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The Senate Finance Committee met on February 11, 2019, to take up invited testimony on Article III – Education. This report covers only invited testimony on the Texas Education Agency and the Teacher Retirement System.

This report is intended to give you an overview and highlight of the discussions on the various topics the committee took up. It is not a verbatim transcript of the hearing but is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.

 

  • Nelson – SB 1 as introduced adds $6b to public education. Believes there is interest and prioritization of public education in both chambers.

 

Texas Education Agency

Tedd Holladay and Aaron Henricksen, LBB

  • $43.6b in all funds in 20-21, 2.6% increase from 18-19.
  • Reviewed LBB presentation for TEA
  • Golden Penny yields expected to increase significantly due to robust property value growth and declining student population in AISD.
  • State share of FSP entitlement projected to be 38.1% in 2020 and 36.8% in 2021.
  • Taylor – This is just FSP entitlement, does not include instructional materials allotment or anything else?
    • Henricksen – Yes it is only FSP.
    • Nelson – This does not account for $3.7b in the base bill for teacher pay, $100m for school safety, $300m for TRS, etc.
    • McGeady – What we have described as FSP entitlement is a narrow definition of FSP as statutorily defined in chapters 41, 42, and 46 of the state education code. Our numbers will differ slightly from TEA because they are different data sets.
    • Taylor – I just wanted to highlight there is more we do for education than just this number.
  • West – Question on recapture, property tax relief fund, the $96m represents what?
    • Henricksen – Recapture was higher than what was appropriated.
  • Perry – Question on I&S funds in the FPS entitlement
    • McGeady – For the FSP state share we include all state funds
    • Perry – 100% of I&S share on the local
    • McGeady – It does not include unequaled I&S
    • Perry – Is that in the retained amounts?
    • McGeady – It is not.
  • Hinojosa – An objective decrease due to savings from property tax growth, has there been a shift in the percentage of state funding of public schools due to increases in property values?
    • Henricksen – District property value growth is something that saves the state funding.
    • Hinojosa – How does property value growth save state funding?
    • Henricksen – Yes as property values grow the amount that states need to fill in decreases.
    • Hinojosa – So there is still a shift in funding of public schools to property taxpayers due to increases in property values.
  • Taylor – Is there somewhere that does not include I&S funding at all, can you give us that information?
    • Henricksen – It is not in the presentation, we can get that for you.
    • Taylor – That will swing that number by a large amount, people quote that 37% figure, but it is not correct. People get the impression we are not doing anything for education, but it is still the number 1 item for our budget. There are big items like TRS, structural materials that are not included in this.
    • Hinojosa – The 37% number comes from the Comptroller’s office.
  • Huffman –We have shifted the burden due to increasing property values, and the burden is now on home and business owners. That burden is unsustainable.
  • Huffman – Question about how recapture is calculated.
    • Henricksen – Recapture value is a function of both property values and student enrollment.
    • Huffman – Yes many of us have districts under recapture and they are bitter about their tax payments being shifted to other areas of the state.
    • Nelson – It is important to understand that just because state funding increases, property taxes will not necessarily decrease. Important to get his information out there.
  • Watson – Do you have a chart for I&S rates?
    • McGeady – We can look into that.
    • Watson – I want to be able to visualize if we significantly increased EDA yield what kind of impact it would have for taxpayers.
  • Watson – Increased eligibility for federal lunch and breakfast programs, are you saying eligibility changed or more students will be eligible due to population growth?
    • Henricksen – I believe it is the latter but will look into it.
  • Hancock – What happened in 2010-11 in property tax, did the state not buy down 50 cents?
    • McGeady – That was phased in over 2 years from 2007-08, 08 was the first full year of state 50 cent buy downs.
    • Hancock – Has the state kept track with student enrollment growth and inflation in funding education?
    • McGeady – The state fully funds enrollment growth and does every year.
    • Hancock – How long did the buy down last?
    • McGeady – Depends on what numbers you look at, but property values increased during that time which decreased the value of that buy down.
    • Hancock – Did everyone receive that 50 cent buy down?
    • McGeady – It depends on what your rates are.
