Trouble looms for the Teacher Retirement System

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On the Teacher Retirement System of Texas (TRS) website, a pastel background sets off  black and white images of smiling teachers, young and old.  But the retirement system — in which UT employees are eligible to enroll automatically on their first day — faces a financial situation that shouldn’t trigger any happy faces. The bottom line is that none of TRS’s main funding sources offer easy answers for the agency’s current budget shortfall.

The sixth-largest pension fund in the United States, TRS relies on three main sources of funding to maintain its substantial trust fund: contributions from the state, contributions from members’ salaries and investment returns.

The system has $101 billion in assets and serves more than 1.3 million Texans, including 312,680 retirees and 1 million or so active employees. TRS members include employees of Texas public schools, colleges and universities.

TRS administers four different benefit programs, including two health benefit programs, a long-term care insurance program and a defined-benefit retirement program.

TRS’s defined-benefit retirement plan promises members a monthly benefit upon retirement, no matter how long they live. The size of the monthly benefit is determined by a pre-established formula that takes into account the employee’s earnings history.

In the most recent session of the Texas Legislature, lawmakers lowered the state contribution from 6.4 percent to 6 percent, meaning that the state now matches 6 percent of every TRS member’s paycheck in contributions to the TRS funds.  (Employers in the system cut 6.4 percent from employees’ before-tax paychecks, making the current employee contribution rate slightly higher than the state contribution rate.)

In the past, the state contribution rate has been as high as 8.4 percent, and during the Sep. 12 hearing of the House Committee on Pensions, Investments and Financial Services, TRS Executive Director Brian Guthrie suggested that the state begin to “stair-step” state contribution rates back up to the original 8.4 percent. Why? Because the program as it stands is “not actuarially sound.”

“Not actuarially sound” is a technical (and polite) way of saying that there is not enough money coming in to the system to support what it needs to pay out. Though the pension plan portion of TRS is fairly solid and should be able to pay benefits through the year 2075, funding for the healthcare plans provided by TRS will run out by 2015. So, how do we solve this problem for the million-plus Texas teachers who rely on TRS?

According to Brian Guthrie’s testimony,  if the state and employee contributions were raised equally, then the blended contribution rate would go up to 7.7 percent, but the state’s contribution would only grow by 1.7 percent at a cost of less than $600 million per year.

The alternative: Raise only state contribution rates or only  employee rates. But that makes the burden greater — possibly too great — on the state or the employees.

What about investment returns, TRS’s third source of funding? The UT Human Resource Services website says that “employee and employer contributions go into a large trust fund that’s managed by knowledgeable professionals.”

By “knowledgeable professionals,” they mean TRS’s nine-member Board of Trustees. Five of these members are appointed directly by Governor Perry, and they must have “investment expertise.” At least one, Joe Colonnetta, has donated over $49,000 to the Texans for Rick Perry PAC.

The other four are chosen by Governor Perry from a list provided by the State Board of Education and the membership of TRS.

In the last fiscal year, TRS made around 7 percent in investment returns. But that’s not enough to drag TRS back to the land of “actuarial soundness.”

If TRS succeeds in some of its internal restructuring efforts, like getting 80 percent of its members to switch to a less-expensive Medicare plan, then it won’t need funds from the state for the next biennium. But even then, it would still be in trouble for the biennium after that.

So what’s TRS to do? I, like TRS’s Board of Trustees, wish I knew. But one thing is certain: the trustees need to quickly make a plan to see just how much groveling for extra funds they’ll need to do come the 83rd Texas Legislative Session.

Wright is a  Plan II and biology junior.