Opinion: Even though teacher pension bill killed, allow fiscal impact study to proceed

C. S. Thachenkary is an associate professor in the Department of Managerial Sciences at the J. Mack Robinson College of Business at Georgia State University.

In this piece, he delves into proposed changes to the Teachers Retirement System. He references a recent AJC story. For background, here is an except of that AJC story:

The 2015 legislative session is over, but the bill by Sen. Hunter Hill, R-Atlanta, was already in the hopper for next year’s session. Pension-reform legislation like this requires a study of the potential financial implications, though, and Hill couldn’t get authorization for one in the face of united opposition from teacher advocates.

Leaders of advocacy groups representing tens of thousands of current and retired teachers filled the meeting room.

“This shows the power of organizing, ” teachers’ advocate Sid Chapman said after the hearing, which took place at the legislators’ office building in Atlanta. The president of the Georgia Association of Educators said his members flooded lawmakers’ email accounts and voice mails urging them to stop the bill. “Public educators are organizing more and more, and we’re not going away, ” he said.

Senate Bill 152 aimed to implement a hybrid retirement plan for teachers hired after 2016, part traditional pension and part 401(k). New teachers would have paid into both. They would have gotten a defined payout for only the pension portion; the growth of the other portion would have depended on their investment decisions.

Teacher advocacy groups argued that the current pension system is well-run. They feared that reduced contributions from future teachers would erode its solvency.

“We are recognized as one of the top five teachers retirement systems in the country, ” Bill Sloan, executive director of the 25,000-member Georgia Retired Educators Association, told the lawmakers. “Why would you mess with something that’s great? … What’s being proposed is terrible, ” said Sloan, who was appointed by Gov. Nathan Deal to the board of the Teachers Retirement System.

With that background, here is Dr. Thachenkary’s essay:

A GSU business professor says the state should study a hybrid pension option for teacher retirements.

A GSU business professor says the state should study a hybrid pension option for teacher retirement funds.

By C. S. Thachenkary

Last week, the AJC reported that State Sen. Hunter Hill,  failed to get Senate Bill 152 seconded in committee, effectively shutting down for two years his proposal to offer a hybrid pension plan for the state’s teachers.

Had the senator prevailed, we would have learned the details of the bill’s fiscal impacts because an actuarial study was required. Teachers and the public would have been better served proceeding with the study and its legislative debate. I suggest another strategy.

SB 152 proposes to freeze the Teachers Retirement System to its existing members. New hires will be enrolled in a hybrid plan. A hybrid pension plan combines the benefits of TRS, a defined benefit plan with those of a defined contribution plan, like a 401(k) plan.

Such plans are known as “DB(k)” plans and Georgia already offers a DB(k) plan. The Georgia State Employees’ Pension and Savings Plan has been in effect since January 2009.  In a hybrid, TRS benefit multiplier will drop from 2 percent to 1 percent. The goal is to reduce actuarial liability. Atlanta offers a hybrid pension plan in its efforts to stabilize the city’s pension system.

Additionally, the hybrid plan will automatically enroll employees in a 401(k) account.  They will be responsible for investing savings in the stock market, and expect to gain from long-term capital appreciation. Both components will have mandated employer and employee contributions. Should one lose all her savings in the stock market, at retirement she would still receive a state-guaranteed lifetime monthly benefit — albeit a reduced one.

The teachers’ association worried that with a hybrid plan fewer workers will contribute to TRS. Members of the hybrid plan will contribute to their own “TRS-like” plan. What got overlooked was that a pension benefit, if guaranteed by a state by constitution, couldn’t be “diminished or impaired.”  So ruled the Illinois Supreme Court in turning down Illinois lawmakers’ efforts to restructure their pension plan. (New York Times, May 9, 2015).

The global financial crisis did weaken TRS.  On June 30, 2007, it had total assets of over $53 billion.  By June 30, 2009, assets had fallen to $42 billion. By June 30, 2014 they had recovered to $66.5 billion. This improved asset position has not enhanced the system’s funding status, however.