    • Hancock – What happened to tax rates during significant increases in appraisals, did the tax rates drop to compensate for that?
    • McGeady – Not generally, but there are some districts who lowered their rates.
  • Hancock – Why is AISD used for Golden Pennies, why is Austin so different from the rest of the state?
    • Henricksen – Austin has experienced high property value growth and declining student enrollment.
    • Hancock – Is that a wise marker to use or would Austin be an anomaly.
    • Henricksen – It is an anomaly in some ways.
  • Kolkhorst – Golden Pennies are tied to AISD, is that also tied to inflation?
    • Henricksen – It is not tied to inflation, but it increases on an annual basis.
    • McGeady – It is not an automatic increase it is based on what happens with Austin. Austin is not guaranteed to continue on this trendline forever.
    • Kolkhorst – Was there a growth in what school districts received from Golden Pennies?
    • Henricksen – Yes there was a growth due to what happened in Austin.
  • Perry – The Golden Pennies is not indexed to inflation, it is statutorily tied to the basic allotment correct?
    • Henricksen – Yes the Golden Pennies equalized wealth level is not tied to inflation.
    • Perry – We probably will not continue to experience levels of growth we have right now, it is unclear how we get to an equity position based on the varied property values across the state. It might be worthwhile to attach a base to inflation rather than the “anomaly” of AISD.
  • Watson – These issues are not because AISD has done anything, AISD was picked to be the starting point in the formula and it happens to be a district where property values have increased. There has also been a decrease in student population. Anything that is happening with the formula is not the result of any action taken by the board of AISD.
  • Taylor – When Austin was picked it was the 88th percentile, since we picked them it has been a “worst case scenario” from the sate perspective because of the rising property values and declining student population.
  • Taylor – In about 10 years recapture will be at the same percentage as state share, which is why there is such an emphasis on lowering property tax rates.
  • Bettencourt – Recapture was $1b 14 years ago, is $2b now, and in 5 years will be $5b, is that the correct projection?
    • Henricksen – Yes we project $3.6b by 2021.
    • Bettencourt – And by 2024 that is $5b?
    • Henricksen – I believe that is in the range.
    • Bettencourt – By 2024 there will be around 750-800 districts in recapture out of around 1,000 total districts, correct?
    • McGeady – We do not project to 2024.
    • Bettencourt – TEA projects that far and that is the figure they project.
    • Bettencourt – Austin is having an explosion in commercial value, I do no think that will slow down. Without some change the recapture will be equal to the state share within 10 years.
  • Watson – If we were to decouple Golden Penny yield from AISD, which is 98th percentile, if we attached it to a lower percentile what impact would that have on recapture?
    • Henricksen – Golden Pennies are not attached to recapture so it would have no effect.
  • West – In order to reduce property taxes, we must have a sustainable, proven source of revenue in order to do that. We must make certain school districts have a safety valve in case the sate does not live up to its side of the bargain.
  • Nelson – There is a lot of misinformation out there. Want to emphasize that local property tax rates are set at the local level. When local collections go up the state’s share goes down.
  • Hancock – It is fine for local revenues to go up, but when they increase at twice the rate of inflation that is when state levels drop. Local revenues can go up within reason.
  • $907m for Harvey, SB 500 has $634m in optional costs available related to Harvey.
  • It is anticipated special ed populations will increase dramatically in the coming years.
  • Recapture expected to grow to 8% of M&O by 2021, had been between 3%-5% every year from 2006-18.
  • Share of recapture paid by large districts grew from 44% in 2011 to 73% in 2018.
  • West – On page 7 item 6, projected increase in special ed, does the budget deal with the issues we have had with the courts concerning special education?
    • Henricksen – Yes, there is an expectation that special ed population will increase by an amount equal to 0.5% of the total student population.
    • LBB staff – This does not directly address the maintenance of effort financial issue. The 5th circuit recently affirmed a lower court’s ruling that Texas did not meet the maintenance of effort requirement.
    • Question about M&O funding for charter schools
    • Henricksen – Historically that has been true, but I don’t have the data in front of me to say if that continues to be true.
  • SB 1 includes an additional 54 FTEs that would be entirely federally funded in order to support special education strategic plan.

