents a real challenge because for every dollar TRS continues to collect in unfunded promises to educators, one is taken from school districts, classrooms, or directly from a teacher or retiree’s pocketbook in the form of never-seen pay increases or retiree cost of living adjustments.
To its credit, the TRS Board of Trustees is adjusting to the changing financial landscape. Last year, TRS lowered its expected return on investments from 8 percent to 7.25 percent. When a pension system’s investment returns don’t meet expectations, it adds debt to the system. Thus, the more conservative the assumptions about future investment returns are, the more predictable the pension fund is likely to be.
This legislative session some will claim that TRS’ $46.7 billion in debt is no big deal, pointing to a prevalent myth that being about 80 percent funded is somehow healthy for a pension system. In fact, according to the Society of Actuaries, a pension “plan’s funding goal should always be 100 percent” in the interest of long-run solvency.
For TRS to reach that goal, additional pension contributions will be required but reforms that address the range of structural issues that caused TRS’ decline in solvency since 2005 are also needed. Implementing more conservative actuarial assumptions, paying down unfunded liabilities faster, and potentially expanding retirement options to better match the needs of future teachers would go a long way in fixing the underlying problems.
Keeping pension promises that have been made to these public servants is a moral and fiscal concern for policymakers. Morally, it is clear: Teachers should receive the retirement benefits that have been promised to them and that they’ve already earned. Fiscally, the pension debt is eating up billions of dollars that should be going to students and classrooms and will increasingly threatening to crowd out more and more public education priorities and programs.
It is time for state leaders and school finance reformers to recognize the long-term threat pension debt presents to public education and to prioritize reforming TRS as part of the upcoming discussions about fixing the state’s education finance system.