Legislative proposals to shore up Texas’ two largest public pension funds could require teachers and state employees to work years longer than they must today to get full retirement benefits.
For example, a teacher who started in the classroom at age 23 may now take full retirement at age 52; that would increase to age 62 under House and Senate bills that are set for committee votes Monday.
Workers nearing retirement, such as those 50 or older, would not be subject to the new rules. But the changes would apply to about half of the active school employees, including everyone from cafeteria workers to superintendents, and about 64 percent of state employees.
Such major changes are necessary to protect the pension funds for the long term, given rumblings that taxpayers can no longer afford them, said Senate State Affairs Committee Chairman Robert Duncan, R-Lubbock.
Under Texas’ pension plans, the state and active members contribute a portion of pay to the funds, the Teacher Retirement System of Texas and the Employees Retirement System of Texas. That money is invested over time and guarantees a monthly check to a retiree until death.
“There is real hostility toward pensions. Even though we’ve done a better job in Texas, other states haven’t,” Duncan said, and that is fueling a national effort to convert public pensions to 401(k)-type retirement plans in which the employee bears all the risk of saving enough money for retirement.
New accounting rules could soon make the pensions’ funding gaps look a lot bigger, which, in turn, would expose the pensions to the political attacks that so far haven’t gotten traction in Texas.
“We can survive this if we make fundamental changes,” said Duncan, who has been an ally of public employees and carries a lot of weight on pension issues in the Capitol. “You just can’t throw money at it. You’ve got to make fundamental changes.”
Breaking a promise?
But people who would be affected by those changes say the state is reneging on its promise to public servants.
“There is no excuse for defaulting on the framework of expectations that we have been working under for all these years,” said Hart Murphy, a high school social studies teacher in Austin.
With 15 years in the classroom, Murphy, 47, would currently be eligible to retire in nine years once he satisfies the Rule of 80: the employee’s age plus years of service must equal 80.
Duncan’s proposal would require Murphy to work an additional six years for full benefits or lose a portion of his annuity. If he left before age 62, Murphy would not be able to participate in the comprehensive retiree health care plan.
“I think it’s an outrageous proposal,” Murphy said. “It’s not as if there was a pot of gold waiting under the rainbow for teachers even under the current scheme.”
The annuity for a typical school employee, who retires at age 62 with 32 years of service, is 52 percent of what was being earned before retirement, according to a TRS analysis. That compares with 82 percent in comparable pension plans around the country.
Texas has avoided many of the missteps that caused other states’ pension funding levels to sink to dramatic lows after the 2008 economic collapse.
The Legislature cannot take a contribution holiday, as other states have done, because the Texas Constitution mandates a minimum annual payroll contribution of 6 percent.
Nor have retirees received plush benefits. There is no automatic cost-of-living adjustment, and retirees cannot get a benefit increase unless the pension funds have the assets necessary to cover their long-term obligations. Retirees last got a boost in 2001 before the funds were hit by back-to-back recessions.
Liabilities to look bigger
Both pension funds now have about 80 percent of what they need, and experts consider that an indicator of good fiscal health.
But they have struggled to chip away at the remaining “unfunded liability” through investment returns alone, and the liabilities will appear bigger under accounting rules that go into effect in coming years. The rules, in part, call for lower assumptions on investment returns when the state reports its finances.
For the $117 billion teachers’ pension, the unfunded liability drops by $7.6 billion to nearly $20 billion by changing the retirement eligibility as well as bumping up contributions from the state and school districts, TRS projections show. That would make the fund “actuarially sound,” a key threshold.
At that point, some retirees would be able to get a 3 percent cost-of-living adjustment, the first increase in more than a decade. The adjustment would be given to about 60,000 members who have been retired for more than 20 years. Most teachers are not part of Social Security, so the pension check is their primary retirement income.
“What we’re trying to accomplish is to make the fund robust so that we can do benefit enhancements as investment returns allow us to do so,” Duncan said.
Tom Rogers, 80, would welcome a little extra in his $2,000 monthly pension check, he said.
“We need the raise badly,” said Rogers, a former science teacher at Anderson and Crockett high schools in Austin.
But Rogers, who retired in 1992 at age 59, doesn’t like that his raise would come on the backs of current teachers, who would have to work longer than he did. The classroom can be a stressful place, and it takes a toll on teachers, he said.
“I don’t think they realize what they are asking of people who work that long in the classroom,” said Rogers, who faults the state for contributing only the required minimum for many years.
Another revenue source
Beginning in 1995, lawmakers lowered the state’s contribution to the constitutional minimum of 6 percent while school employees paid in 6.4 percent. The state stayed at the minimum until 2007.
TRS figures show school employees retire on average at age 60, so Duncan said he is not concerned that these changes are asking too much of school employees. He also pointed out that a typical teacher’s retirement annuity would increase from $32,300 to $42,800 by working until 62 rather than 55.
To create another source of revenue for the fund, school districts for the first time would have to kick in 1 percent of payroll. The Austin school district, however, would not have to contribute because it is one of the few that still participates in Social Security.
Catherine Clark of the Texas Association of School Boards said her members are concerned that changing the rules of retirement would make teaching a less attractive profession, particularly for midcareer professionals.
And school districts already have too little discretion over how to spend their tax dollars, she said.
“I understand the impetus for the bill. I understand their thinking,” Clark said. “But it is an unfunded mandate at a time when the (2011 education) cuts haven’t been restored.”
‘Like a ton of bricks’
For state workers, there is little upside to the shake-up of the retirement rules, and they are asking for an incremental approach. Even after all the changes, the fund would not be considered actuarially sound.
“We didn’t get in this position overnight, and we really shouldn’t expect to get out of it overnight,” said Gary Anderson, executive director of the Texas Public Employees Association.
This proposal is hitting employees “like a ton of bricks,” Anderson said, and could prompt middle- and upper-level people who see private-sector opportunities to take the leap.
The employees groups say the state should absorb more of the burden. The cost to employees is $1.3 billion in lost benefits while the state is chipping in just $60 million more.
“The state needs to increase the contribution level and stop asking state employees to make the lion’s share of sacrifice,” said Seth Hutchinson of the Texas State Employees Union.
Duncan acknowledged that the state has underfunded the pensions over the years by contributing only the minimum. But the employee and teacher groups had a hand in pushing for increased benefits when the funds were flush.
“We’re all to blame and all ought to come together to fix it,” Duncan said.
Proposed retirement changes
Establishes minimum retirement age of 62 to receive full benefits for members of the Employees Retirement System of Texas and the Teacher Retirement System of Texas. The annuity is decreased by 5 percent per year before age 62.
To retire now, longtime employees have to satisfy the Rule of 80 — years of service plus age equal 80 — with no minimum age. Recent hires, however, are subject to age minimums.
Older employees nearing retirement would not be subject to the new rules. Grandfathered ERS members must be at least 50 years old, have 20 years of service or satisfy the Rule of 70 as of Dec. 1, 2013. TRS members must have 25 years of service as of Aug. 31, 2014, or satisfy one of the the same grandfathering standards as ERS members.
Retiree health care
State employees: The state would cover only half of the health care premium for someone who had worked for 10 years, compared with the full premium now. Twenty years of service would be required to get full coverage.
School employees: An employee who retires before age 62 would not be eligible for the comprehensive retiree health care plan but would qualify for catastrophic coverage.
Source: Legislative documents for Senate Bill 1458/House Bill 1884 for TRS and Senate Bill 1459/House Bill 1882 for ERS
Kate Alexander has covered the state budget since the 2009 legislative session and written extensively about state employee pay and pensions.