 

Mike Morath, TEA Commissioner

  • TEA goal is to improve student outcomes
  • Strategic plan to improve outcomes based on 4 priorities
    • Recruit, support, and retain quality teachers and principals.
    • Support for early grades and early years to establish a strong base in reading and arithmetic.
    • More rigorous high school programs.
    • Increase access to resources to ensure everyone has access to a rigorous education.
  • $46m total GR spent on TEA.
  • Significant increase in FTEs, funded 100% federally
  • Taylor – Page 2 of presentation, where are we today on 3rd grade?
    • Morath – These are a few snapshots about where we are today, we measure whether they have mastered grade level abilities in reading, writing, and math. Only around half of 3rd grades achieve mastery of grade level reading and math.
    • Morath – Only 16% of high school students in Texas score on SAT or ACT at a score that would indicate they are ready for college.
    • Morath – 25% of students have earned bachelor’s, associate’s, or trade certification by age 24.
    • Taylor – School Finance Commission focused on early childhood education, which can have a significant impact on later educational success and career earnings.
    • Morath – Students eligible for state-funded pre-K, those students graduate college at 6% higher rates than similar students who did not.
  • Taylor – The steep increase in recapture is becoming a problem.
    • Morath – If the current law remains unchanged there will eventually be no state funding of education, it will be all recapture and property taxes.
  • Nelson – If there is not 100% of children who achieve 3rd grade reading we should stop everything and focus on that. What happened to legislation that said we would not move a child past 3rd grade if they could not read?
    • Morath – The laws have changed, it is now not in 3rd grade, it is now in 5th and 7th grade where a student who fails to meet standards in reviewed by a “grade placement committee”. In 98% of those cases the student is promoted. It is very expensive for a student to be retained.
    • Nelson – There are negative effects to a child repeating a grade, we should use after school programs and summer to teach children how to read by 3rd grade, it is crucially important children can read by 3rd
    • Taylor – We spend over $100,000 per student right now over the 12 years, for that amount of money we must be successful. We cannot let it continue to pass that kids will move onto 4th and higher grades without learning to read.
    • Morath – Absent state money for reading academies districts have to figure it out on their own, which is less efficient than having it funded on the state level. Thanks to the Senate for putting that funding in place, might be useful even to expand that funding.
    • Taylor – Addressing dyslexia would significantly help this issue.
  • Watson – Safe and Healthy School Initiative, would access to mental health professionals include expanded funding, how would it work?
    • Morath – This exceptional item is designed to address connections between existing mental health infrastructure and the schools. For example, helping schools identify private practitioners who could help students.
  • Watson – Since we have 2 sub-funds, is the dual management structure for the School Land Board and State Board of Education the best way to do it?
    • Morath – Short answer no, the Land Board has restrictions as to what it can invest in while the State Board of Education has no such restrictions.
    • Watson – Limitation on School Land Board is that it is primarily oil and gas, real estate. The Land Board has $4b in cash that is not invested.
    • Morath – With a policy change around that $4b in cash we could get $200m in perpetuity for education.
    • Watson – Can be argued that since 2002 there has been over $1b we have lost in investment.
  • Birdwell – There is a way to get a better return on this money without taking on much more risk.
  • Watson – This is not a criticism of the Land Board or Commissioner Bush, this is a structural problem.
    • Morath – Yes the Land Board investments have actually been doing very well.
  • Bettencourt – That change really needs to be made, it is preposterous to leave that money in the bank.
  • Bettencourt – Question about effect of federal funds on state and local shares
    • Morath – In 07 local share was 52.2%, in 17 the local share was 50.2%, but it was around 45% in the interim, so it went down and then back up.
    • Bettencourt – I think it is important to understand there are four major components to school finance: state, local, recapture, and federal
    • Bettencourt – Two procurement agents were shot and killed in the Valley due to contract disputes.
    • Morath –We have some investigative authority, last session that authority was expanded with regard to inappropriate student-teacher relationships. There are certain things we could do to improve in this area.
    • Bettencourt – There are real problems with contracting, school districts need to come in to ensure board members are not into contracts. There are all sorts of nefarious problems that crop up from time to time. I am working on a bill which will provide oversight in these areas.
  • Whitmire – Question to Bettencourt: I share Bettencourt’s concern, if you believe there is corruption in school boards, why are we not getting DAs or Texas Rangers involved?
    • Bettencourt – I will defer to the Commissioner
    • Whitmire – As you proceed with your legislation you should consider getting Das involved.
    • Bettencourt – There are times when DAs are reluctant to get involved with board members, but I will look into it.
  • West – How are Comp Ed funds currently distributed?
    • Morath – There is a 50% test, and there is a limited number of uses for that money.
    • West – Do you believe we are spending those funds in the most efficient way?
    • Morath – There must be a way to connect financial incentives to place the best teachers in the most challenging situations. This would be a way to achieve the higher level of efficiency that I believe you are looking for.
  • West – How much do we spend per student in traditional schools compared to charter schools?
    • Morath – The average M&O per student is higher for charters, but the total per student funding is in general higher than districts due to I&S funding.
    • West – Is there any ability to look at where a charter is attempting to locate in order to decide whether to recommend denial or acceptance of a charter?
    • Morath – Yes with the A-F system we will be giving A & B candidates expedited approval.
    • West – What happens to a charter school’s assets if a charter is removed?
  • West – Hispanics and African American males are always at the bottom of the achievement ladder in education, was there a joint report on how to make sure those groups continue to rise?
    • Morath – Yes we developed a plan with TWC and the Coordinating Board, but there are 3 separate documents because each agency covers different aspects.
    • West – I would recommend you get a combined document showing the common denominators between the 3 reports.
    • West – What are we doing in the budget in order to improve the outcomes for these groups?
    • Morath – Much of our strategic plan is designed to attack that challenge. One is early childhood education, we will increase both access and quality. The Dallas ACE program targets the neediest students. We are working to strategically partner successful schools and principals with other unsuccessful schools.
    • West – What is a reasonable period of time to get results to show whether these are working?
    • Morath – For ACE success was apparent within 1 year, but there are limitations on implementation of that program. For most programs it is 2-3 years. The results will be clear in places where the work is happening, but it might not show up in the statewide data.
    • West – Do you see a real commitment to address this issue under current law?
    • Morath – I believe the press the legislature gets on this issue is worse than the reality. There is a significant commitment to equity, but it can be improved.
    • West – We have spent billions on education in Texas, and these two groups continue to be at he bottom rung, I am trying to figure out why that is and how can we address that problem at scale?
