At Issue: Tricky Choices
Education is the single largest piece of the state budget, occupying roughly one-half of state-appropriated funds. While it’s one of the central functions of any state government, education is also an extremely important mechanism for economic development and a crucial indicator considered by top companies and financial interests before they invest resources in a state.
Yet there’s a fiscal crisis in education largely tied to teacher recruitment, pay and retirement. The Teachers Retirement System (TRS) of Georgia looms very large in this debate. TRS is a pension program that provides K-12 teachers and some college faculty a guaranteed monthly benefit based on that teacher’s final average salary and length of service. The benefit is payable for the life of the retiree, and in some cases may be transferable to a beneficiary. The average yearly payout per member is around $36,000.
It’s a great benefit and a powerful tool in recruiting good teachers. Many of the state’s better teachers take a job, or stay in a job, for that defined benefit upon retirement. But it is expensive. Gov. Nathan Deal’s budget proposal for fiscal year 2019 includes $361 million to shore up the TRS and assure its solvency for the foreseeable future. That’s on top of $223 million added to the system last year.
Why is the fund in crisis? Several reasons. Some budget analysts question the fund’s management and its asset allocation strategies. There’s no doubt the Great Recession set the fund back quite a bit through losses in investment value. Also, through austerity cuts and unfilled teaching positions, there are simply fewer teachers paying into the system now. And each year, more retirees qualify for the benefit. Because of this, the state has had little choice but to increase the percentage of the fund covered by government revenue, driving up its overall cost to taxpayers.
The bad news for teachers and other state employees this year? No pay raise in the budget. Teachers are not used to big pay increases, usually getting around 2 percent or even less. But “zero” is a significant number, and much grumbling has ensued. The governor’s office and top legislators maintain that with the sizeable chunk of the budget going to TRS, it had to be paid for with a zero raise this year.
The problem is that this kind of budgeting isn’t sustainable long term. Many states and local governments are finding it difficult if not impossible to keep their public pension programs funded at levels necessary to meet their commitments to retirees. Many places are worse off than Georgia.
Government is about allocating scarce resources. And you can’t pay for everything. In just the education category alone, the state has to fund not only K-12, but also state colleges and universities, technical schools, new construction, cost of facilities, taxes, etc. Then there’s the other 40 percent to 50 percent of the budget that covers healthcare, transportation, labor, parks and all the rest.
There have been proposals to reform TRS. The most common approach would put new teachers on a 401k-type of plan instead of TRS. But if policymakers adopt such a change, they had better understand what they are getting.
Retirees’ payouts would be determined by the employer and employee contributions to the fund over time as well as how the fund investments perform in the stock and bond markets. Other pension funds have adopted this approach, but with varying degrees of success. And there is a risk.
TRS benefits are defined; they aren’t going to change. Benefits derived from stocks and bonds are more volatile. The short-term overall return would likely be less and subject to the vagaries of the markets and investors. In other words, less security, compared to life with TRS. I wish I had chosen TRS when I started at KSU, but I picked an optional retirement plan, similar to proposals aimed at reforming TRS.
Absent a full commitment to TRS, good teachers who have other options could leave the profession if they feel their lifetime of hard work will not garner a steady income to live on in retirement. Recruitment of new teachers with quality training could also suffer. This is significant, because the studies I’ve seen indicate that the single most important factor affecting student success in K-12 is the quality of the individual classroom teacher.
So, yes, TRS is expensive. It is a major spending item in the state budget. But altering it could result in fewer good teachers for Georgia schools, which could have a number of adverse consequences down the road – including Georgia’s economic competitiveness. State officials should consider any changes very carefully before making that choice.