By Karen Brooks
AUSTIN, Texas (Reuters) - Texas lawmakers passed sweeping changes to the state's $116 billion teacher pension system on Sunday, including the first cost-of-living increase in a dozen years and a new requirement that school districts pay part of the expense.
The state, the teachers themselves and the school districts will increase contributions, making the Teachers Retirement System of Texas less reliant on market returns.
Without the changes, the healthcare account alone would have faced a $1 billion shortfall by 2017, supporters of the legislation said.
"We were upside-down earlier, because we were relying too much on investment returns," said state Senator Robert Duncan, Republican of Lubbock, who authored the legislation. "This puts us in a situation where we are actually having long-term fixed contributions rates that should support this system for a long time."
Teacher contributions to the Teachers Retirement System of Texas would increase over the next four years from 6.4 percent of their pay to 7.7 percent, and school districts would contribute 1.5 percent of total salary costs, up from zero.
The state contribution would increase from 6.4 percent of covered payroll to 6.8 percent starting in September.
Those three sources are expected to add some $600 million to the pension fund over the first two years, according to state documents.
The last time the state passed a cost-of-living increase for retired teachers was in 2001.
Under the plan passed Sunday, teachers who have been retired since early 2004 will see a three-percent increase in benefits, affecting some 195,000 teachers, or 60 percent of those in the system.
The law increases their monthly benefits by an average of $42, though it caps that increase at $100.
Teacher groups said they were disappointed the legislation decreased the pension and health benefits of hundreds of thousands of current employees who had already earned those benefits under the existing system.
Current employees with less than five years of service by August 2014 will have to work two extra years to get full retirement benefits under the new plan. The legislation raises the minimum retirement age for those employees from 60 to 62, according to the Texas branch of the American Federation of Teachers.
It also raises to 62 the minimum age at which a retiree is eligible for the TRS-Care health benefits beyond catastrophic coverage, reducing the benefits for hundreds of thousands of current employees, the group said.
That new requirement does not apply to members who by August 2014 meet a rule of 70, or age plus years of service equal to 70 or more, or have at least 25 years of service credit.
"One of our goals was to continue the stability of the system, and that has been done with the increased state contributions," said Linda Bridges, president of the Texas chapter of the American Federation of Teachers. "There's still more work to be done to improve the system for retirees and active members."
The Texas teachers' pension fund offers a defined-benefit plan and serves more than 1.3 million employed and retired teachers. The average annual teacher benefit is $22,764.
The pension fund is one of the world's largest private equity investors and has invested billions of dollars with firms including Apollo and KKR.
(Editing by Daniel Trotta and Philip Barbara)