    • Morath – I believe our current recommendations would address those issues at scale in a way we have not in the past.
    • West – Why is there no disaggregated data in your presentation?
    • Morath – We tried to fit all of public school finance in 20 pages, we have extensive data on these issues available elsewhere.
    • West – I do not want us to be hiding what the reality is about African American and Hispanic achievement.
  • Nichols – Your data on dollars per child includes charter schools?
    • Morath – Yes, but charter schools do not have a tax base.
    • Nichols – If you separated charter schools from traditional schools would there be a difference?
    • Morath – What you see in charter schools is higher variance, so there are more A’s but also more F’s than traditional schools. I believe this is the natural result of deregulated or less regulated schools.
    • Nichols – We should take into consideration the disparity between how much schools get per child.
  • Perry – Do you survey teachers about what challenges are in schools?
    • Morath – It has been a couple biennia since we received funding for surveys, since I have been with TEA there has not been a survey.
    • Perry – My teachers are not complaining about teacher pay, they are complaining about the poor discipline of small segment of the classroom which teachers and administrators do not want to deal with due to fear of litigation or pushback from parents, is there anything you are doing to address these issues?
    • Morath – We are expanding special education funding, one of the categories for special ed is “emotional disturbance”. We are trying to identify practices that are showing promise, and once we identify we will try to figure out what the scaling strategy is.
    • Perry – Is it legal to remove a disruptive child from the classroom?
    • Morath – Legally yes, but there is often a lack of understanding about that.
  • Perry – Comments on contracting problems with school boards, vendor lists can provide “cover” for board members.
  • Birdwell – For higher education levels, how do you categorize those who have enlisted in the military?
    • Morath – I believe we count them as going into higher school education. I believe we are the only state who counts military enlistment as the same as going to a university.
    • Birdwell – So there is no disincentive for schools to encourage students to join the military?
    • Morath – No, in fact there has been an uptick in schools asking recruiters to come to their campuses.
  • Campbell – Do minority students perform better than their peer in public schools?
    • Morath – I do not know.
    • Campbell – Is it true that nationally Hispanic students read better in charters than public schools?
    • Morath – That data sounds familiar.
    • Campbell – And the charter schools do not use local tax revenues?
    • Morath – Yes that is true.
    • Campbell – Opening charter schools would be an easy way to reduce local tax burdens.
    • Campbell – Are our student outcomes when it comes to SAT and Act scores something to be applauded?
    • Morath – When you look at student-group to student-group comparisons and at the NAPE weighted averages we are near the top of the nation in student achievement. Especially for large states, because no other large state is anywhere near Texas.
  • Flores – How much state funding is put into testing?
    • Morath – Around $90m per year, or $8 per student.
    • Flores – And the rest is federal money?
    • Morath – That $90m is total, state would be about half that.
    • Flores – If we had no tests how much federal funding would be at risk?
    • Morath – $6.3b would be at risk, but we don’t know exactly what would happen since it has never been done.
    • Flores – Does it have to be an annual test, or could it be at more infrequent intervals and we could let the teachers teach?
    • Morath – the feds require an assessment in math and language arts every year from grades 1-8. Texas has some exams that are not part of the federal requirement that we could consider changing while still being compliant with federal requirements.
    • Morath – Texas instituted these tests before the federal requirements and before the rest of the country. There has been research showing that Texas’s testing program has resulted in improvements for students. It is useful for the kids, but that does not mean it is easy.
  • Flores – would like to eliminate redundancy in testing, and make sure testing meets end goal
  • Bettencourt – how important was Dallas leadership in setting up PTech promise
    • WE will most likely have more PTech than any other state in country
  • Bettencourt – concern on scalability
    • Need to negotiate with community college and partners
    • Need seed funding
    • Ongoing basis need to work with community college where some will charge and others will not
    • Really targeting first generational college students
  • Kolkhorst – relationship between trustees and school performance
    • Study on trustee performance and student performance
    • In two of three election cycles found low correlation
    • In one study found some correlation – when performance of schools was covered in press, voters notices
    • Believes this study should help legislators take heart in light of A-F system
    • Also see research on trustees’ behaviors on student outcome
    • Reporting calendars, becomes part of their oversight – see districts get better
    • Not crossing the line to manage but watching it to see what in management is working
  • Both pay and working conditions need to be improved for teachers
  • Kolkhorst – regarding the districts impacted by Harvey; hold harmless, is this double the ADA pay?
    • Correct, a one time hold harmless,
    • Kolkhorst – SB 500 has $900 billion as set aside and looking at helping certain impacted districts
    • Have updated numbers, as a state the cost is $450 million, less expensive than originally expected
  • Huffman – should we be doing something more in special education, what is needed?
    • There are weights for special education
    • A blanket weight for dyslexia
  • Hancock – avg. teacher starting pay around the state, would say it was $42k a few years ago but over $50k in a certain region (N. Texas)
    • Those schools that put starting pay about $50k have put priority in classroom
    • Hancock argues they are avg districts
  • Taylor – where are we if we don’t weight scores, have challenges before us and thinks West questions are important
    • Much worse
  • Taylor – military is not a slam dunk, 25% of students are not able to get in
  • Taylor – there is a difference on charters, how quickly they are closed down
    • Can be low performing for 3 years and then they cease operations
    • Notes there is one in Houston that have been underperforming for 9 years
  • Taylor – parents tend to be optimistic towards their own school, A-F will now provide a very clear picture
  • Taylor – feels they are making great strides, will not just put in more money but sending aide to where it is needed the most
  • Taylor – Morath is a genius and fortunate to have him, Tennessee has great commissioner there, but we have one here
  • Nelson – drilled down on some grant programs at TEA, how can they get a better handle on evaluating the programs
    • Will work with them
  • Nelson – asked about IMA, electronic/open source
    • Most recent biennium had more resources but asked to build it out in ELAR, in process on that
    • Over time could see reduction in textbook related expenditures
    • May see this move into access for full text material
  • Nelson – talks about working conditions, students with discipline issues concern and would like to know what they can do now this session
    • Nelson – feels this problem is huge, give these teachers environment where they can teach
    • Will call project lead and will work on getting something they can act within the next 60 days
  • Whitmire – Done such a good job of not criminalizing school behavior, but disturbance by an emotionally disturbed youth – thinks we could do a better job mentoring and perhaps just facilitate the mentoring of young teachers
  • Nelson – have also heard horror stories from experience teachers so they may each require a different answer
    • Taylor – teacher needs a good principal

