FAQ - 13th Checks and Special Session
by Ann Bishop | July 16, 2021
In recent days, the matter of 13th checks for members of the Teachers Retirement System (TRS) has dominated headlines because of its inclusion as an agenda item for the ongoing special session. This has left some state of Texas retirees wondering aloud, "what about our 13th checks?" With great respect and reverence for teachers and members of the state workforce alike, TPEA's Executive Director Ann Bishop has formulated responses to some questions and concerns about 13th checks:
We hold teachers and retired teachers dear, but I understand your frustration in not getting a 13th check for over 20 years. I want to address all of your questions and comments thoroughly, so please bear with me:
Q: I thought the Employees Retirement System's (ERS) funding was in better shape than the Teachers Retirement System's (TRS)
A: In regards to the financial health of the TRS trust fund compared to the ERS trust fund, by 2019, both trust funds were underfunded and unable to pay the promised benefits. There are several ways to look at the conditions of the TRS and ERS trust funds: one way is to determine if the fund has enough money to pay its promised benefits to both current retirees and active employees who will retire in the future. The formula that compares the amount of money the trust fund has versus the amount of money a trust fund needs to pay all of the promised benefits is called the funded ratio. In 2019, TRS (the much larger retirement fund) had a 76.4% funded ratio and needed approximately $49.5 billion to pay all of its promised benefits, while ERS had a 70.5% funded ratio and needed an additional $11.7 billion to pay earned and promised benefits to active and retired state employees. Clearly, from a pure dollar perspective, ERS was in much better shape than TRS, but as a percentage of assets, TRS' percentage succeeded ERS'.
Another benchmark used to look at the viability of a retirement fund to pay its promised benefits is determining whether the fund is receiving enough contributions (state, local, employee) to pay off the shortfall or debt. This is very similar to paying down a mortgage or car payment. If you do not contribute enough money to pay off the debt, the interest keeps accruing, and the debt keeps increasing. State law and general industry standards require that a retirement trust fund must receive enough contributions to pay off the unfunded liability or debt in less than 31 years to be actuarially sound/in good financial shape. Based on that benchmark, in 2019, based on current contributions from all sources, TRS could pay off its debt in 29 years, while ERS could never pay off its debt. Under this measure, ERS was in worse shape than TRS.
Neither TRS nor ERS is legally allowed to give retirees a benefit increase, whether it is a 13th check or a cost-of-living increase (COLA) if the fund cannot pay for the benefit increase and continue to pay off its debt in 30 years. ERS has not been able to provide the 13th check since 2001.
During the 86th legislative session in 2019, the Legislature took steps to pay down TRS' debt by providing gradual contribution increases from the state, school districts (public education employers), and active employees over the next several fiscal years. The ERS trust fund was not addressed during the 2019 legislative session, but key legislative members promised they would address the ERS pension fund in 2021.
The good news is that the Legislature addressed the ERS pension debt by infusing over an additional $1 billion per biennium in the trust fund over the subsequent 30 years without increasing the employee contributions or cutting benefits to existing employees as they did in 2009 and 2013.
TPEA strongly supported the legislation to put the pension fund on a path to actuarial soundness under the 31-year statutory requirement and create a cash balance defined-benefit plan for new state employees starting September 2022. Having worked with Legislative leadership since 2003 on this issue, TPEA recognized the opportunity this legislation presented for resolving the ERS fund's debts without a reduction in benefits to current employees, retirees, and beneficiaries. Senate Bill 321 also has an added benefit to future retirees. State employees who retire under group 4 in SB 321 have a built-in benefit enhancement. Those pensions automatically adjusted upward when ERS earns investment returns above 4%.
SB 321 and the funding from House Bill 2 addressed the ERS pension debt and have the other significant benefit of creating the possibility of either a 13th check or benefit enhancement for ERS retirees in the future. These two pieces of legislation changed the ability of the ERS pension fund from never being able to give a benefit enhancement to retirees to allowing the possibility of providing a benefit enhance to ERS retirees in the future.
Q: Where will the money [for a TRS 13th check] come from?
A: At this point, it is unclear where the money will come from. The Legislature could, as it did in 2019, provide a one-time lump sum funding to pay for the benefit enhancement immediately. However, if the Legislature does not give TRS the money, TRS could use money from the TRS trust fund to pay the one-time payment and still be able to pay off the pension debt legally. The funding period would increase from 26 years to 27 years.
There are ten bills filed that would give TRS retirees some benefit enhancement. The bills that have the best chance of passing are SB 7 and HB 85. Both bills would provide a one-time supplemental payment to eligible annuitants in an amount equal to the lower of their monthly benefit or $2,400. Under SB 7, TRS would be required to pay the 13th check only if the Legislature appropriates money for the payment. Under HB 85, the money for the supplemental payment would come out of the TRS trust fund.
Regardless of where the money is coming from, as long as the House of Representatives does not have a quorum to conduct business, neither bill can pass.
Q: Is this some payback to the teachers' union?
A: Numbers matter.There are over 1.6 million teachers and retirees in Texas, including over 405,000 retirees, while there are only 348,000 active state employees and retirees, of which 117,000 are retirees. Teachers have a significant voice in the Legislature because of many reasons.
First, their numbers: there are teachers and retired teachers in each legislative district in Texas. Teachers advocate for themselves in their hometown and in Austin. They see their legislative members at schools, grocery stores, churches. Many legislators have spouses who are teachers or have children or grandchildren going to school, and teachers tend to take an active role in talking to their legislative members.
Active and retired teachers tend to be active members of their associations. They work with their association to write letters, emails and call their legislators, testify at hearings, and contribute to their association's political action committee. In 2020, one association gave over $285,000 in campaign contributions. TPEA, on the other hand, has approximately 11,000 members, 3,000 of whom are retirees, and the TPEA political action committee - EMPACT - only had $6,000 in campaign contributions. TPEA was successful in getting SB 321 passed because of good, old-fashioned leg work, being present, and talking to legislative members every day. The employee and retiree organizations that were against the bill also worked hard, but those organizations were also big contributors to legislative members' campaigns.
Historically, teachers have also succeeded in getting a 13th check by pointing out that most retired teachers are not covered under Social Security, while state employee retirees receive Social Security.
Q: I would expect TPEA to ask for an explanation.
A: TPEA is well aware that state employees have not received a pay raise since 2015 and the last benefit increase to retirees was in 2001. One of the many reasons TPEA so strongly supported SB 321 was to get the pension funding issue resolved so that our retirees could get a 13th check or benefit enhancement. The Legislature's creative solution to addressing the pension fund by automatically including the additional $1 billion in the appropriations bill for the next 30 years creates an opportunity for ERS retirees to get a benefit enhancement. Based on our conversations with ERS, they anticipate a benefit enhancement could be given to our retirees in 4-6 years. While this does not help our retirees today or tomorrow, SB 321 changed the likelihood of retirees receiving a benefit enhancement from impossible to possible. It is up to all of us to make that possible into probable.