Pension Sustainability: Texas
Pensions Policy
Analysis of Texas's policies
As of August 31, 2015, the most recent date for which an actuarial valuation is available, Texas's pension system for teachers is 80.2 percent funded, a decrease of 0.6 percentage point since NCTQ's last report. Its current pension debt is $6,400 per pupil throughout the state. It also has an amortization period of 33.3 years. This means that if even the plan earns its assumed rate of return and makes its full actuarially determined contribution payments, the state will pay off its unfunded liabilities in 33.3 years. While the funding ratio meets the recommended minimum standards, its amortization period slightly misses its mark.
Texas does not commit excessive resources toward its teachers' retirement system. The mandatory employee and employer contribution rates to the defined benefit plan for FY 2017 are 7.70 percent. The employer rate, however, which experienced scheduled increases the last several years, is less than the actuarially determined amount of 7.92 percent required to paying down the system's unfunded liabilities over a 30-year period. This will raise costs in the future.
Recommendations for Texas
Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded to allow more protection during financial downturns. Rather than setting a fixed rate for employer contributions, the state should require employers to contribute at minimum the actuarially required amount in order to ensure that the burden of paying today's promises is not put off onto future generations. Statutory rates are based on assumptions about the future which may or may not be met. For instance, if future payroll growth falls below expectations, then contributions will fall short of the actuarially required contributions and will need to be made up down the line.
State response to our analysis
Texas was helpful in providing information that enhanced this analysis.
Updated: December 2017
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Research rationale
Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices.[3] Without reform, funding is unlikely to keep up with promised benefits and these systems will become increasingly vulnerable to collapse.
Pension plans disadvantage teachers early in their careers. By overcommitting employer resources to retirement benefits, these plans often require districts to depress salaries and restrict incentives. The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies.[4] Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up valuable compensation resources to ensure pension systems are more sustainable and equitable for all teachers. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.[5]
The burden placed on districts to fund unsustainable pension systems is further exacerbated for those in states where teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.[6]
[1] Doherty, K. M., Jacobs, S., & Lueken, M. F. (2017, February). Lifting the pension fog: What teachers and taxpayers need to know about the teacher pension crisis. Retrieved from National Council on Teacher Quality website: https://www.nctq.org/dmsView/Lifting_the_Pension_Fog
[2] For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Costrell, R. M., & Podgursky, M. (2011, February). Reforming k-12 educator pensions: A labor market perspective. New York, NY: TIAA-CREF Institute. Retrieved from https://www.tiaainstitute.org/public/institute/research/briefs/institute_pb_reforming_K-12_educator_pensions.html
[3] NCTQ's analysis of the financial sustainability of state pension systems is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office. (2007). Government Accounting Standards Board statement No. 25. Retrieved from http://www.gasb.org/st/summary/gstsm25.html
[4] Costrell, R. M., & Podgursky, M. (2011, February). Reforming k-12 educator pensions: A labor market perspective. New York, NY: TIAA-CREF Institute. Retrieved from https://www.tiaainstitute.org/public/institute/research/briefs/institute_pb_reforming_K-12_educator_pensions.html
[5] For further evidence supporting NCTQ teacher pension standards, see The Segal Group, Inc. (2010). Public employees' retirement system of the state of Nevada: Analysis and comparison of defined benefit and defined contribution retirement plans. Retrieved from https://www.nvpers.org/public/executiveOfficer/2010-DB-DC%20Study%20By%20Segal.pdf
[6] For additional information on state pension systems, see Loeb, S. & Miller, L. (2006). State teacher policies: What are they, what are their effects, and what are their implications for school finance? Stanford University: Institute for Research on Education Policy and Practice. Retrieved from http://web.stanford.edu/~sloeb/papers/Loeb_Miller.pdf; and Hansen, J. (2008, May). Teacher pensions: A background paper. Committee for Economic Development. Retrieved from http://eric.ed.gov/?id=ED502293