On June 30, 2007, TRS had a funding ratio of almost 95 percent  This means for each dollar it had in pension liabilities, it had 95 cents in assets to cover that liability. (70 percent funding is generally considered solvent.)  A ranking of state retirement plans by Morningstar places Georgia at No. 12 with a 2011-funding ratio of 81.9 percent.  Wisconsin and Washington top the list with 99.9 percent and 98.1 percent respectively.  Illinois was worst at 40.4 percent.

TRS has made changes to shore up its asset position.  In 2007, its required employee and employer contribution rates were 5.25 percent and 9.7 percent respectively. For 2015-2016, the rates are set at 6 percent and 14.27 percent for a total of 20.27 percent, an increase of 5.28 percent.

TRS has also changed its asset allocation mix drastically after the market collapse. In 2007, TRS invested 60 percent in equities and 40 percent in fixed income. This mix has shifted over time reaching 73 percent and 27 percent in 2014, reflecting a more aggressive investment strategy. (In 2003, the ratio was almost 50/50.)

On May 10, the AJC reported that Georgia’s pension plans have underperformed relative to their targets like the S&P 500. TRS does not invest in low-cost index funds. AJC claims that Georgia’s pension funds have collectively missed about $1 billion compared to a portfolio strategy that just mimics low cost index funds.  The report argues that our state pensions could save an average of $37 million per year by adopting a passive approach?

One suggestion for our lawmakers to consider is offering a hybrid plan initially as an option for new employees to select voluntarily. The University System of Georgia offers an Optional Retirement Plan, mostly to university faculty.  Unlike Hill’s hybrid plan, the ORP works like a pure 401(k) plan. Many faculty members have joined it, reducing our state’s actuarial liability. Based on personal experience, it would appear that a number of ORP participants would be willing to convert to a hybrid plan.

Perhaps, Sen.Hill might draft a bill to offer an optional hybrid plan to university system employees only. Should it turn out to be a success, the state could offer windows or “open enrollment periods” for those in TRS to join the hybrid.

 

 

Reader Comments 0

50 comments
Harlequin
Harlequin

I quite agree that the TRS is well-run and as the old adage goes; "If it ain't broke, don't fix it!" The TRS constituents (including retirees) are quite vigilant and that is good, because of the presence of certain "foxes" in this state who would love to gain access to the TRS "henhouse" for their own evil ends! 

Wascatlady
Wascatlady

@Harlequin As they gained access to the money in the teachers' health insurance to spend on state's poor money management, and then the rates on teachers were increased because of the "lack of money in the account."

BearCasey
BearCasey

The TRS is well-run.  Any change to the system would only allow outside financial parasites to tap into teacher retirement money.  The really good news is that without secure retirement, only complete morons will enter the teaching profession.

jezel
jezel

Thuggers and muggers every where.  First it was the teacher's performance that was the problem... next was... public education needs charter schools and for a governor to take over failing schools...now it is the TRS that needs fixing.


Most on this blog seem informed and thanks for sharing your knowledge. Maybe it is not too late to get the word out to the general public.

MaryElizabethSings
MaryElizabethSings

@jezel 


Good for you for seeing how all of the items you mentioned above are politically connected.  Every voice makes a difference in informing the public as to what is occurring in the political world which will affect every area of their lives, including the education of their children, and the type of Democratic-Republic we will have into our future.  Thanks for posting and for sharing your voice and insights.

OriginalProf
OriginalProf

Just as a political note to Professor Thachenkary: allowing a fiscal impact study of SB 152 to proceed would not be a random, neutral activity. Making a financial impact study is the preliminary step to considering any state legislation pertaining to retirement, and usually the findings support such legislation. Surprise!

MaryElizabethSings
MaryElizabethSings

@OriginalProf


Professor Thachenkary knows that already, I well imagine.  The point is that the members of Georgia's House and Senate Education Committees voted NOT to proceed with the actuary study for SB 152 at this time.  To try to continue with that study at this time is pure arrogance.

