Will Texas teacher pensions suffer if property taxes are slashed?

Texas leaders are promising homeowners the biggest property tax cuts in state history at the exact moment the state’s largest teacher pension system is flashing new warning signs. These two developments are connected—and unless lawmakers confront that tension directly, today’s tax relief could become tomorrow’s public pension crisis.

At a recent board meeting, actuaries at the Teacher Retirement System of Texas (TRS) warned that the system’s financial outlook has worsened. Just one year ago, consultants projected TRS would reach full funding in 28 years. That timeline has now slipped to 35 years—well beyond what state law and industry standards consider actuarially sound. To stabilize the retirement system, actuaries are urging the state to raise its annual contribution rate from 8.25% of teacher payroll to 9.75%, a change that could cost taxpayers roughly $1 billion more each year.

That pension contribution request arrives as Gov. Greg Abbott and Lt. Gov. Dan Patrick aim to push Texas toward eliminating school property taxes for homeowners. Patrick’s “Operation Double Nickel” would extend the school-tax freeze to homeowners at age 55 instead of 65 and boost the homestead exemption again, with the explicit goal of wiping out school taxes for homeowners over the next few sessions.

Abbott went further still, pledging to end school district property taxes on homesteads altogether and to make that his top priority in the next session.

The clash is obvious: TRS is demanding more money while state leaders are promising to permanently shrink one of the main tax bases that funds educator pension benefits.

The Teacher Retirement System’s rising costs are not a mystery. TRS trustees have prudently lowered investment return assumptions, which raises required contributions. At the same time, teacher pay has risen significantly. Higher salaries are deserved, but in a traditional defined-benefit pension system, they automatically increase lifetime benefit obligations.

The 9.75% rate suggested by TRS actuaries falls just below the constitutional 10% cap placed on state contributions to TRS. Any missed actuarial assumptions in the short-term and/or mid-term could subsequently result in the need for additional employer contributions and place TRS on a collision course with the state constitution—the kind of legal and fiscal squeeze lawmakers had to work around in 2021 when they restructured the Employees Retirement System.

Patrick has acknowledged the cost of eliminating school property taxes for all property owners, estimating it would require roughly $40 billion a year in education funding to be found elsewhere and drive the sales tax into the mid-teens—politically unrealistic. His workaround is incremental: earlier freezes and higher exemptions costing under $4 billion per biennium, while more than 20% of the state budget already goes toward property tax relief.

Abbott is focused on his endgame: zero school taxes on homesteads, funded by state revenues from growth and surpluses. That vision assumes Texas will always have sufficient fiscal room to permanently absorb the entire school maintenance and operation (M&O) budget. TRS’s fiscal burdens are the biggest threat to that assumption.

Texas currently carries roughly $62 billion in unfunded teacher pension liabilities. As long as those liabilities remain structurally underfunded and boxed in by a constitutional cap, pension costs will quietly compete with property tax relief for the same pool of state dollars. In the next downturn, lawmakers will face impossible choices between pension solvency, school funding guarantees, and resistance to new taxes.

There is a responsible way forward.

First, Texas should adopt true actuarial funding discipline by implementing an actuarially determined employer contribution policy for TRS. That means automatically adjusting contribution rates each year to what actuaries say is required, rather than relying on fixed statutory rates that create budget stability on paper but pension instability in reality.

Second, the system must be modernized for a more mobile teaching workforce. TRS assumes that roughly half of new hires will leave before vesting. A 2024 Reason Foundation study found most new teachers would be financially better served with a choice between an inflation-protected pension and a high-quality defined-contribution or cash-balance option.

Texas can deliver meaningful tax relief, honor its commitments to educators, and keep its budget on stable ground. But it cannot do all three at once unless TRS is placed on firm actuarial footing first. Eliminating the homestead maintenance and operation tax does not eliminate the district’s obligation to contribute to TRS; it simply forces the state to replace the revenue that districts use to make those contributions. Until that happens, promises of zero school property taxes rest on a fragile foundation.

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Source: https://reason.org/commentary/will-texas-teacher-pensions-suffer-if-property-taxes-are-slashed/