TSEU/CWA

- September 2007 Report -

_____The meetings of the Board of Trustees of the Teacher Retirement System of Texas on September 13 and 14th, 2007, were the most emotionally charged of any of the Board meetings I have thus far attended. Tensions on the Board have been rising for months as the Board struggled to find a way out of a funding shortfall. The funding shortfall itself is not worrisome and, in fact, is quite normal for a defined benefit pension fund. However the funding shortfall has prevented the TRS Board from granting an increase to TRS retirees for the last seven years. Since a TRS pension has no automatic “cost of living” increase, the retirees rely on the Board to increase their retirement checks periodically on an ad-hoc basis. This system has worked well in the past. Historically either the Board or the Legislature has been able to increase the pension checks enough to keep up with inflation.
_____However for the last decade the State of Texas has refused to contribute its fair share to the pension fund. Without an adequate State contribution and with poor investment returns during the first three years of the George W. Bush presidency, the growth of the pension fund could never catch up with the growth of its liabilities. As a result for the last seven years the retired teachers have had no increase in their pension checks. With inflation averaging about 3% every year, the purchasing power of the teacher’s pension checks has decreased steadily, year-by-year. Their health care premiums and other expenses increase year-by-year. The retirees are caught between stagnate incomes and increasing expenses. Between 2000 and 2007 the standard of living of the state’s retired teachers declined by at least 20%.
_____Finally in 2006 the state’s teachers and educators were sufficiently organized to defeat public education’s worst enemies in the Texas Legislature and clear a way forward. In 2007 the Legislature agreed to increase the state’s contribution to the TRS pension fund and agreed to allow the TRS Board to send each retiree an extra check for about the amount of a normal monthly pension check. The extra check is called “a 13th check”.
_____In the meantime the TRS trustees were looking for another way to raise enough money to give the retirees a raise. In normal times the pension fund administered by TRS earns about 8% a year. (This return on investment accounts for about 70% of each pension check mailed out.) Everyone knew that a return on investment of more than 8% could eventually close the gap in funding. (This is precisely what the Legislature was hoping to happen and may explain why they refused to increase the State contribution for so many years.) To increase the return on investment, in 2004 the TRS trustees began to very slowly shift the fund’s investments into what were called “alternative assets” such as private equity and real estate. In 2006 the trustees put together a modest incentive bonus plan for its top investment staff in hopes of increasing the fund’s returns.
_____In late 2006 the Chief Investment Officer (CIO), the person in charge of investing the TRS pension fund, left TRS employment to work at a much smaller fund at his alma mater. The new job offered the same salary as did TRS. In fact he was the third Chief Investment Officer to leave TRS in the last ten years. TRS, because of its low state-employee salaries, has become a “farm team” for other funds. Periodically its best investment managers are lured away by higher salaries and wider opportunities elsewhere.
_____In the Fall of 2006, the trustees undertook the search for a replacement CIO. When the process was well underway, a Texas native and son of a Texas teacher, Mr. Britt Harris, sent in his resume. He had no public pension fund experience but had made a name for himself managing the employee pension fund for TXU before moving north in search of better pay and wider opportunities. By 2005 he was earning $4 million a year and managing a fund the size of TRS. He outlined a plan that would reduce the pension fund’s risk while at the same time increasing its return on investment. The trustees offered Mr. Harris the job as the TRS CIO. As soon as he was hired Mr. Harris began the difficult and tricky process of changing the pension fund’s allocation from the traditional 60% US stocks and 40% US bonds to an allocation that would eventually look much like those of Harvard and Yale Universities.
_____The new CIO quickly realized that the state-employee salaries offered by TRS could neither attract nor retain the caliber of investment professionals he needed to implement the new investment strategy. He commissioned a study to find how much money it would take to attract the best of the nation’s investment professionals to Austin. He then devised a bonus plan that offered those salaries yet cost less than 1% of the excess returns needed to earn the bonus. He asked the Board to suspend the old incentive bonus plan and substitute the new plan in its place.
_____Consideration of the new bonus plan opened old wounds from 2006 that had only begun to heal. In 2006 retiree groups had openly and vocally opposed the bonus plan. They believed that a large payout to TRS investment managers would negatively impact the funding status of the pension plan and make it less likely that the retirees would receive the long-delayed increase. TRS trustees received thousands of letters and e-mails and hundreds of telephone messages opposing the bonus plan. Pressure on the trustees was intense and consideration of the bonus plan split the TRS board. The plan was finally adopted only after a long and contentious series of meetings. Now less than a year later Mr. Harris was asking for another, larger and more expensive bonus incentive plan.
_____Once again many retirees mobilized to oppose the plan. The press ran articles that misrepresented the plan and inflamed the passions of their readers. However this time the major retiree groups stay out of the fray. Perhaps they now realized that the bonus was only part of a larger plan to get the long-awaited and desperately needed increase for the retirees. Three of the trustees, all representing higher education or public school employees, struggled to link the bonus plan directly to an increase for retirees. They wanted to guarantee that the retirees got an increase in their pension checks before the investment professionals got a payout of their incentive bonus.
_____The struggle to link the bonus plan directly to an increase for retirees was unsuccessful and on September 13th five of the eight trustees voted to accept the bonus plan without any linkage to an increase for retirees.
_____The status of a 13th check is currently unresolved. In November the TRS Actuary will determine whether the pension fund is sufficiently funded to give a 13th check to the retirees. If it is not then the trustees have the option of increasing the active employee’s contribution in order to fund the 13th check for retirees. This will pit the immediate interests of those members of TRS who are still working against those who are retired. Those of us who are employed may be asked to contribute more to the pension fund so those who are retired can get a small one-time check worth 8% of their annual income. I fear that once again the press will fan the flames of discontent, that once again the passions of the members will be aroused and that once again the trustees will be pitted against each other.
_____If the failure of the State to contribute its fair share to the pension fund was a scheme to endanger the main source of income of the state’s retired public educators then it is succeeding. If the failure of the State to contribute its fair share to the pension fund was an oversight then we, the state’s public educators, whether retired or not, must not endanger the future of our pension plan by allowing ourselves to fight over details. Now is the time to come together, defeat the anti-worker, anti-public education, pro-privatization forces that dominate Texas State government and defend our pension plan.
_____I encourage members of our union to seek common ground with each other and with those of us who are working if you are retired and with those who are retired if you are still working. Don’t allow our common enemies to divide us. Our motto should be: Divided, we are conquered. United, we stand. Let’s find a way to defend our pension plan.

In solidarity, Philip Mullins, Trustee, Teacher Retirement System of Texas.