OriginalProf
OriginalProf

@MaryElizabethSings @OriginalProf 

Not so sure of the Professor's knowledge of state politics, and the ins and outs of legislation.  You'd think it would occur to him that there had to be good reasons for both committees to decide to stop further consideration, but he wrote this essay anyway. Many professors just take state politics at face-value.  He's a Business professor, and I think he's trying to enlighten the multitudes about the benefits of 401K retirement programs. Again, he's revealed that he himself has chosen a 401K plan, not the state's defined benefits plan.

MaryElizabethSings
MaryElizabethSings

@OriginalProf 


Many people are asked to write articles which benefit certain groups. SB 152 is a political hot potato because it represents the transition from a public to a free market educational system. I do not believe that this professor is politically naive.

MaryElizabethSings
MaryElizabethSings

A lot of erroneous assumptions have been made in the posts, below, regarding investing your retirement money through 401ks (for teachers).  The spokesperson for the TRS who spoke at the meeting of the Organization of DeKalb Educators - Retired, told our group, 2 years ago, that it is always more secure and more profitable to have a group contribute to your retirement funds (such as the TRS's collective pool of money from many teachers) which are invested in large amounts for the teachers, over the years, than to try to accomplish this feat for the duration of your life, as an individual teacher.  In the long run, he said, it is also more profitable for the state of Georgia to have this defined benefit plan for teachers, paid for by the teachers themselves, in the large part (83% presently; 95% before the Recession).

MaryElizabethSings
MaryElizabethSings

@OriginalProf 


As was stated in the combined meeting of Georgia's House and Senate Education Committees last week, Georgia has the 3rd best-ranked TRS in the nation (in financial viability).  The 83% funded viability which I had mentioned in my post, above, was the percentage of 2 years ago when the TRS representative presented his data to us. Since that time it has risen again, and Georgia's TRS's financial viability was at 95% before the Recession beginning in late 2008.


And, as your link read, Wisconsin's teachers have unstable monthly checks in retirement, dependent upon the rise and fall of the market, unlike that of Georgia's teachers, who have a set income in retirement.  I prefer Georgia's benefits to those of the Wisconsin teachers.

OldPhysicsTeacher
OldPhysicsTeacher

"...and they make pretty good coin,but they work for the owners of the plan..."  Actually they work for themselves.  They make money buying AND selling AND they take a "management fee."  These "small businessmen"/hedge fund managers make millions and they are trying to get a "piece" of the TRS market.  As heyteacher said, "Follow the money."  It's difficult, as these fund managers hide information to make them look like "small businessmen," but they're Wall Street millionaires looking for new markets to tap.


Basically there is no reason to change TRS.  We didn't get into teaching to be stock traders.  We gave up high salaries for the LONG-TERM cautious risks taken by TRS.  We (this nation) got into trouble in the 20's buying and selling stock and having an appearance of wealth.  October 28, 1929 taught us a lesson about gambling with, what we thought was, someone else's money and getting caught.  We forgot it in 1987 and were completely blind to it in 2006.  Now a large sum of money is sitting in TRS and theses Wolves of Wall Street with their "gifts" to our lying legislators, want to get their hands into it.  NO!!

Astropig
Astropig

@OldPhysicsTeacher


Stick to teaching. It's tempting to say that you know next to nothing about 401(k) management,but that would be inaccurate. You know nothing.You obviously don't have a clue. May you live a long life on a small pension.

Belinda51
Belinda51

The stock market is for the long term. 1929, 1987 -- blips. The market recovered. Over decades, you will ALWAYS come out ahead if you diversify. Discipline to begin saving early is the key, and YOU determine your wealth by becoming more knowledgeable about investing. Pensions invest in the stock market, too. They rely on earnings, not just contributions. The best plan, imo, would be to OFFER a 401k type plan and allow workers to choose. No requirements, just the option. If you know nothing about finances or the market, you can choose the pension, where someone else manages it for you.

OriginalProf
OriginalProf

@Belinda51 

USG employees at least, though not public school employees, have this option. They have to choose within 30 days of hiring, and it's irrevocable.

MaryElizabethSings
MaryElizabethSings

@OldPhysicsTeacher


They will have a legal battle on their hands, such as they could never have imagined, if they even try to raid our TRS funds, promised to us when we began our teaching careers - in my case 45 years ago, with 35 years of teaching banked.  When I started, I was told, "You take care of the kids, and we will take care of your retirement." I took excellent "care of the kids" and Hell will freeze over before I will let mercenary opportunists raid our TRS funds, even if I am 90 years old.

