Texas TRS at a Glance
Reason Foundation’s Pension Integrity Project examines the Teacher Retirement System (TRS) of Texas’ assets, liabilities, and other important funding metrics over the last two decades.
Unfunded Liability
The funded ratio is calculated by dividing the value of plan assets by liabilities. When "Actuarial" is selected in this tool, the actuarially smoothed assets are used. When "Market" is selected, the market value of those assets is used. Actuarially smoothed assets spread gains and losses over a five-year period, while the market value of assets is the actual value of the assets at a given time with no smoothing applied. The difference between plan assets and liabilities is the unfunded accrued liability (UAL).
Figure 1. Texas TRS Unfunded Liability and Funded Ratio
Figure 2 shows the difference between the plan's assets and liabilities–looking at the difference between those assets and liabilities (UAL).
Figure 2. Assets vs Accrued Liability
Drivers of TRS Debt
To understand the pension system’s declining funding, it is important to identify the contributing factors that caused TRS to accrue over $57 billion in unfunded pension obligations. Financial reports prepared annually by TRS show that there were several factors contributing to this run-up in public pension debt since 2001.
Figure 2 shows the difference between plan assets and liabilities–looking at the difference between those assets and liabilities (UAL).
Figure 3. Origins of TRS Pension Debt 2001-2023
Source: Pension Integrity Project analysis of TRS valuation reports.
- Underperforming investments (not meeting overly optimistic targets) added $26 billion in unfunded liabilities to TRS.
- Negative amortization (the interest costs of TRS debt exceeding the actual debt payments made) added $14.1 billion in unfunded liabilities.
- Assumption changes revealed $11.9 billion in additional unfunded liabilities.
- Benefit changes increased unfunded liabilities by $8.3 billion.
- Liability experience (payroll, retirement, and mortality outcomes differing from plan assumptions) reduced unfunded liabilities by $3.2 billion.
- The net change to TRS' unfunded liability, from 2001 to 2023, was an increase of $57.1 billion.
Figure 4. TRS Interest Costs Adding to TRS Debt 2001-2023
Negative amortization can occur in years when contributions to a pension plan are insufficient to cover the interest accruing on the pension plan's unfunded liabilities. This situation can happen when the employer's contribution rate is set too low or when amortization schedules extend out too far. For TRS, this, plus investment results coming in below the plan’s previous overly-optimistic expectations, and the extra debt realized as actuaries have reduced future investment return expectations has resulted in two decades of interest costs exceeding payments made to reduce the system’s unfunded liabilities. This is a major part of how TRS funding has continued to worsen despite growing contributions going into the system.
Figure 5. TRS Interest on Debt Exceeding Amortization 2001-2023
Investment Performance
The chart below compares the system’s assumed returns with market, actuarial, and geometric average rolling returns. When looking at multiple years, the geometric mean is valuable for seeing through year-to-year volatility. TRS' extended challenges with amortization indicate that the plan is still struggling to recover from the investment setbacks experienced in 2002, 2008, and 2009. The system has prudently reduced its assumption on annual returns down to 7%, but that rate is still above most market forecasts, and it is still very vulnerable to major down years like 2022 or any other future recession.
Figure 6. Investment Returns on TRS Fund Assets 2001-2023
Endeavoring to keep up with its unrealistic investment expectations, TRS has expanded upon high-risk/high-reward hedge funds and private equities since the early 2000s. This strategy is more volatile and comes with significant downside risks that can result in adding more debt and growing costs on Texas taxpayers.
Figure 7. TRS Allocation of Investment Assets 2001-2021
Source: Pension Integrity Project analysis of TRS valuation reports.
The different categories include:
- Fixed income: Government securities, corporate bonds, mortgage-backed securities, asset backed securities, etc.
- Public equities: Publicly reported and traded stocks.
- Cash: Cash and cash equivalents.
- Hedge funds: Investments in hedge funds.
- Private equity: Investments in funds managed by private firms such as Blackrock, StateStreet, and The Vanguard Group.
- Real estate: Investments in real estate investment trusts (REITs), and other real estate-related funds.
- Commodities: Investments in commodities.
TRS’ Rate of Investment Return Probability
The return probability analysis applies TRS' current allocation of assets to mid and long-term forecasts of several market research firms, calculating the probability of achieving a given assumed rate of return. The system's current assumption of market returns is 7%.
Given that several market experts—and the plan's actual historical experience—suggest TRS has a low probability of achieving 7% in investment returns over the next 10-to-20 years, policymakers should be prepared to make more reductions to the system's assumed rate of return. The overly-optimistic assumed return rate means current measurements of TRS’ unfunded liabilities may still be understated.