House Committee on Pensions

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1 Teacher Retirement System of Texas House Committee on Pensions February 23, 2015

2 TRS The Teacher Retirement System manages a $132 billion trust fund and provides pension and health care benefits. TRS serves 1.4 million active and retired members. One of every 20 Texans is a member of TRS. The average retirement payment is $1,995 per month with $8.5 billion paid in retirement benefits in FY The pension trust fund earned a return of 16.9% for FY The 25-year return rate as of August 2014 is 8.8%. The assumed rate is 8.0%. As a result of changes during the 83 rd Legislative session, the fund is currently actuarially sound. 2 TRS manages two major health programs: TRS-Care for retirees: 244,784 participants TRS-Active Care for actives: 482,684 participants

3 3 Organizational Structure

4 Nine-member Board appointed by Governor TRS The Board of Trustees is responsible for the administration of the system under provisions of the state constitution and laws. The board is composed of nine trustees who are appointed to staggered terms of six years. Three trustees are direct appointments of the governor. Two trustees are appointed by the governor from a list prepared by the State Board of Education. Two trustees are appointed by the governor from the three public school district active member candidates who have been nominated by employees of public school districts. One trustee is appointed by the governor from the three higher education active member candidates* nominated by employees of institutions of higher education. One trustee is appointed by the governor from the three retired member candidates who are nominated by retired TRS members. *Note: The 82nd Texas Legislature passed new legislation in 2011 that will impact the composition of the TRS Board of Trustees beginning in The current higher education trustee position on the board will become an open seat at that time. Beginning with the 2017 board election, TRS retirees, members in public school districts, and members in higher education institutions may run for nomination to this trustee position. The top three vote recipients names will then be submitted to the governor for appointment. 4

5 Active Employee Contribution TRS Pension Fund 83R SB 1458 increased the active employee contribution rate in a stair-step approach from 6.4% to 7.7% in FY School District Contribution 83R SB 1458 created a new employer contribution from non-social Security school districts. These districts contribute 1.5% of payroll subject to the minimum salary schedule. Language in the bill provided that if state contribution rate is reduced from 6.8% in the future, active employees and school districts contribution rates would be reduced by an equivalent percentage. 5 Contribution Rates Active Employee: Non-Social Security ISD: FY 2015 FY 2016 FY % 7.2% 7.7% 1.5% 1.5% 1.5%

6 TRS Pension Fund Projection of Unfunded Actuarial Accrued Liability based on Market Value of Assets 6

7 Pension State Matching 7 TRS Funding in FY HB 1: INTRODUCED BILL $3.1 billion for public education; continues 6.8% rate and assumes 2% payroll growth $455 million for higher education; continues 6.8% rate and assumes 4% payroll growth TRS Care Matching $562.2 million for TRS Care; continues 1% rate and assumes 2% payroll growth Administrative Operations funded by Pension Trust Fund No general revenue is used to finance TRS administrative costs. TRS is requesting no additional administrative funds over the introduced bill. $196.4 million in pension funds, FTEs $40.3 million for TEAM Program; 6-year plan replacing major data systems $7.4 million in capital projects; IT needs, fire suppression, backup generator EXCEPTIONAL ITEM REQUEST TRS-Care Funding $768 million is the most recent estimate of funding shortfall

8 History of TRS-Care (for retirees) The program was created in 1985 as an interim solution but has endured for more than 30 years. It was redesigned in 2004 to provide an additional decade of solvency. Under state law, catastrophic coverage is offered to all retirees at no cost, with the Board given the option of offering a more comprehensive option that would be paid for by the retiree. Coverage for dependents is paid for by retirees. The TRS Board is authorized to make plan design decisions and set premiums. Optional plans may be offered, including coverage for eligible dependents. Retirees selecting an optional plan pay a premium based on the plan selected, years of service, and Medicare status. TRS-Care currently offers three plan options and is administered by Aetna. TRS-Care 1, the basic plan, provides catastrophic coverage. TRS-Care 2 and TRS-Care 3 offer more comprehensive benefits, including a carve-out prescription drug benefit. 8

9 TRS-Care for retirees Funding Sources 9 Retiree Premiums & Cost Sharing 38% Other Contributions 11% District Contributions 13% State Contributions 23% Active Employees 15% *The funding is based on active member payroll and not actual health care costs. State Contributions: 1.0% of active member payroll by law. Active Employees: Contribute 0.65% of payroll. District Contributions: Contribute 0.55% of active member payroll. Retiree Contributions: Retirees pay premiums for any plan option other than TRS Care-1. Other Contributions: Includes Medicare Part D subsidy and investment income.

