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:
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.