Southwest Washington Education (K-12)

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Washington State Teachers Pension Plan Liabilities – Healthy or Sick?

Given the teacher strikes around Washington State as we started the 2018/19 school year we thought it would be interesting to investigate the status (health) of the Washington State Retirement System (TRS) to see how well it’s funded and what the public is on the hook for if there is a shortfall. Please note that the newest data we can find is through the summer of 2018 and thus does NOT include the impact of the recent double-digit salary increases. So, what we are about to present is the “best case” scenario.

This review is ONLY for the teachers retirement fund. There are other retirement funds that appear to be in different financial conditions. Again, this is ONLY for the teachers TRS retirement fund.

We did an online search looking for information published within the past year. The links below constitute those materials. Please read them for yourself and interpret them. For those who prefer a summary we share ours…but…be aware that we are conservative and somewhat harsh which may not fit your approach…so please read.

First item: Washington State Department of Retirement Systems Comprehensive Annual Financial Report Funds of the State of Washington for the Year Ended June 30, 2018

  • Page 24: In this chart it shows the financial snapshot with descriptions of line items.
    • Focus on the TRS 1-2-3   
    • What do we see? There are 3 plans with different benefit’s depending on when you joined the plan
    • Looking at liabilities and assets it appears that they nearly balance
  • Now if we shift to page 51 we see the number of people eligible (at some point in time) for pension benefits under one of the 3 plans:

 

 

Here is a table that shows the number of people who will be eligible to draw a pension at some point in time:

 

 

  • Pages 63-69 provide the detail about the 3 different plans. Here are some highlights:
    • It appears that to meet all of the projections the plan needs a 7.4% annual return on investment. While that may be possible under some circumstances it simply isn’t sustainable over the long-term. Indeed, during economic downturns it’s impossible…in which case…the plan becomes underfunded and/or needs more taxpayer money
    • TRS Plan 1
      • Plan Membership: As of June 30, 2018, TRS Plan 1 membership consisted of the following: TRS Plan 1 Inactive Plan Members or Beneficiaries Currently Receiving Benefits 33,460 Inactive Plan Members Entitled to But Not Yet Receiving Benefits 147; Active Plan Members 497; Total Membership 34,104
      • Benefits Provided: TRS Plan 1 provides retirement, disability and death benefits. Retirement benefits are calculated using 2% of the member’s Average Final Compensation (AFC) times the member’s years of service — up to a maximum of 60%. AFC is the average of the member’s two consecutive highest-paid fiscal years.
      • Retirement: Members are eligible for retirement at any age after 30 years of service, at age 60 with five years of service or at age 55 with 25 years of service. Other benefits include temporary and permanent disability payments, and an optional Cost-of-Living Adjustment (COLA).
      • Contribution rates: TRS Plan 1 Actual Contribution Rates Employer 15.20% Employee 6.00%; State Agencies 15.20% Employees 6.00%;  Local Governmental Units 15.20% Employees 6.00%
        • Comment: Taxpayers put 2.5x more than employees. In the private sector IF there is a 401k plan it’s matching and then only up to 5 to 6%.
      • Liability: Net Pension Liability of Participating Employers The components of the net pension liability of TRS Plan 1 as of June 30, 2018, were as follows: TRS Plan 1 Dollars in Thousands
        Total Pension Liability $ 8,722,439; Plan Fiduciary Net Position ($5,801,847); Participating Employers’ Net Pension Liability $2,920,592; Plan Fiduciary Net Position as a Percentage of Total Pension Liability 66.52%

        • Comment: It appears the Pension Fund is UNDERFUNDED by 33.48%
      • Assumptions: TRS Plan 1 Inflation 2.75% total economic inflation, 3.50% salary inflation; Salary Increases In addition to the base 3.50% salary inflation assumption, salaries are also expected to grow by promotions and longevity Investment Rate of Return 7.40%
    • TRS Plan 2/3
      • How many people?   
      • Benefits Provided: TRS Plan 2/3 provides retirement, disability and death benefits. Retirement benefits for Plan 2 are calculated using 2% of the member’s Average Final Compensation (AFC) times the member’s years of service. Retirement defined benefits for Plan 3 are calculated using 1% of AFC times the member’s years of service. AFC is the monthly average of the member’s 60 consecutive highest-paid service credit months. TRS Plan 2/3 has no cap on years of service credit. Members are eligible for retirement with a full benefit at age 65 with at least five years of service credit. Retirement before age 65 is considered an early retirement. TRS Plan 2/3 members who have at least 20 years of service credit and are 55 years of age or Notes to the Financial Statements (cont.) Comprehensive Annual Financial Report — Financial Section DRS 67 older are eligible for early retirement with a reduced benefit. The benefit is reduced by a factor that varies according to age for each year before age 65. TRS Plan 2/3 retirement benefits are actuarially reduced to reflect the choice of a survivor benefit. Other TRS Plan 2/3 benefits include a Cost-of-Living Adjustment (COLA) based on the Consumer Price Index, capped at 3% annually
        • Comment: Private sector jobs rarely have any COLA in retirement and Social Securities increases (if any for a given year) come nowhere near this. This is a very good deal for teachers.
      • Contributions: State/District = 15.2%; Employee = 7.06% (Plan 2) and for Plan 3 Employee contribution = 0%
      • Liability: Charts appear to show 96% funded.
      • Assumptions: TRS Plan 1 Inflation 2.75% total economic inflation, 3.50% salary inflation; Salary Increases In addition to the base 3.50% salary inflation assumption, salaries are also expected to grow by promotions and longevity Investment Rate of Return 7.40%

2018 Legislative Session – Changes to TRS 1-2-3:  https://wssra.org/legislative/legislative-insight/ 

Closing thoughts:

  1. Retirement contributions and taxpayer guarantee’s appear to be far better than private sector with COLA’s; rates of return that are FAR higher than most anyone could ever muster.
  2. If the numbers, as interpreted, are correct, the teachers pension programs are mildly to significantly underfunded…which means higher taxes in the future

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