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.]

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)