OldPhysicsTeacher
OldPhysicsTeacher

@Astropig @OldPhysicsTeacher 

Actually I know quite a lot about 403b, which is what I have that is not anywhere near doing as good as the TRS.  In fact the only thing that is doing good is when I examine the market, and I make the decisions on which stock to buy straight out.  Every time I turn money over to a mutual fund manager, I lose money and value, and his income continues to rise. I'll stay with the TRS, thank you very much.

BCW1
BCW1

Leave the TRS funding system alone. Unless you contribute, you have no say in the matter...period!!!!!

heyteacher
heyteacher

The only people that stand to benefit from moving to a 401K plan are the CEO's of said 401K plans.  Follow the money on this one.

Astropig
Astropig

@heyteacher


There are no Ceo's of 401(K) plans. Once that money is deducted from a pay check,it by law cannot be used for any other reason than the employee's benefit.There are administrators of 401(K)'s and they make pretty good coin,but they work for the owners of the plan,not for Scrooge McDuck, like you seem to think.


Your 401 can make you rich-if you take full advantage of it. If you start early and have discipline,when your hotshot 28 year old boss wants to mess with you some day in your mid-50's, you can tell him/her to stick it where the sun don't shine because you had the discipline back in your 28 year old hotshot days. I  know this first (and second) hand. Nothing quite like having the freedom to tell them that they need you more then you need them.

OriginalProf
OriginalProf

@Astropig @heyteacher 

And are facilities workers, custodians, and office secretaries likely to have this exemplary discipline?  For they will be covered by this new hybrid retirement plan if it is passed.

Astropig
Astropig

@OriginalProf @Astropig @heyteacher


My daughter is a CNA. They make squat. Her 401 deducts the money before she ever sees it.She has worked for 7 years in her profession and has about $21,000 in her 401. She watches it like a hawk and is proud to see it grow.They have a lot of Vanguard funds (ultra,ultra low cost funds) and she can invest without the money being gobbled up by fees.


You tell me-Will they have the discipline? I hope so.

Astropig
Astropig

@heyteacher @Astropig


The someone making money off of the plan should be the participants. Of course, the administrators should be paid. They shouldn't work for free.


As for contributing...It's hard work. It involves sacrifice and delayed gratification. I wish that I could offer an easier alternative,but there is none.

OriginalProf
OriginalProf

@Astropig @OriginalProf @heyteacher 

Good for your daughter, a Certified Nursing Assistant. I would consider her a professional, even though she makes squat. She also has you as a father to give her advice, and you seem pretty knowledgeable about the mysteries of the stock market.

I can't say if groundskeepers, custodians, janitors, cafeteria workers, file clerks, and so on, would have the discipline to keep putting money into their 401Ks when they often are living paycheck to paycheck. I too would hope so, but I have my doubts.

OriginalProf
OriginalProf

@heyteacher @Astropig 

There have been legislative efforts to change TRS to a defined contributions plan for 3 years that I know of--maybe longer-- for the politicians see it as a way to lower the state costs for the present defined benefits plan.  There have also been several legislative attempts over the years to allow the substantial reserve funds of TRS to be used for investments in regional firms, start-up companies. Both efforts have been pushed back by united opposition from the teacher groups.

Expect them at the next legislative session too...



heyteacher
heyteacher

@Astropig @heyteacher 

I bet to differ. Someone is making some money off this plan or they wouldn't be pushing so hard to change TRS -- call it what you like -- CEO or administrator but it's ALWAYS about the money and not about the "good of the teachers". And frankly, I don't know very many teachers that can contribute to their 403B plans on a salary that has been stagnate since 2008. 