 

Teacher Retirement System

Avery Saxe, LBB

  • $5.4b in all funds, 1.2% increase
  • Gave overview of LBB recommendations
  • 3 exceptional items, totaling $1.1b in all funds, $1.08 in GR
  • Watson – $240.8m in additional GR already in budget for TRS care, how much would the state’s contribution rate need to increase in order to cover that?
    • Saxe – We have not done the research on that I can get back to you.
    • Watson – School districts pay TRS portion above the minimum salary as adjusted by the CEI?
    • Saxe – Yes
    • Watson – What would happen if we eliminated the CEI, would there be an increase?
    • Saxe – It depends on how the legislation is worded.
    • Watson – If we just blanket eliminate the CEI it would d raise the cost to districts because of the way the formula works?
    • Saxe – Yes if you increase the range of the payroll the school districts have to pay then yes.
    • Watson – But we cannot do away with the CEI without assuring there would be a cost increase to the districts?
    • McGeady – Yes I think if that is part of a school finance reform legislation package I think the formula would have to be reformed. You could address a lot of it by uniformly raising the minimum salary schedule, but there would still be winners and losers.
  • West – For vendor procurement audit, the assumed rate of return changing from 8% to 7.25%, did they not previously believe that &.25% was more realistic?
    • Saxe – My understanding is that 8% used to be the long-term assumption. This is a long term, 20-30-year rate of return, not a target for any individual year and the board now believes 7.25% is realistic by looking at peer institutions.
    • West – And is there any data on whether the assumptions have been borne out?
    • Saxe – There has been a recent movement by these institutions to reduce their assumptions, in the past more of them were closer to the 8% figure.
  • Perry – Of the $3.7b for teacher’s raises, does that increment include cost of TRS?
    • Saxe – It includes an increase in payroll, the way the legislation is currently structured the assumption is that
    • McGeady – My current understanding is that the $3.7b would be enough to cover the TRS.
    • Perry – It is either there or it is not
    • Saxe – The $3.7b was an early estimate, the intent is to cover TRS even if the initial estimate turns out to not be enough.
  • Perry – Would the transfer of external investment managers to internal be the most cost-efficient way?
    • Saxe – Yes we believe so.
  • Huffman – The agency believes using in-house investment managers instead of external could save up to $1b.
  • Huffman – My understanding is the increased cost to the state for pensions would be $119m, is that correct?
    • Saxe – The pay increase does not amend the minimum salary schedule (MSS), so based on the current for of the legislation the retirement costs are not borne by the state.
    • Huffman – So it is your belief the districts would owe the $119m?
    • Saxe – Do not have those numbers
    • Huffman – Does that affect unfunded liability?
    • Saxe – TRS has done some analysis, there may be some changes in retirement behavior, but it is mostly a short-term impact.
  • Hinojosa – Within the current ERS care system, do they have co-pay?
    • Saxe – As of August 2018, it was $500, the agency would have more information
  • Watson – Because of the MSS, and the state pays up to the MSS and districts pay anything above. If we blanket do away with CEI, then the districts would see an increase in costs?
    • McGeady – I believe we said earlier that that part of the code would need to be adjusted if the CEI was eliminated.
    • Watson – Then Huffman asked if the state was already paying the maximum amount it can pay due to the MSS? So, the $119m Huffman is referring to, the great bulk of that would need to be paid by the districts unless the MSS is changed?
    • Saxe – Yes I believe that is correct.
  • West – What is the source of the $300m, is it GR?
    • Nelson – I was going to ask that we use ESF for that, but it has not been voted on yet.

 

Brian Guthrie, TRS Exec Dir.

