As the session nears its end, the Texas Legislature faces the decision either to act responsibly and begin to repair the finances of the Teacher Retirement System (TRS) or to let the fund deteriorate further, leaving a bigger mess for future lawmakers.

TRS reports that Texas’ past and present teachers have earned retirement benefits worth approximately $200 billion, but the retirement system has only about $154 billion on hand to pay for those benefits. That means TRS is at least $46 billion short of what should be in the fund today.

To put that huge number in context, the value of all other Texas state-level debt totals around $53 billion.

Texas’ pension debt has continued to increase despite a decade-long bull market that saw the S&P 500 index increase by more than 300 percent from its bottom in 2009. It is clear TRS isn’t going to grow its way back to fiscal health.

TRS’s worsening funding situation is due to two primary causes: First, TRS has consistently underestimated the cost of benefits. And second, the state legislature has failed to appropriate sufficient contributions.

Let’s start with the TRS board of trustees’ slow reaction to changing economic conditions. Despite interest rates falling consistently since the 1990s, TRS did not lower its assumed investment return from 8 percent to 7.25 percent until the end of last year. Higher returns allow plans to rely less on annual contributions from members and taxpayers. But if realized returns are lower than assumed, costs can rise quickly because of the power of compounding.

Consider that in 2001, TRS reported that it was fully funded, assuming an 8 percent return.

Since then, the average annual investment return has been just 5.8 percent, falling 2.2 percent short of the target. That’s equivalent to $30 billion more that TRS expected to be in the fund today – money that will now need to be made up through higher contributions.

By keeping its assumed return at 8 percent for so long, TRS spent two decades undercounting the cost of benefits. While it’s hard to say for sure that more realistic cost estimates would have resulted in better funding, it certainly would have increased pressure on the Legislature to do more to appropriately fund teachers’ benefits.

Which leads to the second problem — only twice in the past 17 years has the Texas Legislature paid the full bill owed to TRS. In Texas, pension contribution rates are fixed in statute instead of being allowed to adjust to match actual benefits cost as they are in many other states. In recent years, those fixed rates have fallen short of what was needed to fully fund benefits, and the Legislature has failed to bring cost and contributions back into alignment.

No matter how accurate TRS’s cost estimates are, if the state refuses to pay the full bill, then the pension plan is destined to slowly dwindle until it runs out of money.

The TRS board has taken the first step toward remedying its funding problems by lowering its investment assumption to 7.25 percent, and thereby providing the state with a more accurate cost estimate. And they are likely to further reduce the rate in coming years given that their own consultants predict that the plan faces a 50-50 chance of achieving 7 percent.

Now it is time for the Legislature to act and address the state’s underpayment.

SB12 and HB9 would begin to address the issue by ramping up contribution rates to TRS over the next few years. However, it’s likely that more will need to be done.

The Texas Pension Review Board has laid out guidelines for pension funding that recommend plan sponsors (in this case, the state) pay the full actuarially determined contribution each year, and that pension debt be paid off in 20-25 years. The contribution rates recommended by these guidelines would significantly exceed the requirements of SB12 and HB9, even under today’s somewhat optimistic 7.25 percent assumed return.

Failing to address TRS’s funding challenges in this session will just make the bill grow much bigger in two years, increasing the negative impact on teachers and taxpayers alike. State leadership should begin fixing the problem today so that they leave a more manageable problem for future policymakers. It’s the only fiscally responsible choice.

_______________
This piece originally appeared in Houston Chronicle, by Josh McGee and Anthony Randazzo on May 8, 2019.