Faceless Bureaucrat
Faceless Bureaucrat

@heyteacher  The people making money off this plan are the government (and by extension taxpayers).  Total employer (public money) contributions to the hybrid plan will be much less than what is contributed to the DB plan today. As the article mentions, the state implemented a hybrid plan for state employees in 2009. Today, the state employer contribution to the DB plan is 21.96% of payroll.  Its contribution to the hybrid plan is 20.12%. The difference may not seem like much, but almost 2% savings on every new hire will end up being real money (on a total state payroll of more than $2 billion) when the last DB employee retires. 


The only problem is that state employee benefits (retirement and health care) are nothing like they used to be (certainly no better than a private sector job). We all know that state pay isn't great; so good luck being able to recruit decent state employees.  I am one (coming up on retirement) and I have told my kids NOT to consider a career in state government.  Perhaps in a few years we'll be telling them (if we aren't already) not to be a teacher.

Astropig
Astropig

TRS works fine. I'd leave it be. That said...


Traditional defined benefit plans won't keep up with inflation.Teachers should max out their Roth IRA,contribute to a 401(k) if they can and enter retirement with no debt.Yes- it can be done. I know teachers that have done it. Those teachers are the ones next to me on the beach with big floppy hats, icy little drinks and a wry smile for having the discipline to invest and save.

OriginalProf
OriginalProf

@Astropig 

As a retired TRS member, I thank you for your support on this. 

Hard to see, though, how today's teachers can pay their contributor's amount to the traditional benefits plan, plus a Roth IRA and keep a 401K going, all on their salaries that haven't seen a boost since 2008.


P.S. TRS gives retired members a COLA every year, so this particular defined benefits plan  keeps up with inflation.

Astropig
Astropig

@OriginalProf @Astropig


Politicians should leave teachers (and other state employees) retirement money alone. Period. They can barely do their own jobs,let alone overseeing something as important as investing for events 30-40 years into the future.They made a commitment and they need to keep it-no ifs,ands or buts.


As for the other part, you have to do without in the here and now to live better in the there and then.And that COLA? It's based (as I understand) on the official CPI numbers,yes? The one that politicians won't leave alone? The one that ignores "volatile food and energy prices"?  "Real World" inflation is much higher than "official " statistics will own up to.I contend that traditional pensions are a ticket to genteel poverty if they are not supplemented by your own savings and investments.

heyteacher
heyteacher

@OriginalProf @Astropig 

"Hard to see, though, how today's teachers can pay their contributor's amount to the traditional benefits plan, plus a Roth IRA and keep a 401K going, all on their salaries that haven't seen a boost since 2008. "


Agreed. I can't "max out" my 403B on my salary and still pay my mortgage (and we live very frugally). I'm grateful that I have been putting money into one all along (thanks to frugal parents) but it accounts for having a pension in place.

OriginalProf
OriginalProf

@Astropig @OriginalProf 

You omit Social Security as part of that "supplement."  Believe me--for I know first-hand-- a traditional pension such as TRS plus Social Security makes for a secure retirement.

Astropig
Astropig

@OriginalProf @Astropig


Sure. But SS is headed toward "means testing". That will act as a penalty on people that have saved and invested. Will the government draw the line under or above your income when it is means tested?


There is already a form of means testing. If you work as  a tutor, after you earn a certain amount, SS cuts one dollar in three out of your benefit,no matter what that statement in the mail says you'll get. Just wait until the "income inequality' hue and cry targets seniors with a "guaranteed income" and substantial assets.

Wascatlady
Wascatlady

I had understood the actuary study was canceled.

MaryElizabethSings
MaryElizabethSings

Do NOT allow the TRS actuary study to proceed.  The representatives of the people of Georgia in the House and Senate Education Committees, ALL voted against that actuary study's proceeding (except for the bill's sponsor, Sen. Hill, and he even voiced publicly that he does not support his own bill as it is now written).

Astropig
Astropig

@OriginalProf @popacorn @MaryElizabethSings


It doesn't have to be that way. Saving and investing from a young age in a diversified way can ensure a dignified retirement for anyone with the discipline to stick with it-Anyone-no exceptions.


But relying solely on a traditional defined benefit plan is asking for trouble.There are other vehicles that can ensure a comfortable retirement that doesn't require begging some politician to do the right thing.


My WalMart has eliminated their greeters positions,btw.

