Georgia’s Teacher Pension’s Negative Investment Returns Reveal a Trend

Georgia’s Teacher Retirement System (TRS) is facing massive losses in 2022– a dramatic reversal that comes just a year after an unprecedented boom.

The end of the fiscal year 2022 has confirmed the worst predictions for the state’s TRS. This pension system, responsible for the retirement benefits of over 400,000 current and retired Georgia teachers, has not only experienced returns below the plan’s assumed rate of 6.9%, but it has also recorded a significant loss, dropping an estimated $15 to 20 billion in assets in just one year. 

Georgia TRS guarantees monthly benefits to retired educators, funded through employee or employer contributions and investment gains on those payments. As a result, years like 2022, marked by a significant decline in investment returns, severely impact the fiscal health of the pension plan. Pensions rely on long-term results that play out over decades, so a single year of results does not define the long-term health of a plan. But a year of significant losses usually means that state budgets and taxpayers will be saddled with several years of catchup payments.

Like state-run pension systems across the country, Georgia TRS has had an exceptionally bad year that will more than wipe out any gains made the previous year. New reporting from the system indicates that 2022 investment returns stand at –12.8%. As of this writing, this was the  lowest investment return reported among similar public pension plans – a stark contrast to a record-breaking 29.2% return TRS had in 2021. 

Georgia TRS has made several positive changes as of its last valuation report, including lowering its assumed rate of return (ARR) from 7.25% to 6.9%. However, the system has returned only 6.23% on average since 2001. And going forward, industry experts foresee much more modest returns. Therefore, for the investment rate to reflect current market expectations, TRS should continue lowering investment targets in order to keep the system fully funded.

The latest development in returns highlights the increased level of volatility public retirement systems face, but the state’s issues with funding the teacher pension predate these recent swings. Even before the tumultuous pandemic years with their investment lows and highs, Georgia TRS’ funded ratio has been declining. Figure 1 shows how unfunded liabilities have been steadily growing since 2004 while the funded ratio has been declining. As a result, the pension plan that was fully funded at the turn of the century only has an estimated 81 cents per dollar owed to its retirees, and this figure does not account for the 2022 investment losses.

fig:  GATRS_R_slides_files/figure-pptx/debt-1.png
Figure 1. Georgia TRS Funded Ratio & Unfunded Liabilities

Source: Pension Integrity Project analysis of TRS actuarial reporting.

The issues that TRS faced before the pandemic still exist today, and state policymakers need to consider a few options to address these longstanding funding challenges.

In the past, the Pension Integrity Project at Reason Foundation spoke about how lowering investment expectations would improve Georgia TRS’ ability to keep promises to retirees. First and foremost, continuing to lower investment assumptions will reduce the risk of insolvency. It will also improve the long-term predictability of contribution rates, enabling the pension system and its government backers to better plan for what is expected.

Another strategy that could put the pension plan on the solvency track long-term could be to shorten the time frame to pay off pension debt. While a recent reduction of the amortization period for future unfunded liabilities from 30 down to 25 years is important, the plan should continue shortening this timeframe. Adopting this strategy can reduce the total long-term costs of the pension system, leaving more money for things like school maintenance and other public services across the state.

Finally, creating a new reduced-risk benefit tier could be an option. While it would not change the benefit structure of current participants, it could lower the overall risk that the plans impose on taxpayers and state budgets. 

State lawmakers raised concerns about TRS’ long-term financial viability in the past, but these legislative efforts fell short of bearing fruit. While evaluating the past three years and preparing for the post-pandemic reality, Georgia’s policymakers still need to address the problems within TRS to protect state retirees and taxpayers. If legislators fail to address the financial risk and long-term funding challenges TRS presents, rising plan contributions will cause problems. As a result, the state may have to divert money away from other public priorities, including the school’s day-to-day operating expenses, to pay for its rising pension costs.