Proposition 9 (2023) would amend the Texas Constitution by introducing a new section granting the Texas legislature the authority to enact laws allowing for cost-of-living adjustments and supplemental payments to eligible annuitants of the Teacher Retirement System of Texas (TRS).
In the 2023 legislative session, the Texas legislature passed Senate Bill 10, which outlined the process of appropriating and distributing this adjustment and additional payments to eligible retirees who retired before Dec. 31, 2021.
The amendment, now up for popular vote via Prop. 9, includes a temporary provision that mandates a one-time transfer of funds to the Teacher Retirement System of Texas to provide a cost-of-living adjustment, with strict limitations on the use of these funds. The temporary provision would expire on Sept. 1, 2025.
Texas voters will decide on the proposed constitutional amendment in the Nov. 7, 2023, election. Prop. 9 requires a simple majority of voter support to pass.
Fiscal Impact of Texas Prop. 9
The Texas Legislative Budget Board concluded that the proposed cost-of-living adjustment outlined in Senate Bill 10 and authorized by Prop. 9 would have no fiscal impact because the legislature funded a lump-sum payment of $3.35 billion to the TRS Pension Trust Fund from General Revenue for the state’s 2024 fiscal year. The payment was calculated by TRS actuaries using the current financial and demographic assumptions, including projected investment returns, and is meant to ensure that the issuance of the cost-of-living adjustment does not affect the actuarial soundness of the fund.
The Teacher Retirement System of Texas, however, currently has $63 billion in unfunded pension liabilities, according to administrators. Because investment returns constitute a significant portion of the system’s annual revenue, the accuracy and timing of these investment returns will ultimately determine whether the lump sum payment is sufficient to prevent the fund from adding to its debt and becoming actuarially unsound.
Arguments in Favor of Prop. 9
Arguments in favor of Prop. 9 come from a variety of labor groups, advocates of public education, and representatives of retired personnel who frame the issue as reflective of Texas residents’ support for public educators, including, according to Ballotpedia, the Texas AFL-CIO, Raise Your Hand Texas, Texas Association of School Administrators, Texas Association of School Boards, Texas Elementary Principals and Supervisors Association, and more.
The Texas Retired Teachers Association (TRTA) notes that TRS retirees have not received cost-of-living adjustments since 2004. Opponents note retirees have received some one-time bonus checks issued in recent years instead of a COLA, but teachers’ advocates claim this method hurts retirees’ purchasing power since inflation occurs over time.
Unlike other public employees around the state, most retired educators in Texas do not participate in Social Security, making the TRS pension benefit their primary source of retirement income. The Texas affiliate of the American Federation of Teachers (Texas AFT), the state’s largest union of public sector educators, has mostly expressed support of Senate Bill 10 and Prop. 9. Texas AFT materials point out that consumer prices have increased by almost 60% since 2004 and say Prop. 9 would support retirees who have not received an adjustment to their TRS annuity over that period to help them keep up with inflation.
After the the State Senate’s unanimous passage of SB 10, Texas Lt. Gov. Dan Patrick (R) said, “Texas retired educators have given so much for our students and for the future of Texas. It is only right that the state help give back to them.” Texas Gov. Greg Abbott signed SB 10 into law.
Arguments Against Prop. 9
Although no formal opposition was registered during the legislature’s consideration of Senate Bill 10 or Texas House Joint Resolution 2 (HJR 2, 2023) which placed the issue on the November ballot, there are three main concerns.
First, the state legislature’s ability to grant any cost-of-living adjustment to TRS participants is predicated on the pension system demonstrating that it will still be on a 30-year track to full funding after the COLA is implemented. Investment performance greatly influences the annual amounts needed to pay off TRS’ current $63 billion debt. Given that the lump-sum amount tied to Prop. 9 is based on plan assumptions, any short-term investment underperformance could cause TRS to exceed its 30-year amortization maximum, increase the system’s unfunded liabilities, necessitate more taxpayer-backed funding to cover the debt and make future COLAs less likely.
The second concern was most clearly on display in messages to members during the hearing of SB10 and HJR2, from Texas-AFT, who described legislators’ efforts as “not providing retirees with a ’COLA’ that reflects the actual increases in the cost-of-living.” Union members also raised concerns about the lack of structural changes to allow for ongoing COLA increases as inflation continues to rise.
Finally, with TRS and taxpayers responsible for $63 billion in unfunded pension benefits, some stakeholders voiced the imprudence of enhancing benefits in a structurally underfunded pension system. While other major pension systems like the Employees Retirement System of Texas (ERS) are funded based on dynamic rates set by plan actuaries that reflect the fund’s real-world experience, TRS contributions remain hard-coded in state statute and require legislation to adjust. Since investment returns comprise nearly two-thirds of all revenue flowing into public pension systems, and the amount appropriated to fund the Prop. 9 TRS COLA is based on the system’s 7% investment return assumption, having an unresponsive funding policy will make it more likely that the system will again exceed the state’s 30-year amortization limit and add to the $68 billion unfunded liability in down years.
In the fundamental sense, a cost-of-living adjustment is simply a feature of a defined-benefit pension plan that systematically increases annuity payments so retirees can maintain the value of their earned retirement benefits. As a feature of the benefit, COLAs are most effective when they are funded as part of the normal costs of the benefit and distributed according to specified conditions.
Despite teachers’ groups raising concerns over the impact of inflation on retirees, the COLA authorized in Prop. 9 does not reflect the actual inflation rate experienced by retirees and, thus, is not a true cost-of-living adjustment. Given that Texas enjoyed a budget surplus in 2023 that was the size of some smaller states’ entire budgets, the push by state leaders to use surplus funds to support retired educators came as no surprise. In 2019, the legislature considered a similar proposal but opted instead to issue an additional annuity payment to retirees, commonly referred to as a “13th check.” As even proponents of Prop. 9 have highlighted, granting a one-time benefit increase or issuing an extra annuity payment does not solve the long-term systemic challenge inflation poses to retirees.
Unlike other similar pension funds around the country, the TRS benefit that members signed up for when they began working with their public employers has never included a guaranteed cost-of-living adjustment as part of the benefit. The TRS benefit is, at its core, a contractual agreement between the state and the employee. An educator works for the participating employer, and in exchange for meeting established tenure requirements, the employer provides a predetermined pension benefit established in state law, called a “defined benefit.” Thus, it is important to recognize that while TRS retirees may desire a cost-of-living adjustment, they are not owed one. If a COLA feature is not included as an element of the defined benefit, which is the case with Texas TRS, retirees are implicitly agreeing they are responsible for planning for inflation risks.
This is important because a defined benefit pension plan with a cost-of-living adjustment feature costs much more than one without a COLA feature, which usually translates into higher employer and employee contributions throughout an employee’s career. Any ad hoc increases to current benefits come with the associated risks of higher costs on future budgets and taxpayers. Essentially, a cost-of-living adjustment was never paid for by TRS retirees or their employers while they were working. As a result, Prop. 9 is effectively asking today’s taxpayers to cover an unplanned benefit increase for already retired teachers.
Lastly, none of the estimates circulated on the potential costs associated with the proposed cost-of-living adjustment include scenarios where investment returns come in lower than the Teacher Retirement System’s expected 7% rate of return. Any shortfall below this expected rate of investment return would increase the state’s $63 billion in unfunded pension liabilities, which would ultimately be passed on to future taxpayers.
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