Isolator70
Isolator70

Both options invest in the stock market. The defined benefit plan does so currently and the calculation for percent funded assumes an 8% annual return.  The problem is many financial experts are currently forecasting long-term returns below that level.  In the defined benefit plan, taxpayers will eventually be on the hook for any shortfall.  In the defined contribution plan, like most private system workers, if returns fall short, it goes to the individual.  It all comes down to risk management and the teacher's union, understandably, will always take the side of putting that risk on taxpayers even though it may well lead to private taxpayers, who are in dire straights themselves because stock market returns are low, having to foot the bill to ensure teachers have a fully-funded retirement.  You can mitigate this somewhat by investing in lower risk options, but that requires bigger contributions to make up for the shortfall in estimated returns.

OriginalProf
OriginalProf

@Isolator70 

There are no teachers unions in Georgia (as per Code Section 20-2-989); and in any case, nation-wide, there aren't college professors' unions. So the author here is expressing his own personal opinion.

Astropig
Astropig

@Isolator70


"The defined benefit plan does so currently and the calculation for percent funded assumes an 8% annual return."


Agree. Totally unrealistic. Private pension plan managers (and there are fewer of them every year) don't assume that rate of return.

MaryElizabethSings
MaryElizabethSings

To whom does this writer, Dr. C. S. Thachenkary, have allegiance?  Sen. Hill stated to everyone in that room in the Coverdale building that he does not even support his own bill, SB 152, if teachers' salaries were not significantly increased as well as changing their retirement plan, and their salaries were not changed, Hill stated.  Hill was the only member voting for this bill in both the Senate and the House Education Committees.


As Mr. Sloan stated in the article, above, " 'Why would you mess with something that’s great? … What’s being proposed is terrible,' said Sloan, who was appointed by Gov. Nathan Deal to the board of the Teachers Retirement System."


Moreover this writer attempts a "slight of hand" with his words.  Dr. Thachenkary states: "On May 10, the AJC reported that Georgia’s pension plans have underperformed relative to their targets like the S&P 500."  He conveniently switches to all pension plans in Georgia, not just the separate Teacher Retirement System plan, evidently thinking that this reading audience would not notice.


I noticed and thus I do not trust his motivations nor his honesty with the public. 


OriginalProf
OriginalProf

@MaryElizabethSings 

From internal evidence, it appears that Dr. Thachenkary is not enrolled in TRS, but in another retirement plan offered by the University System, the Optional Retirement Plan (OPR). He concludes: "Based on personal experience, it would appear that a number of ORP participants would be willing to convert to a hybrid plan."  OPR is a 401K plan, limited to USG employees. I would guess that his knowledge of the TRS is not extensive, for there are additional factors he doesn't seem to consider.


Does he understand that TRS members include not just USG employees, but, by law, all of Georgia's public school employees, staff as well as educators? Also, USG staff members who choose to join?  That is a major reason why its reserve funds are so solid: it has so many members. Does he think that staff members will welcome the complexities of a 401K stock investment retirement plan? The new ones will not have a choice, remember. I am a retired TRS member, and can still remember my conversation with the custodian who cleaned my office, also about to retire and a member of TRS. She said, "Sure, I chose TRS.  I don't know anything about the stock market, and don't want to learn!"

As a Business professor, Dr. Thachenkary is comfortable with investments and the stock market. He should not assume that all TRS members share his expertise.

Kvinnan2
Kvinnan2

Some good background info. But it's no surprise that the article opens with a plug for the state's smaller teacher group—which just happens to be the local affiliate of the NEA, the country's biggest teachers' union.

If unionism were the answer, would union-friendly Illinois be at the bottom of the secure pensions list?

Looking4truth
Looking4truth

Why is the answer to everything invest in the stock market?  The recession caused many retirees to lose the money they thought would be safe.  Such a maneuver may force retirees back into the job market, depressing wages.


If the purpose of retirement is to make way for new workers, why do away with defined benefit plans in favor of plans where older workers may need to return to the workforce?  Stock investments can supplement at the discretion of the individual, but defined benefits assure workers will retire and make way for new entrants.  The circle of life, so to speak.