Texas is not immune to the problems that trouble pension systems across the country. In Texas, state and local governments employ about 16% of workers. Most of them have a defined-benefit pension plan that promises a regular payment to retirees based on guaranteed formulas and irrespective of investment returns. Underperforming investments and generational accounting issues are exhausting these plans leaving them with mounting, unsustainable liabilities. In fact the Texas Pension Review Board (PRB) noted in its 2019 report to the Legislature that “despite a nearly 10-year bull market following the 2008 market downturn, the unfunded liabilities of many public retirement systems both across the country and in Texas continue to rise.”
In this Let People Prosper episode 71, I chat with James Quintero and Dr. Derek Cohen of TPPF about the benefits of bail reform (SB 628 & SJR 37), the costs and benefits of the latest version of reforming the Teacher Retirement System of Texas (SB 393) (more on TRS problems here), and what to expect in Gov. Abbott's State of the State (like a possible emergency item of property tax reform).
The Texas Teacher Retirement System has had massive debts for years and there is growing concern the system is moving toward insolvency. There are good options the Texas Legislature can pursue to fix the system, but they all require hard choices. Which path will policymakers take, or will they put it off?
Great discussion with Stephen Gassenberger of Reason Foundation, Monty Exter of the Association of Texas Professional Educators, and Josh McGee of the Texas Pension Review Board on TRS issues and potential solutions.
Check out this recent TPPF-Reason publication that provides an overview of issues facing TRS.
In this Let People Prosper episode 58, let's discuss education-related issues in Texas of school finance reform, property tax relief, and the Teacher Retirement System (TRS) of Texas pension solvency.
To sum up, taxpayers have increased funding for public schools for years (see here and here) and now it's time for those elevated current dollars to be spent wisely to the classroom for improved education outcomes. School finance also includes property tax relief which should be accomplished by following the TPPF plan of actually lowering property taxes. And the latest TPPF-Reason Foundation paper highlights the mounting problems with the TRS pension that must be addressed soon before the pocketbooks of teachers and all taxpayers are hit.
There's much on the line for education in Texas. Serious discussion about spending taxpayer dollars wisely, lowering property taxes, and assuring the TRS pension system is solvent through reform are essential elements of improving education in the Lone Star State.
A recent Wall Street Journal article highlighted how the $4 trillion in total unfunded public pension debts of cities and states nationwide equals Germany’s economy. The WSJ figure below highlights how this massive sea of red ink means that there could be a tremendous burden on taxpayers as contributions rise or on public sector employees’ as funded ratios decline without major reforms.
In other words, public sector employees and taxpayers may soon be in a world of hurt because of decades of poorly managed and constructed defined-benefit pension plans.
The Teacher Retirement System of Texas, or TRS, recently lowered its assumed rate of return for its pension fund from 8 percent to 7.25 percent. The TRS figure below shows that the lower rate is more consistent with the average annual returns in the past 20 years of around 7 percent, but it remains well above the 5.8 percent average return in the last decade.
While some Texas teachers and unions worry about potential benefit cuts, teachers shouldn’t fret about changes to current benefits from the lowered assumed rate of return but rather note that the increased transparency helps better reflect longer-term solvency issues.
The lowered return indicates unfunded liabilities amount to a staggering $45 billion, pushing the funded ratio below 80 percent, which that some consider actuarially sound. However, if the funded ratio is below 100 percent, then some teachers are at risk of not receiving their retirement because of insufficient funds to pay them.
The goal of public pensions should always be a 100 percent funded ratio so teachers and taxpayers aren’t shortchanged.
To better fund teachers’ pensions, TRS has stated they will request more contributions from the Texas Legislature this upcoming session. These added contributions could come from current teachers or taxpayers through increased state or school district spending, but that’s up to legislators.
While Texas has historically had terrific credit ratings, it risks a downgrade if the Legislature doesn’t solve what could be a looming pension crisis. Total state unfunded pension liabilities now amount to more than $60 billion after the recent TRS decision. These unfunded liabilities, if not covered, will require more resources from teachers and taxpayers.
Lowering the rate of return to a more accurate assumption is a step in the right direction, but more reform is necessary.
To assure a 100 percent funded ratio, the Legislature should consider transitioning pension plans to cash balance plans. Or, to avoid getting back into the current situation from mismanagement of the portfolio over time, legislators should consider hybrid contribution plans or defined contribution, 401K-style, plans.
Traditional opponents of defined contribution plans say they cost more to the state, are less stable for retirees, and generate less returns over time. However, most of these are unfounded and those that are legitimate have solutions. A well-designed defined contribution plan can be even more beneficial to teachers so that they are in control of their retirement while practically eliminating the risk to taxpayers.
The looming debt crisis could hurt teachers and taxpayers if the can is continually kicked down the road. Before the can makes it off the cliff, legislators should act and reform the system.
Vance Ginn, Ph.D.