Teacher Pension Debt Undermines Public Education in Georgia

Georgia’s students deserve fiscally responsible public education management, but chronic underfunding of teachers’ pensions is putting that at risk. Over the past three years alone, legislators had to reroute over $600 million away from other budget priorities to make additional payments into the state’s retirement system for teachers.

As of today, public education employees have been promised $25 billion more in pension benefits than Georgia is expected to have available to fully pay its obligations. Each year, a certain amount of money needs to be contributed to the pension fund in order to pay promised benefits. The required contributions has been steadily increasing – reaching 21 percent of total payroll as budgeted for 2020 – escalating the pressure on school finances and siphoning education dollars away from the classroom.

Undoubtedly and understandably, retirement benefits are a major source of post-employment income for Georgia’s public education professionals. The Teachers Retirement System (TRS) of Georgia’s mission is to serve teachers by administering their retirement benefits and protecting the system’s long-term financial solvency. However, TRS is facing some major risks that could harm not only retirees, but also current students and teachers.

Realistically, contributions are likely to increase even more in the event of investment underperformance or a recession.

Unfortunately, the primary driver of the increase in costs is the “unfunded liability” for TRS, i.e. the gap between how much money should be on hand to pay promised teacher pension benefits over the long term and what the retirement system actually has.

To sustainably deliver all the promised pension benefits to teachers, TRS needs to be fully funded at all times. All the actuarial assumptions that went into creating the pension plan – the educated guesses on the “what ifs?” about what happens in the future with regard to markets, demographic trends, and more – need to be correct.

But consider the performance of investment returns against the educated guesses that Georgia’s TRS has been using. For the past two decades, TRS has assumed it would earn a 7.5 percent investment return but only averaged 5.5 percent between 2001 and 2017 – a result of a “new normal” of low asset returns for most institutional investors, not just TRS. And, although some years were better than others in terms of the investment returns, the overall underperformance has created $9.7 billion of the current unfunded liabilities.

Missed demographic assumptions and negative amortization – an increase in the pension debt simply because total contributions are less than the interest accruing on that debt – were other major factors driving today’s $25 billion unfunded liability.

Going forward, the funding deficit is likely to continue driving higher state and school district pension contributions and crowding out spending that could otherwise be directed toward classrooms and students.

School district contributions to teacher pensions represented less than 10 percent of payroll costs until 2011. If future investment returns average just 6.5 percent, annual payments would grow to 22 percent of payroll by FY2040. If investment returns continue to average 5.5 percent, annual taxpayer contributions to the TRS would increase to 27 percent of payroll.

That means that for every dollar paid in salary to current teachers, a quarter needs to be added to the pensions system – money that could have otherwise gone towards their benefits or compensation.

What does this potentially mean for teachers and students?

When school districts need to increase TRS contributions to pay down rising pension debt, this money needs to come from somewhere. Without some increases in the system’s revenue, districts would reroute education funds. That could force reductions to after-school programs, freezing teacher salaries, and/or cutting services from within the state’s education system.

Georgia’s public education system is the cornerstone in building the state’s future. Families of all walks of life rely on public schools. Redirecting resources from the classroom to the pension system means less money where it is supposed to be: in classrooms.

“The provision of an adequate public education for the citizens shall be a primary obligation of the State of Georgia,” Georgia’s Constitution states. Absent meaningful reform to reduce financial risk and improve the TRS’ solvency, the state will be increasingly unable to afford to invest in young Georgians’ education. Georgia’s political leaders owe it to parents and students to resolve the pension system’s solvency challenges.

Go here to read the Issue Analysis, “Georgia’s Teachers Retirement System: Historic Solvency Analysis And Prospects for the Future.” 

This column was originally published by the Georgia Public Policy Foundation.