Financial advisers to the Texas Teacher Retirement System trustees urged the board to make a big cut in the projected rate of investment returns on assets in your pension fund—which would create the appearance of a sudden need to raise contribution rates or lower benefits sharply. Fortunately, after receiving letters from thousands of you and hearing testimony from Texas AFT and others opposing an overly hasty decision on this crucial issue, the trustees voted to postpone any action until their next meeting on April 19-20.
We’ll have much more to report on this high-stakes policy choice between now and then, but for now we want share these points from Texas AFT legislative counsel Patty Quinzi’s testimony today defining the issue:
1. The proposed drop to 7.25 percent from the longstanding assumption of 8-percent returns is a big cut.
2. This cut risks overstating future funding needs and encouraging opponents of defined benefits who want lawmakers to believe current benefits are too costly to maintain.
3. Previous experience studies for the pension fund have supported the 8-percent return assumption. What has changed?
4. It seems that disproportionate weight is being given to a few years in the recent past with subpar investment performance.
5. But the most recent year’s return of more than 12 percent shows that the trend is not obviously down.
6. The new experience study also does not take into account major federal policy changes of the past couple of months and their potential impact on economic growth and investment returns—i.e., the tax cut and spending increases approved by Congress.
7. It is true that the low-interest environment has led many public pension plans to recalibrate their returns to a lower level. However, the period of cheap money appears to be over, as the Federal Reserve is set to raise interest rates three times this year. It would therefore be prudent to step back and see how the economy reacts to higher bond rates (which will be good for institutional investors).
8. Don’t let what may already be outdated conventional wisdom dictate your decision.
9. In terms of its effect on a pension plan’s finances, the investment return assumption is the single most important of all actuarial assumptions. It would be highly unusual for a pension board to move so fast on such an important matter. This experience study has been done ahead of schedule, and you should take the time needed to avoid a hasty decision. Why can’t this decision wait until your next board meeting at least, in April? Don’t let your decision be rushed; you are making a decision here that will play out over a 50-year time horizon or longer for a teacher in her mid-20s today. You can afford to take a couple more months to get this right. If you do decide to move to a lower rate of return, it also would make sense to do so gradually, taking further readings of market performance en route, not with a great leap of three-quarters of a percent all at once.
10. You should probe for answers to some specific questions about the new experience study before you adopt a new rate-of-return assumption.
a. Does it make sense to lower the inflation rate assumption, given the signs that inflation will likely increase?
b. Does it make sense to base expected returns on market averages when TRS investment managers historically have beaten market averages?
c. Does it make sense to assume salaries for active members will grow at a 3-percent rate, when school districts are tapped out on local taxing authority and the state has not budgeted additional funding for public schools?
11. Let us be clear. Quite apart from the rate-of-return decision, there is already a strong case to be made for increased state contributions. The state contribution is by far the lowest of any state where school employees typically do not receive retirement income from Social Security–even after the fairly recent increase to 6.8 percent. The next lowest state rate is around 14 percent. That 6.8-percent state contribution rate also still is substantially less than the employee rate of 7.7 percent. The state needs to catch up—not just to sustain current benefits but to make benefit improvements, like overdue cost-of-living adjustments for retirees, feasible. (In addition, the state needs to invest more in health care for both retired and active school employees.)
12. The TRS board has an important role to play in making lawmakers aware of all these facts. We are counting on you to act in the best interests of TRS members, both active and retired, by making careful, evidence-based decisions on the rate of return and delivering careful, evidence-based information to lawmakers about the sufficiency of state contribution rates.