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Two state legislative committees are considering changes to the way the Teacher Retirement System is funded, changes that could impact not only your retirement benefits but your take-home pay as an active employee.
Texas is in a minority of states whose employer contributions to the retirement system are a fixed percentage set in statute – currently that amount is 6.58% of payroll (active employees contribute 6.4%). Most states have a variable employer contribution rate that can change from year to year depending on the financial status of the retirement fund.
Theoretically, the advantage of a “floating” contribution rate is that the state would have to increase its contributions when the system is underfunded; of course, the flip side is that the state could also lower contributions when the system is healthier. Some states even allow the employer contribution to go as low as 0%. One key to the relative health of the Texas TRS fund has been the constitutional provision prohibiting the state’s contribution rate to fall below 6%.
The House Pensions and Investments Committee and the Senate State Affairs Committee both have interim charges that require consideration of changing to a floating rate system. Specifically, the committees must look at whether the state (and potentially employee) contributions to TRS and ERS should vary from year to year to meet the “annual required contribution” (ARC) – a rate determined by each system’s actuary based on the current value of the fund and assumptions about future benefit payouts to members.
One problem of allowing for a floating rate is the likelihood that the rate would be set at JUST the level where the funding status is considered acceptable, but where there would be no room to allow for benefit increases for current or future retirees.
(In Texas that level is a 30-year ARC - the contribution rate that would allow the pension fund to pay its long-term debts within a 30 year period. Think of a 30-year mortgage – knowing how much debt you have to pay off, and making assumptions about your income, you can figure out the amount you have to pay toward your debt each month to pay it off in 30 years. Convert that amount to a percent of your pay, and you have your personal equivalent of a 30-year ARC. A 30-year funding period is considered an acceptable level of “debt” but Texas law prevents any benefit increases that would take the funding period above 31 years. So keeping the fund at the 30-year period would never allow a margin for funding benefit increase.)
TCTA’s testimony to the House P&I Committee emphasized the fact that TRS has remained relatively healthy under the current funding structure. Meanwhile, many of the states with floating rates who allowed their contributions to plummet during the good times have become sorely underfunded and have been unable to increase state funding enough to bring their systems back into good health. Others have had to keep their funds healthy by increasing funding by as much as 50%. Many of these states are now looking at ways to revise their structure to provide more stability in funding rates – the most straightforward of which would be to set the rates in statute, as Texas already does.
Our comments also reflected the need to fund the system at a level that will allow for ongoing benefit increases for retirees.
We noted that school employees would be skeptical of a floating rate system because of the state’s history of not keeping up its end of the bargain on retirement issues, specifically pointing out the reductions in benefits for current members in the 2005 session, and the two decades of state contributions that were less than the rate specified in statute. (The state consistently paid less than the 8% in statute, though it never attempted to go below the 6% constitutional minimum.) We would be very concerned that a floating rate would tend to have the effect of lowering state contributions far more often than raising them. Also, since the pension fund’s downtimes can coincide with the state’s downtimes, it seems unlikely that significant increases to the fund would be adopted while the legislature is grappling with a budget deficit.
TCTA informed the committee that we would strongly oppose any lowering or elimination of the 6% state floor, and we want to see employee rates set in statute (as is the case in most other states with floating state rates). Employees need to be able to count on stability in their take-home pay, and not face the possibility of significant increases in their retirement contributions in any given year.
The committee seemed receptive to the comments of TCTA and others attesting to the benefits of the current structure, but gave no real clues as to whether any change would be seriously considered. We expect the Senate committee to be more interested in this concept, but no hearing has been set at this time.
Web posted: 04/04/07