  • Provided overview of TRS functions
  • Rate of return assumptions on trust fund has been lowered from 8% to 7.25%.
    • Trust fund status has been changed as a result of shift in assumptions
    • Asking for increase in contribution rate
  • Active care program has an “affordability problem”.
    • $2.25 per member per month contribution from state and districts has remained fixed, while costs of healthcare have increased, so costs borne by members have increased dramatically.
    • In 2001 members bore 30% of the cost, by 2018 members covered 70%.
  • Rider authority to seek relief from FTE cap and in a way that is fiduciarily responsible and in a way that will save management fees.
  • West – Page 11 of LBB, item 9 the vendor procurement audit, respond to that and the HIPPA issue
    • Guthrie – Our internal audit in the summer 2018 identified certain areas for improvement. These do not apply to large contracts, but for small contracts we have strengthened guidelines and put in place a new procurement handbook to be released this September.
  • West – Austin Statesman article in October, delays in teachers receiving pension checks
    • Guthrie – A lot of it had to do with death benefits and a lack of information. The main problem was delays related to a change in processing systems, and that situation has been fully rectified.
    • West – Do you use outside managers
    • Guthrie – We do use outside managers, and we pay them fees as well as performance related fees. We paid out over $1b in fees last year and that is why we are trying to bring that expertise in-house.
    • West – Do you have any African American outside managers?
    • Guthrie – Yes we continue to deal with that issue.
  • Watson – If you took $1,000 and spent it in some way that would make active care better, would that be a better use of the money than giving that $1,000 in salary? They would not have to pay tax on the active care, but the pay increase would be a long-term pay increase. Is there a way to do an apples-to-apples comparison of if you gave $1,000 salary or $1,000 in a way that changed their active care benefits?
    • Guthrie – There is no single answer to that question. In some districts they will forgo salary increase and give that to active care contributions. If a person is healthy with no kids then active care contribution would not be a big deal, if a person has family with expensive medical needs that active care would be a bigger benefit than a salary increase of an equal pre-tax amount.
    • Watson – Is there some way you can give an election where the teacher could decide that the $1,000 would go directly to active care rather than salary?
    • Guthrie – That decision would probably be made on the district level.
  • Huffman – TRS care funding period was 32- or 33-years last session, action taken last session saved health care for TRS.
  • Huffman – How did the board come up with the decision to lower the rate to 7.25%? And second question, do you expect additional change?
    • Guthrie – The board considered 30-year and 10-year data. Consulted 7 outside investment firms, all of which gave projections around 7.25%, none of the projections exceeded 7.5%. Past returns do not guarantee future returns.
    • Guthrie – To the second question, I would not expect additional change at this time.
    • Huffman – You feel like we are at a solid place now in line with where other pension systems are?
    • Guthrie – Yes, when we were at 8% we were in line with other worldwide systems. 7.25% is now standard, assumptions generally range from 6.75%-7.5%
    • Huffman – Where are we in terms of worldwide pension systems?
    • Guthrie – We have the 13th largest pension system in the world and the 6th largest in the USA.
    • Huffman – What would the proposed $300m from ESF do for the system?
    • Guthrie – It would not have a substantial impact, it would make a very small difference. Our funding period would go from 87 years to maybe 86 or 85 years.
    • Huffman – How much would it take for actuarial soundness?
    • Guthrie – $1.6b in perpetuity.
    • Huffman – How much would it be for us to fix it now with a one-time sum?
    • Guthrie – Something in the range of $5-$10b would move the needle substantially, but even that would not reach a 30-year funding period.
    • Huffman – Another way to do it is to increase contributions over time from all 3 funding sources, correct?
    • Guthrie – Yes that is correct.
    • Huffman – If we do the $300m and nothing else, will we get to an infinite funding period before too long?
    • Guthrie – It depends on investment returns. Our current period is 87 years, meaning in 87 years we will pay off our unfunded liability. That may change based on the evaluation done at the end of this month, it could increase based on the upcoming evaluation.
    • Huffman – How do these numbers effect the economic health of the state?
    • Guthrie – The rating agencies have taken into account the fact we were likely to lower the assumption, so for now there has been no negative impact. If there are no actions taken this session or next session that might worry the rating agencies, but for now they are taking a “wait and see” approach.
    • Huffman – And it is possible to get to actuarial soundness with contribution increases?
    • Guthrie – Yes, and even if it is stair-stepped it would take that into account. Under Huffman’s proposed bill the system would be actuarily sound within 2 years and unfunded liabilities would be paid off within 19 years.
    • Huffman – And giving a cost of living adjustment (COLA) right away could throw off the actuarial soundness of the plan?
    • Guthrie – Yes that is correct.
  • Huffman – TRS care, how did you come to the decision to make the changes you did?
    • Guthrie – We made changes to ensure the program was stable. We had lost some members, but that has stabilized around 230,000 members. The funding we receive is smaller than the overall cost, we will be continuing to have funding shortfalls each biennium even with the changes made.
    • Huffman – Is ti correct that the under-65 retirees continue to be the driving factor in this cost?
    • Guthrie – Yes, we assume our members are receiving Medicare, so ¾ of the costs you see is the pre-65 population?
    • Huffman – What percentage of the retiree population is under 65?
    • Katrina Daniel, Chief Healthcare Officer, TRS – 70% are in Medicare, 30% are not in Medicare.
    • Huffman – And that 30% not in Medicare accounts for what percentage of the cost?
    • Daniel – It has changed, we are currently analyzing the data to see what it is. We used to quote it was a 4:1 ratio but that has changed, we will get that data when we have it.
    • Huffman – Question about prescription drug costs
    • Daniel – We have 3 separate pharmacy management contracts, we procured all 3 at the same time. We were then able to chose 1 vendor based on who would provide the cheapest service, we awarded the contract to CVS. With our new contracts we have been able to flatten out that cost.
    • Huffman – How has the free maintenance generic drug program worked?
    • Daniel – It has saved around $50m.
  • Huffman – What is the best thing we can do to give active teachers relief on their healthcare cost?
    • Guthrie – I would consider the contributions being made into TRS active care because that will have the biggest impact. There are many cases of teachers opting out of the system because premiums are too high.
    • Huffman – This is an example of some teachers getting better deals than others depending on what district they are in.
