Bloomberg on Texas TRS CIO Harris & alternative investment

In a June 5 article titled 'Texas Teachers Taking Alternative Investing to New Risks', Gillian Wee of Bloomberg provides a long and fairly glowing profile of Teacher Retirement System of Texas chief investment officer Britt Harris that piece focuses particular attention on the strategy that Harris has advocated of substantially increases the Texas TRS pension fund stake in alternative investments. I found it quite interesting and informative but disagree with some of the details.

Wee posits "an unprecedented double squeeze: Baby boomers entering retirement are placing growing demands on resources, while investment returns during the past decade have dropped." Presumably to reinforce the urgency of this "double squeeze," she cites Joshua Rauh's controversial $4 trillion plus figure for nationwide unfunded pension liability.

Even without relying on Rauh's questionable estimate, the condition Wee describes may hold true for many retirement schemes but she provides little evidence to that effect. For Texas TRS, Wee's demographic assumption doesn't appear to match the facts. Covered active employees and payroll has risen steadily over at least the last 35 years. [*] This is not surprising since student population growth has continued steadily for many years and shows no sign of abating. Average age and years of service among active employees have held steady during the last ten years. I see nothing to indicate a large sustained increase in retirements coming among Texas public school and higher education employees.

Wee says that "In the next five years, almost 200,000 Texas teachers will reach retirement age." This does not appear to me to be correct. Somewhere between 64,000 and 97,000 active Texas TRS covered employees--about half of whom are teachers--are currently--based on age and years of service--eligible to retire immediately with a standard unreduced benefit. It appears more correct to say that within the next five years some 200,000 Texas public and higher education employees will have reached eligibility to qualify for an unreduced standard benefit.

Wee tells us that, facing this "double squeeze," Harris is "ramping up stakes in so-called alternative assets ranging from private equity to real estate to hedge funds." Harris has repeatedly stated his view that investments in publicly-traded equities--now and in the future--will not generate desired returns at acceptable risk levels. However, there has been no public discussion among Texas TRS staff or consultants about demographic concerns. It appears to me that return and risk are what is driving investment into alternatives.

[* Note: The last ten years have seen two significant deviations from that trend: (1) In 2004 employment and payroll both fell and in 2005 employment fell but payroll increased modestly. Also in 2003 and 2004 retirements increased dramatically but resumed normal patterns in 2005. This period coincided with large state education budget cuts leading to layoffs and with a change in federal Social Security law that strongly encouraged immediate retirement for many eligible employees. (2) 2011 saw a real decrease in covered employment and preliminary figures for 2012 portend a decrease in both employment and payroll. This period coincides with a major economic downturn leading dramatic cuts in state education funding.]

Texas TRS awards bonuses to investment staff

The Teacher Retirement System of Texas Board of Trustees yesterday approved performance incentive payments totaling $9.7 million for 108 employees. TRS investment staff earn bonuses based on performance against target benchmarks related to their area of work. Yesterday's payments cover pension fund investment performance in the first half of 2010, as well as deferred awards from 2008 and 2009. (Employees may accrue bonuses in years when the total fund loses value but bonuses are only paid out in years with overall gains.)

The TRS press release 'TRS earns 12.6% annual return rate, ranks first among peer pension funds nationally' highlights the fund's impressive performance over the last year.

Austin American Statesman writer Kate Alexander reports in today's edition:

"Texas' teacher pension fund awarded $9.7 million in performance bonuses to its investment team on Thursday after achieving a 12.6 percent one-year return for the fund.

"The $104 billion Teacher Retirement System of Texas turned in the best one-year performance among the nation's largest public pension funds as of Sept. 30, according to an independent comparison of trust funds."

Read the rest at '$9.7 million investment bonuses awarded by Teacher Retirement System'.

The Associated Press offers much the same at 'Pension fund bonuses upset some retired teachers' and the Austin Business Journal at 'Teacher Retirement System of Texas investors given $9.7M bonuses'.

Paul Burka opines at 'The TRS Bonuses'.

Chicago Trib on city pensions

"Politicians helped bring Chicago's public pension funds to the brink of insolvency: Inadequate contributions, underperforming investments have also jeopardized the retirement of tens of thousands of city workers and put taxpayers on the hook for billions of dollars"

The Chicago Tribune reports that political "exploitation" has brought the city's public pension funds to "the brink of insolvency."

Read the article

Texas AFT on TRS at Texas Senate Hearing

(Yours truly had a productive exchange with Senators Bob Deuell, Republican of Greenville, and Eddie Lucio, Democrat of Brownsville.)

Texas AFT urged lawmakers to step up the state’s contributions to the TRS pension fund. . . . Melina Raab also urged the legislature to go beyond its current level of funding for the TRS-Care program of health coverage for retired school employees. He called for the use of the state’s so-called Rainy Day Fund, soon to be worth more than $9 billion, to help deal with the state’s current revenue problem.

Melina Raab told the Senate State Affairs Committee that Texas AFT supports a balanced approach to balancing the state budget, including new revenue. For example, he said, Texas AFT supports closing loopholes in the coverage of the sales tax, which currently exempts—for no good reason—a wide array of business and professional services. Eliminating those exemptions (except for lifeline services like health care and children’s day care) would raise $5.6 billion in fiscal years 2012-2013.

Texas AFT Testifies on TRS Issues at Capitol Hearing

Texas AFT reports TRS board meeting

Retired school employee health care: TRS-Care premium increase likely next year.

Active school employee health care: TRS staff likely to recommend elimination of the top-tier TRS-ActiveCare 3 plan next year.

And a bit of testimony from yours truly on keeping the pension fund strong, bolstering member confidence in its integrity and delivering a benefit to retirees.

News from the Texas Teacher Retirement System

Short-term savings for state could mean long-term costs for ERS: TANSTAAFL

The Austin American-Statesman's Kate Alexander reports on testimony by Ann Fuelberg, executive director of the Employees Retirement System of Texas, before the Texas Senate's Committee on State Affairs.

"Some 18,000 state employees — 13 percent of the workforce — are already eligible for retirement." Any policy that made retirement more attractive than staying on the job "could ripple through the pension fund." A sharp increase in retirees--with commensurate annuity costs--would occur at the same time as a likely drop in pension contributions--presumably because employees replacing the retirees would be earning lower salaries.

Read the full article

(TANSTAAFL? There Ain't No Such Thing As A Free Lunch)

Irving ISD considers TRS ActiveCare

Dallas Morning News reports that the Irving Independent School District is considering a number of measures to reduce its budget. The article also mentions that the district is considering joining ActiveCare, the health-care program for active school employees administered by the Teacher Retirement System of Texas health insurance program.

The context of the article seems to suggest that joining ActiveCare would be a cost-saving measure. Irving is a fairly large school district--some 4,300 FTE employees--so it would be surprising if a switch resulted in substantial reduction in the direct cost of health coverage. However, a move to TRS ActiveCare would probably make future health-care costs and benefits more predictable and would likely shift some administrative costs from the district to TRS.

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