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At its Nov. 9 meeting, the Teacher Retirement System Board of Trustees was briefed on the Aug. 31 actuarial valuation of the TRS fund and formally approved the 13th check benefit increase for retirees. Board members had been notified in October that the bonus check would be affordable without the need for an increase in active member contributions. Eligible retirees (those retiring prior to Dec. 31, 2006) will receive an extra check in January in the same amount as their normal check (but no more than $2,400).
The actuaries presenting the report credited the state’s increased contribution rate (6.58%, up from the 6.0% of the past 12 years) with providing adequate funding for the 13th check, though the improving economy and accompanying increased investment returns make up the bulk of the system’s actuarial gains.
The actuarial valuation is an analysis of the pension fund considering various factors (such as investment returns, contribution rates, benefit structure, estimated salary and inflation figures, retirement rates, mortality rates, etc.) that affect the money coming into the fund and the money paid out over time. This analysis provides information about the fund’s solvency and about the need for any changes in contribution rates to ensure adequate funding for current and future benefits.
One of the assumptions in the actuarial report is that investments will earn at least 8% – which means that any investment returns over 8% improve the actuarial condition of the fund (other factors being equal), while returns of less than 8% are negative. The market value of the TRS fund is now over $112 billion, largely due to investment returns of more than 14% for the year. The average return over the last five years was 12.2%; the losses of the early 2000s lower that to a 10-year average return of 8.1%.
Actuaries use a five-year “smoothing” period to help offset large fluctuations in the market. This approach spreads out investment gains and losses over five years; for example, if the system earned $5 billion above the 8% assumption in one year, the actuaries would only count $1 billion of that for each of the next five years. Only a few years ago, this meant that even in years when the system had earned moderate investment gains, the losses of 2001 and 2002 were still negatively impacting the actuarial status of the fund. Because the system has now experienced several consecutive years of investment gains, there are currently “unrealized” gains of more than $8.7 billion that will show up in subsequent valuations. This means that even if the system met all of the actuarial assumptions exactly, the fund’s fiscal status would improve because it will benefit from those previous gains.
A key benchmark is the unfunded liability period. The period represents the amount of time it would take the fund to pay off its obligations (benefits) given its income and other relevant factors. Under Texas law, the Legislature cannot approve any benefit increases that would raise the unfunded liability period to more than 31 years; recently, the period has been “never,” but the improved investment returns and higher contribution rate have now improved that period to just over 27 years.
From the TRS Actuarial Valuation as of Aug. 31, 2007, prepared by
Gabriel Roeder Smith & Company, Consultants and Actuaries
The August 2008 valuation and subsequent February 2009 interim valuation should show an even lower unfunded liability period, allowing for the possibility of additional benefit improvements in the 2009 legislative session. TCTA will be seeking an ad hoc increase (an ongoing raise, as opposed to the one-time bonus of the 13th check) for retirees as well as repeal of benefit reductions that were adopted in the 2005 legislative session.
Web posted: 11/29/07 from The Classroom Teacher, Winter 2007