    • Guthrie – Yes
    • Huffman – And there are problems with giving districts the option to opt out, correct?
    • Guthrie – It is an adverse selection problem, if we take the good experience districts out all that is left are the bad experience districts and the costs will rise for everyone.
  • Huffman – Question about shifting to in-house investment managers
    • Guthrie – We are one of the most sophisticated and largest pension funds in the world, we believe we can attract the in-house talent we need and can save a significant amount of money that we have been paying in fees to outside managers.
  • Kolkhorst – HB 3976 from last session (made changes to TRS care), have we seen retirement patterns change?
    • Guthrie – We have not seen any changes yet, but we would expect to see a decrease in pre-65 retirees over the long-term due to the increased costs to pre-65 retirement.
    • Guthrie – Some years ago we instituted new rules that said if you retire before age 62 you do not qualify for certain benefits, and we have seen an increase in average retirement age after that.
    • Kolkhorst – Can you talk about the changes in retirement patterns that have occurred since the changes that were made in 2005?
    • TRS staff – We stopped the retire-rehire program, if we had not made those changes ti would have been disastrous.
    • Kolkhorst – I have heard rumors that people are thinking about going back to retire-rehire, but districts have to put that money back into the pension fund, correct?
    • Guthrie – Yes that is correct.
    • TRS staff – Yes, and there is now a rule that a teacher has to stay out a whole year before coming back but the surcharge is still there.
  • Nichols – How often do you take a look at your return and actuarial assumptions?
    • Guthrie – we are required to look into them every 5 years, but we have accelerated that process due to what was happening around the country. Moving forward we will continue to do that on a more frequent basis.
    • Nichols – The $1.7b, was that every biennium?
    • Guthrie – In perpetuity, yes.
    • Nichols – You said that moving from outside managers to in-house would save $1.4b, is that in perpetuity?
    • Guthrie – That is over a 5-year period.
  • Perry – Have you internally modelled pay growth vs medical cost inflation so we can eat that a little bit at a time? And can you give us an idea if the state was committed to inflation at a certain percentage that would be the fix?
    • Guthrie – We have done pretty much everything we can in terms of savings, we will be coming before the Committee next biennium with a shortfall because of the way the statute is structured. I would also advocate that raising the active member payroll contribution to 1.6% or 1.7%.
    • Perry – Is there a model to see wage growth vs medical inflation growth?
    • Guthrie – Yes it is in here, slide 19 shows that under the current funding model medical cost inflation outpaces our wage growth. One thing we could do is a stair-step approach that would not completely address the problem but would stop the bleeding.
  • Perry – Question about unfunded liability
    • Guthrie – We are on a path toward zero, but it will take 87 years to get there.
    • Perry – What is the biggest factor in that 87-year number?
    • Guthrie – Changing the return assumption was one factor
    • Perry – And that is responsible managing of the dollars, take the returns out of it, how did we end up in this hole?
    • Guthrie – In the 1990s the trust was over 100% funded, at the time there was a decision to change the contribution rate to 6%, which is the constitutional minimum. The tech bust in 2001 and the 2008-9 recession also contributed to the trust having a lower rate of return than was expected.
    • Perry – Benefit tweaks have huge effects, little things that we do to “grant wishes, so to speak” have huge impacts on the next generation of teachers.
  • Taylor – I hear anecdotally that districts not involved in TRS active car pay much less than the districts that are involved, is that true?
    • Guthrie – The $2.25 contribution has remained fixed, but the costs of health care have increased, so the proportion paid for by contributors is higher
    • Taylor – My question is if some districts are contributing more than others
    • Guthrie – There are some districts who contribute more to premiums, and those are typically the ones not in TRS active care. This is generally the larger districts (Houston, Austin, etc.)
    • Taylor – But the districts that are in TRS active care can pay more than the $2.25?
    • Daniel – gave a comparison of benefits of different districts, in Pasadena the district is paying $20 extra per member. In some districts there are $200-$300 contributions, so the member pays much less.
    • Taylor – Are your costs comparable to TRS active care?
    • Daniel – I can get that information to you. Once you start deviating from a high-deductible plan benefits are wildly different.
    • Taylor – How many are on high-deductible plans?
    • Daniel – Around half of the total 450,000 members.
    • Taylor – Do you bid out based on region?
    • Guthrie – We do it statewide, we considered doing it based on region, but it was better to do it statewide.
    • Taylor – If an ISD is outside TRS active care why would they not use your program?
    • Daniel – we hear rumors all the time of districts wanting to come in and some wanting to come out. There must be at least 10,000 to have a credible group, and even at that level it can be very volatile.
    • Taylor – 10,000 is a very high number
    • Daniel – Yes that is why 90% are in TRS active care.
    • Guthrie – Yes and active care was initially created for those small and medium sized districts.
  • Nelson – Are there cost-containment efforts?
    • Daniel – Procurement is a big one, staying on top of the market when things change (e.g. with a merger/acquisition), which they do frequently. Changing vendors can bring benefits but can also disrupt the membership. We are always looking for ways to improve outcomes and save costs.
    • Nelson – Have there been projections about how much would need to be set aside in order to take care of pension liability?
    • Guthrie – $10-$15b would be needed as a corpus that would be investable and would create significant returns that could be used for pension liability or anything else. The longer you wait on that the higher the number becomes.
  • Perry – It will take cash to fix the pension fund?
    • Guthrie – The pension fund is described by benefits = contributions + investment returns. Since the return assumption has been fixed at 7.25% contributions or benefits will have to be changed.
    • Perry – 7% seems like a fairly aggressive investment strategy, there would be a significant amount of corpus at risk.
    • Guthrie – We have a very diversified portfolio that we believe we have a moderate risk.
    • Perry – To move above 7.25% would move you from moderate to aggressive risk.
    • Guthrie – Which we believe would be excessive.
    • Perry – Is it fair to say that the 7.25% return is exceptionally good compared to the risk?
    • Guthrie – We have a risk management team that monitors and ensures we are not taking excessive risks.
    • Perry – 7% is a great return, that beats the stock market, I think the average return is 4-6% in the stock market.
    • Guthrie – It beats the stock market, but we are not solely invested in the stock market.
    • Perry – Important to remember that when pursuing aggressive investment strategies, when they fall, they fall a lot deeper and take a lot longer to recover.