10 10 TRS-Care Funding Financial History & Projection Through FY 2019 with Data Through December 2014

11 TRS-Care Balance Projection Fund Balance (Incurred Basis in Millions) As Of December 2014 $890.9 $741.0 $551.0 $457.9 $ $ $

12 TRS-Care Study Key Findings TRS-Care is facing a severe projected funding shortage for of $768 million (as of December 2014). Without additional funding, the sustainability of the program in its current structure is at significant risk. There is no correlation between funding streams and health care claims costs. Non-Medicare retirees are the biggest cost driver to the program. With provider and benefit level choice, comes additional cost. There is a disparity between TRS-Care benefits and premiums in comparison to what is available to Texas state employee retirees under ERS. For example, the premium for Retiree Only coverage under ERS is 100% funded by the state. 12

13 TRS-Care Study Options 1. Pre-fund the long-term liability 2. Fund on a pay-as-you-go basis for the biennium 3. Fund for a 10-year solvency 4. Retiree pays full cost for optional coverage 5. Require purchase of Medicare Part B; mandatory participation in Medicare Advantage and Medicare Part D plans 6. Fixed contribution: Health Reimbursement Account (HRA) for non-medicare population 7. Consumer-directed plan: Accountable Care Organization (ACO) 13 for the non-medicare population

14 History of TRS-ActiveCare TRS-ActiveCare was passed by the 77th Texas Legislature in The bill required districts with less than 500 employees to participate in the health plan with coverage to be effective September 1, The State s contribution was set at $75 per month per employee. The school district s contribution was set at a minimum of $150 per month per employee (districts may elect to contribute more). Since then, most larger districts have chosen to join the plan. There is no provision to opt out. The State contribution has remained the same since the plan began in 2002 and is funded to the districts through the school finance formula. Three self-funded options administered by Aetna: ActiveCare 1-HD, Select, and ActiveCare 2. Three fully-insured regional health maintenance organizations (HMOs) in select service areas: FirstCare, Scott & White, Allegian 14

15 TRS-ActiveCare Funding TRS-Active Care is funded by: State contribution $ 75 per month School district contribution $150 per month (minimum) Employees Premiums 15 Since 2003, there have been nine premium rate increases. Examples: FY 2014, 9%-22.7% for Active Care 1 HD; 15% for ActiveCare 2; and 25% for ActiveCare 3 in FY 2015: 0%-8% for ActiveCare 1; 0%-7% for ActiveCare2 Benefits have also been reduced since ActiveCare 3 was discontinued in FY 2015 Enrollment (participants) ActiveCare 1 & 1-HD 188,945 ActiveCare 2 169,086 ActiveCare Select 73,816 HMOs 50,837 TOTAL 482,684

16 16 TRS-ActiveCare Premiums

17 TRS-ActiveCare Monthly District Contributions FY 2015 Monthly District Contributions Contribution Number of Districts % of Districts # of Employees % of Employees $225 (minimum) % 80, % $226-$ % 125, % $276-$ % 114, % $326-$ % 46, % $376-$ % 12, % $426-$ % 21, % $476-$ % % $ % 2, % Total % 405, % 17

18 TRS-ActiveCare Key Findings TRS-ActiveCare has an affordability issue. State and minimum district contributions have not changed since the inception of the program in The employee s share of the total premium cost has increased significantly. As premiums have increased, employees are selecting lower benefit plans. Districts that do not participate in TRS-ActiveCare and administer their own plans may feel more accountable for the affordability of coverage. There is a disparity between TRS-ActiveCare benefits and premiums in comparison to what is available to Texas state employees (under ERS). 18

19 TRS-ActiveCare Study Options Return funding ratios and benefits to FY 2003 levels. For FY 2016 funding only for ActiveCare 2 would require 84% employer increase from $225 to $414 per month For FY 2016 funding including restoring benefits to FY 2003 level would require 104.9% employer increase to $461 per month 2. Offer only high deductible plan with Health Savings Account (HSA) Assumes employer contribution of $400 per month 3. Offer only self-funded Exclusive Provider Organization (EPO) 4. Eliminate uniform statewide coverage 5. Eliminate coverage for spouses

20 Combine TRS-Care and TRS-ActiveCare Significant difference in the level of funding per employee/retiree between ERS and TRS: TRS-Care-3 TRS-AC 2 TRS-AC 1-HD ERS HealthSelect*** Monthly Premium $90-310* $330** $100** $0 Medical Deductible $300 $1,000 $2,400 $-0- Out-of-pocket maximum $3,700 $6,000 $6,350 $6,350 Drug Deductible $-0- $200 brand-name drugs Combined with medical deductible $50 Retail short term 1 Generic Brand preferred Brand non-preferred $10 $25 $40 $20 $40 $65 20% after deductible $5 $35 $60 Mail Order and Retail-Plus (90 day supply) Generic Brand preferred Brand non-preferred $20 $50 $80 $45 $105 $180 20% after deductible $15 $105 $ * Premium range based on years of service and Medicare eligibility. ** Assumes $75 state contribution and $150 minimum district contribution. Districts can contribute more to lower employee costs. *** In-Area Network costs

21 Combine TRS-Care and TRS-ActiveCare Option 1: Offer same benefit as ERS HealthSelect 21 Employer (state and district) contribution would need to increase to $12.3 billion for the biennium. Required funding would be greater if employer also provided 50% contribution toward cost of dependent coverage. Assumes all districts would participate Option 2: Increase employer funding to $400 per participant Combine TRS-Care and TRS-ActiveCare and increase funding from the employer (state and district) from $189 per retiree and $225 per active employee to $400 per month. With the $400 per month contribution employee only and retiree only coverage the FY plan could be offered at a premium of $58 per month. The only option for Medicare eligible participants would be a Medicare Advantage plan with the same benefits as TRS-Care 2.

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