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Enhance Teacher Retirement Benefits

State law should be amended to increase benefits given to Teacher Retirement System of Texas beneficiaries.

Background
The Teacher Retirement System of Texas (TRS) administers a defined-benefit retirement plan for employees of public schools and institutions of higher education. TRS had 720,000 active members and 160,000 retirees in fiscal 1998.

Teacher Retirement Benefits
Under TRS' defined-benefit plan, the state is required to pay a retirement annuity based on a statutory benefit formula that considers an employee's years of service, a benefit multiplier of 2 percent for each year of service, and the retiree's final average monthly salary. Employees who retire with 30 years of service, for example, would receive a monthly annuity of 60 percent (30 years of service multiplied by 2 percent) of their final average monthly salary, which is calculated based on an average of the highest three years' earnings.

The Employees Retirement System of Texas (ERS) also administers a defined-benefit plan for state employees, but retirement benefits provided by the two systems are not equal. Although the statutory benefit formulas are similar, the benefit multiplier for ERS members is 2.25 percent--12.5 percent higher than the TRS multiplier.

TRS's actuarial condition is excellent. In fiscal 1998, the system was over funded--that is, its present assets exceeded its total future liabilities--by more than $2.4 billion. In fiscal 1998, TRS earned 8 percent market returns on an investment portfolio with a market value of more than $66 billion in assets.

For the 1998-99 biennium, active TRS members contribute 6.4 percent of their salary for retirement; the state contributes 6 percent. The TRS retirement trust fund is considered actuarially sound if its funding is sufficient to cover its "normal cost" and to pay off any unfunded liabilities over a period of less than 31 years. The unfunded liability is the portion of the actuarial cost of future benefits that exceeds the actuarial value of current assets. The normal cost is the percent of payroll needed to fund plan benefits for new members; TRS' normal cost for fiscal 1998 was 11.35 percent.[1] This means that nearly all of the total combined state and member contribution rates--11.35 percent out of the total 12.4 percent--is used to fund the system's normal cost. The remaining 1.05 percent is used to pay off any unfunded liabilities of the system.

TRS estimates that about 80 to 85 percent of its members (primarily public school employees and some local community college employees) are not covered under Social Security. Only about 30 to 40 Texas school districts are covered under Social Security.[2]

Compared to the multiplier in other state and local government retirement systems, TRS' multiplier is low, especially given that most TRS members are not covered by Social Security. According to a 1997 survey by the Public Pension Coordinating Council, the average benefit multiplier for plans whose employees are not covered by Social Security was 2.36 percent, compared with 2 percent for plans having all of their members covered by Social Security.[3]

Over time, inflation has eroded the purchasing power of retirees' monthly annuities. To address the issue of low pensions for many long-term retirees and to help counter the effects of inflation, every Texas Legislature since 1975 has authorized benefit increases for retirees.[4]

In 1993, the Legislature approved the first of four installments of a TRS inflation "catch-up" plan for retirees. The purpose of this plan is to increase retiree pensions over time to completely restore the purchasing power lost to inflation. In this plan, older retirees generally receive higher annuity increases than newer ones, because more time has elapsed for inflation to erode their purchasing power. The first installment resulted in average annuity increases on the order of 5 to 15 percent. In 1995, the Legislature approved the second installment, resulting in an average increase of 14 percent for most retirees. The third installment, approved in 1997, represented an average increase of 7.5 percent.[5]

TRS estimates that the fourth and final installment that will be proposed for the 2000-01 biennium would completely restore retirees' purchasing power lost since retirement and would represent an aggregate 5 to 7 percent increase in retirement benefits for current retirees.[6]

According to TRS, the trust fund can afford, at current contribution rates, the fourth and final installment of the inflation "catch-up" annuity increase for retirees, combined with a 2.1 percent benefit multiplier for current and future retirees.

Recommendations
A. State law should be amended to provide the fourth and final installment of the inflation "catch-up" annuity increase for TRS retirees during the 2000-01 biennium, contingent upon a finding by the system's actuary that this benefit increase can be funded at current contribution rates and that the system would remain actuarially sound within the statutory 31-year limit.

According to TRS, this recommendation would provide a 5 to 7 percent increase in annuities for current retirees and would restore retirees' purchasing power lost over time to inflation.

B. State law should be amended to establish a 2.1 percent benefit multiplier for current and future TRS retirees, contingent upon a finding by the system's actuary that this benefit increase, combined with the retiree benefit increase recommended above, can be funded at current TRS contribution rates and that the system would remain actuarially sound within the statutory 31-year limit.

The benefit multiplier should be increased to 2.25 percent to match the ERS rate as soon as TRS can afford this at current contribution rates.

A 2.1 percent benefit multiplier would provide a 5 percent benefit increase for retirees. It also would bring the TRS multiplier more in line with state and local retirement systems whose members are not covered by Social Security.

Fiscal Impact
The recommendations would incur no additional cost to the state, as they would be contingent upon the system remaining actuarially sound with no increase in state and member TRS contribution rates. The recommended benefits, however, would dramatically increase the system's unfunded liabilities, normal cost, and funding period. According to TRS, the benefit increases combined would generate an unfunded liability of $1.4 billion and increase the fund's normal cost from 11.35 percent to 11.85 percent, resulting in a funding period of 20 years.[7]


Endnotes
[1] Watson Wyatt Worldwide, Teacher Retirement System of Texas, Actuarial Valuation as of August 31, 1998 (Dallas, Texas, November 18, 1998), pp. 1, 7.

[2] Telephone interview with Ronnie Jung, chief financial officer, Teacher Retirement System of Texas, Austin, Texas, May 1, 1998.

[3] The Public Pension Coordinating Council, 1997 Survey of Local Government Employee Retirement Systems, by Paul Zorn (Chicago, Illinois, 1997), p. 34.

[4] Texas Sunset Advisory Commission, Teacher Retirement System Staff Report (Austin, Texas, December 1994), pp. 9-10.

[5] Telephone interview with Ronnie Jung, May 1, 1998.

[6] Teacher Retirement System of Texas, "Notes for Actuarial Briefing," Austin, Texas, December 18, 1998, p. 2.

[7] Teacher Retirement System of Texas, "Notes for Actuarial Briefing," p. 3.