 

Spotlight on Public Testimony

  • Tim Lee, Exec. Dir. Texas Retired Teacher’s Assoc – Raise contribution base funding for TRS pension trust and raise base funding for TRS healthcare program.
  • Ryan Smith, teacher – Support for reading education. More resources for eco-dis students. Pay raise for teachers alone is not enough.
  • Christy Rome, Texas School Coalition – Ensure no school receives less funding as a result of school finance reform. Want additional district discretionary spending to hire additional teachers to decrease class size.
  • Austin Hawk, teacher – Need more mental health and emotional support for students with traumatic experiences.
  • Christopher Tucker – Support and funding for mental health professionals in schools.
  • Pierce Bush, CEO of Big Brothers Big Sisters Lone Star – Organization has had success in helping children with incarcerated parents stay out of jail and achieve measurable outcomes.
    • West – I believe this program will give measurable results.
  • Cherie Howell, dyslexia coordinator Frisco ISD – Include allotment for per-pupil dyslexia in SB 1.
  • Jacquie Benestante, Dir. Advocacy and Outreach Austin Soc. Of Texas – SB 1 should include TEA’s request for $50m for special education funding. Support for rider 47.
  • Sharon Hoffman, policy fellow with Hawk Foundation for Mental Health – Support funding for mental health programs in schools.
  • Doug Williams, Superintendent Sunnyvale ISD, representing TASA – Need to infuse additional funds into districts.
    • Taylor – You say that the state share of funding of public education is 38% based on LBB numbers, but that number leaves out a lot of stuff and the number is not accurate. We understand what is going on, but it is not helpful to spread misinformation.
  • Chandra Villanueva, Center for Public Policy Priorities – Reduce recapture, increase basic allotment by inflation.
    • Nelson – Important to understand the bill is a starting point, changes will be made.
  • David Stasny – Additional discretionary funds for districts.
    • Nelson – This is not an either-or situation, we can give teachers salary increases and do other things as well.
  • Alissa Sughrue, National Alliance on Mental Illness – Support TEA safe and healthy schools initiative.
  • Ann Fickel, Texas Classroom Teachers Assoc. – Support for teachers pay raises. Support for additional money for districts to give pay raises to librarians, counselors, and support staff.
  • Monty Exter, Texas Assoc of Professional Educators – Support for Huffman’s proposed solution to TRS pension fund. If there is a decrease in Golden Penny yield, there must be an increase elsewhere or else it would just be a budget cut for schools.