TRS Board receives 2022 annual report on health of the educator pension fund
Retirement | TRS | Social Security
Date Posted: 12/09/2022 | Author: Monty Exter
The TRS Board met Dec. 8-9 in Austin for its last meeting of 2022. Highlighting the agenda, the board received the annual actuarial evaluation, or health checkup, of the TRS pension fund. Joe Newton, longtime TRS actuarial consultant with Gabriel, Roeder, Smith & Co., presented the following remarks based on a snapshot of the fund as of Aug. 31 (the last day of the fiscal year).
Investment returns for fiscal year 2022 were down, coming in at -6.7 percent. Thankfully this year’s market downturns were offset by the previous year’s extraordinary investment returns of approximately 25 percent. Over the last five years, the fund has earned at a rate of approximately 7.3% of the last five years; 8.1% over 10 years; and 7.8% over 20 years. Those rates all exceed the 7% target, or assumed, rate of return, used to project the fund’s future investment revenue.
On Aug. 31, the market value of the fund was $184.2 billion, and the smoothed value was $193.3 billion. Smoothing is a process by which the highs and lows of years like 2021 and 2022 are averaged out over a five-year rolling period. The fund is currently 79% funded, just 0.1% less than in 2021. This means that TRS has on hand 79%of the dollars it would need to pay out projected benefits for all current retirees over the remainder of their lives.
The fund is projected to hit 100% funded status in 26 years, which puts TRS on target with the funding period predicted upon the passage of Senate Bill (SB) 12 during the 86th legislative session. At the end of 2021, the funding period was 23 years, significantly ahead of schedule. These projections are based on current statutory contribution and benefit rates. To date, contribution rates have moved up in accordance with SB 12, and there is one final contribution increase contemplated by SB 12 that the upcoming legislature must fund to maintain the projections. An unfunded cost-of-living adjustment (COLA) would push out the funding date and decrease the overall health of the fund.
Of course, retirees are in desperate need of a COLA, having not received one from the legislature in nearly 20 years. It is important that retirees and active educators alike press legislators to pay for a COLA using state revenue instead of the pension fund. Doing so would protect the health of the fund while also serving the needs of retirees.
The least expensive method of funding a COLA is with a one-time lump sum up front. However, the legislature could also commit to funding a COLA over a set period of time. As a lump sum, every $1.1 billion buys a COLA of approximately 1 percent. On the other hand, if you spread the payments out over a set schedule, the total cost would increase to between $1.7 billion (over 12 years) and $2.6 billion (over 25 years) per 1% of COLA. That equates to a cost of $148-247 million in the current session. The same 1% COLA fully funded through the pension fund would add $7 billion in unfunded liability.
During the December meeting, the board also heard updates on the newly opened TRS branch office in El Paso and progress on the agency’s move to its new consolidated Austin headquarters. Board materials and archived footage of the meeting can be found here.
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