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Teacher Retirement System staff and the pension fund’s actuarial firm, Gabriel Roeder Smith & Company, briefed TCTA and other interested parties on the fund’s latest actuarial valuation. Based on the results of the 2009 valuation, the actuaries are recommending increased contributions to the fund in order to improve its financial health.

Each year on August 31, the actuaries look at the status of the fund on that day and make projections about the ongoing viability of the fund based on its income (state and member contributions, investment returns) and its liabilities (benefits to be paid out throughout the life of all current members). Because it is a long-term projection, the valuation also takes into account estimates of school employee salaries (upon which benefits are based), inflation, mortality and retirement rates, and other factors that would influence the amount of benefits paid.

The calculations take several weeks, and the results help drive policy decisions during legislative sessions. Highlights of the 2009 actuarial valuation:

 The (relatively) Good News

  • The market value of the fund (“money in the bank” on Aug. 31, 2009) was $88.7 billion. That compares to $104.9B on Aug. 31, 2008, and $70.6B on Feb. 28, 2009, demonstrating that while the fund has not returned to previous levels, it has begun to recover from its low point in early 2009.

  • For next year, the state’s contribution rate would have to increase from its current 6.4% to 7.72% to make the fund actuarially sound. This is a significant improvement from the 11.25% estimated in the Feb. 2009 valuation. (Note, though, that this is a one-year figure that in the long-term could increase – see “Bad News” below.)

  • Assuming current contribution rates, the fund could continue to make benefit payments through 2058.

  • TRS compares favorably in its “funded ratio” (the ratio of assets to liabilities) of 83.1%, with other public funds ranging from just over 40% to over 100%. When the most current figures are provided for other funds, TRS’s funded ratio is expected to place in the top quartile.

The Bad News

  • The “funding period” - the number of years it would take for the system to pay off all promised benefits given the current level of contributions - is “never”. By law, the funding period must be under 30 years in order for the legislature to authorize a benefit increase that would be paid for out of the fund. (Note – the 13th check authorized in 2009, which is currently awaiting approval by the Attorney General, would be possible because it would be paid for out of state general revenue, not the retirement fund.) Lowering the funding period will require increased contributions, lowered benefits, or improved investment returns (or a combination thereof).

  • From the report: “The past 24 months have done significant damage to the sustainability of the current combination of contribution policies and benefit structure….It is possible for the investment earnings to recover over the long term in order to place the System back into a sound funded position – but unlikely.”

  • Even if economic conditions improve, unless investment returns for the next several years are well above 8% (the assumed rate of return upon which projections are based) the valuations of future years will likely show declining health. This is because of investment losses that have not yet been included in the calculations.

We expect that legislators will renew talk of increasing both state and member contributions to TRS. The actuarial firm “strongly recommends the contribution rate be increased beginning with the next biennium…For example, one option would be to increase the Employer rate by 1% and the Member rate by 0.50% for the 2012-2013 biennium, with the expectation of another 1%/0.50% increase in the following biennium if needed.”

The actuary notes TRS benefits are toward the bottom end of the range in comparison to peers (in part because public employees in most other states participate in Social Security and receive Social Security benefits, which are included in the comparison). This observation should be useful if legislative proposals turn toward the subject of lowering benefits to help improve the fund’s condition.

Posted: 11/18/09