If you only make the minimum payment on your credit card for 13 of the past 15 months, your debt would climb fast. Unfortunately, that’s what the Texas Legislature has done to the Teacher Retirement System (TRS) for 13 of the past 15 years. Those inadequate contributions are a big reason why TRS currently has a $46 billion shortfall.
Pension funding policy can be complicated, but one principle always works for keeping debt in check: pay your bills on time.
TRS retirement benefits can be a great bargain for employers and the state. The state can promise an amount of monthly retirement income to educators and contribute a portion of that promised amount into a pool that earns investment returns. For example, over the last two years, the state’s contributions to TRS were only about 14 percent of TRS’ total revenue, the largest chunk being investment income.
Just because TRS retirement benefits are a great value doesn’t mean they don’t have a cost. If the contributions fall short, or the returns don’t cover the balance of promised benefits, pension debt accumulates. Ensuring adequate contributions is like paying a full credit card bill every month — you purchase items and the cost is ultimately reflected in an amount to be paid.
What does “pay your bill” meanin the case of pension financing?
During a teacher’s working years, there should be enough paid into the system so that these contributions, combined with investment earnings, can cover their future monthly pensions.
To figure out how much should be contributed annually, financial professionals should estimate an adequate contribution rate using reasonable assumptions. If there’s a shortfall — if the pension fund has fewer dollars on hand than it needs to pay out all accrued benefits, as has been the case for TRS since 2001 — those in charge of the fund should set a policy to get the system fully funded again.
This produces an “actuarially determined” contribution rate for pension systems. Unfortunately, Texas has effectively ignored this practice.
Unlike most major pension systems, TRS board trustees have no control over statutorily set contribution rates. The Legislature determines how much Texas, school districts and employees contribute. Since 2003, the contribution rate in statute has only matched the actuarially determined rate twice.
The TRS board can improve the policies on the investments side of the equation, which helps determine how much the state should contribute. TRS trustees recently adopted a lower, more realistic investment return assumption. But if the contribution rates set in statute don’t at least match what the actuaries recommend, TRS runs the risk of increasing debt.
Inadequate contribution rates over the past 15 years is one of the primary reasons TRS has billions in pension debt, even after spending over $16 billion on debt payments during that same time frame.
If the Legislature doesn’t address the lack of adequate TRS contributions, there will be long-term negative effects on Texas’s fiscal sustainability.
Just consider how the pension debt levels are creating budgetary headaches right now.
TRS has requested a minimum increase of $1.8 billion in contributions from the budget. That money could pay for a nearly 2% across-the-board teacher salary raise, put retired teachers’ healthcare plan on solid footing, or cover any number of other legislative priorities. But because the Legislature didn’t pay its past bills in full, the cost is higher than it otherwise would have been, and now lawmakers have to pay with interest.
Ignoring the problem today will mean TRS’s debts will continue accruing interest, making the need for greater contributions in the future.
That’s why the Association of Texas Professional Educators and Equable Institute are launching the #paythebilltx campaign to urge the adoption of a serious plan to ramp up contributions to TRS. We encourage Texans to do the same using #paythebilltx.
Increased funding doesn’t have to happen in one year. The increases could be allocated in a variety of different ways. Whatever the plan, TRS needs to be fully funded based on reasonable assumptions, so retired teachers can feel secure that the state will uphold its pension promise.
Disclosure: The Association of Texas Professional Educators has been a financial supporter of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune's journalism. Find a complete list of them here.