It would take 33 years to pay down their debt
Retired teachers under the age of 65 will pay higher premiums and deductibles beginning January 2018
Texas teachers are facing a retirement crisis because funding for their healthcare plans has been decreasing at an alarming rate. Earlier this month Gov. Greg Abbott signed a bill that changes a health care plan for those teachers under the age of 65.
The results of a 2016 on Teacher Retirement System (TRS) pension plan, revealed some disturbing problems. In summary, the “Funded Ratio” was below was too low. Less than 80 percent of the money owed to pensioners were covered by the investment portfolio. It would take 33 years to pay down their debt. The amount of money owed to retirees that has not yet paid for is $35 billion. In 2000 it was zero.
TRS remains fairly stable with over 1.5 million members and about $139.7 billion in net assets, but financial trends have been going in the wrong direction. Experts indicate that older teachers closer to retirement age (or already retired) are in good condition. But proposed changes will effect younger educators.
Retired Texas teachers who have not been eligible for Medicare has caused a fast draining of TRS funds. The result of this new bill means that retired teachers under the age of 65 with this plan will pay higher premiums and deductibles beginning January 2018.
“…state legislatures passed the law with a unanimous majority…”
According to Texas Sen. Joan Huffmann, the bill’s author, state legislatures passed the law with a unanimous majority because the results would have been devastating for future retirees. Timothy Lee of the Texas Retired Teachers Association supported of the bill. Lee was especially relieved to see that the bill allows retirees to fill their prescription drugs at no cost. Retirees will not pay a monthly contribution until 2020, provided their fall under these stipulations:
- Had taken a disability retirement under the TRS system on or before January 1, 2017;
- Were receiving disability retirement benefits from TRS;
- Were not eligible for Medicare.
The Employee Retirement System of Texas (ERS) is also studying the use of alternative retirement plans to prevent a crisis. One line of thought is to provide incentives and encouragement for newly hired teachers and state workers to move from a traditional plan to a 401K-styple pension plan.
Current plans still provide guaranteed lifetime benefits based on an employee’s years of service and final salary.
The advantage would be that the burden of paying for retirement is handled by employees rather than taxpayers. Existing employees and retirees should note the bill doesn’t interfere with their current plans. It still provides a guaranteed lifetime benefits based on an employee’s years of service and final salary.
Teacher unions and groups such as the Texas Public Employees Association and Texas Retired Teachers Association (TRTA) opposed such bills and actively fought against it throughout the spring and summer. But Lee, the executive director of TRTA, thinks going against the bill could undermined the strength for teachers. It could force them to join the Social Security system (of which they do not belong to now).
The bill (and alternative plans considered) favor teachers with more than 20 years of service, or about 28 percent of teachers. Teachers who depart from their careers earlier could benefit from a new plan that would allow them the opportunity to self-fund part of their retirement. They could take it with them to a new location or career change.
TRS has also been studying a new compensation structure with hedge fund managers called a 1-and-30 model. TRS would only pay hedge fund performance fees if an agreed upon hurdle rate was reached. During a year in which the fund underperformed, the management fee gets paid back to investors from the following year’s performance fees. It’s a change from the industry practice of charging investors 2 per cent of assets and 20 per cent of profits. The fund has pledged to “lead the industry in improving terms for better alignment in a low-return environment”.
TRS has been investing in hedge funds since 2001, deploying capital to AQR Capital Management, Fir Tree, GoldenTree Asset Management, MKP Capital Management and PDT Partners, among others. The fund has $10.6 billion in hedge fund investments, accounting for 8.3 per cent of its total assets, and paid $203.5 million in management and performance fees to them, directly or indirectly, in the fiscal year to August 2016.
“…it should not apply to those teachers that met the requirements and have retired.” –Tobey Tomblin, Jr.
During the first quarter of 2017, TRS had strong investment earnings of $6 billion, or a 5 percent return on the current fund. Like most funds across the country, the TRS funds dropped from $100 billion to $67 billion during the 2007-2008 financial crisis. The current value is about $140 billion.
“I don’t think this was and is fair to teachers who have already retired,” said Tobey Tomblin, Jr. a south Texas teacher, about the state bill signed this month. “This bill is increasing health care to the point that the retirement of those whom are already retired may be forced to re-enter the workforce just to pay other bills. I see several things happening here:
First, it basically retains teachers to keep working even though they met the State of Texas years to be retired.
Secondly, it should not apply to those teachers that met the requirements and have retired.
Thirdly, it will make future people thinking of becoming an educator to pursue other jobs.”
Legislatures point out that teachers under 65 are costing the system the most money because they are not eligible for Medicare. Huffman’s bill increases the deductible to $3,000, while the average retired teacher receives about $24,000 per year.
The TRS shortfall was projected to be $1.1 billion for 2018 and 2019. The Texas 85th Legislature considered the changes to HB 3976 were required to save the TRS plan from going into a “death spiral,” said Huffman.