After an exhaustive study, the Texas Teacher Retirement System (TRS) last week presented a report to the state’s Legislative Budget Board showing that changing the state’s largest public pension plan could increase the state’s pension liability by as much as $11.7 billion, increase the state retirement costs, and possibly result in benefit cuts.
Despite the potential costs and benefit reductions, opponents of public pensions say that they will continue their efforts to eliminate the state’s largest traditional pension plan, which serves 1.3 million teachers, public school and higher education employees, and retirees.
The teachers retirement pension plan “(is) very efficient and delivers a modest benefit at a very low cost,” said the Texas Federation of Teachers’ legislative director Ted Melina-Raab to the Austin American Statesman. “Any move away from it is one that is based on ideology and politics.”
The report entitled the TRS Pension Design Study is TRS’ response to a legislative mandate to study the impact of changing the state’s retirement plan for public employees. The Employee Retirement System, which serves state employees, was directed to complete a similar study that should be made public next week.
The TRS pension plan is a traditional pension, sometimes called a defined benefit plan, that provides a modest but secure pension for education workers who meet certain age and years-of-service requirements.
The average monthly TRS annuity is $1,897. About 95 percent of Texas public school employees do not participate in Social Security, so their pension is their only guaranteed source of retirement income.
The report finds that it would cost taxpayers more to provide the same level of benefit through alternative plans, such as a 401(k)-type defined contribution plan. If the state chose to replace the TRS pension with a defined contribution plan and keep benefits at their present level, the state contribution would increase from the current 6.4 percent of payroll to between 10.9 percent and 18.89 percent depending on which type of plan was chosen.
The alternative to increasing contribution rates would be to cut benefits. According to the report, “(retirement) plans do not achieve savings by simply moving to a different structure. Rather, a benefit reduction must accompany such a move in order for the plan to achieve savings.”
The experience of six states that changed their retirement plan is cited by the report. After changing the structure of their retirement plans, five of the six states reduced benefits by between 3 percent and 30 percent.
The report also finds that the state won’t reduce its funded liability if it bars new hires from participating in the pension plan as has been proposed by pension plan opponents. In fact, excluding new hires from the pension fund will increase the current funded liability of $24 billion to $35.7 billion.
If the funded liability is allowed to grow to $35.7 bill, the state will have no choice but to raise its contribution substantially or reduce benefits or do both.
The report also finds that despite dire and unfounded warnings the TRS pension fund is in good shape. If current contributions continue at their present rate and return on investment income continues to average about 8 percent as it has done over the last 25 years, TRS can pay benefits at the current level until 2075.
The report recognizes significant challenges facing the fund and recommends steps to address them. The main challenge is that the current funded liability cannot be eliminated without a modest contribution increase to the plan. If employee, contributions remain constant, the funded liability could be eliminated by increasing the state contribution to 8.1 percent of payroll, slightly below the 8.5 percent that the state contributed until 1983.
Opponents of the pension plan such as the Texas Public Policy Forum (TPPF) have proposed eliminating public pensions in Texas by excluding new hires from pension plans such as TRS’, eliminating state funding for pensions and channeling that funding into individual retirement accounts, and freezing pensions of current employees.
The report shows that switching to such a plan will likely be costly and lead to benefit reductions. Despite the findings of the report, a spokesman for TPPF said that the group will continue to push its plan.
“(Changing the pension plan) will get a good look (when the Legislature meets next year),” said Talmadge Heflin of the TPPF to the Statesman. “There is a high likelihood that changes will be made,”
“That just doesn’t make sense,” said Derrick Osobase, political director of the Texas State Employees Union, whose higher education members belong to TRS. “The report shows public pensions are good for employees and good for taxpayers. When people who claim to be taxpayer advocates say the want to get rid of something that saves taxpayer money, you have to wonder what their agenda really is.”