TRS–Now what’s going on over there?

Three years ago, TCTA published a “What’s going on over there” article on the Texas Teacher Retirement System, explaining a handful of issues that were creating controversy within the agency and concern from legislators and members. It’s starting to appear that this article may become a tradition, as once again we find it appropriate to address a number of events involving TRS.

First, it’s important to note that TRS remains essentially healthy. Like all pension plans or other funds that rely primarily on investments for growth, the economy has hit hard, and the fund has moved from “overfunded” just a few years ago to 83% funded now. (This is consistent with the national average for pension funds.) Investment returns for the last year have been solid, and the market value of the fund has been restored to over $100 billion, but years of sustained losses have left their mark. Under current conditions, it will be many years before the fund could support a benefit increase for retirees.

During the elections I heard there was some kind of investment scandal at TRS. Is my money safely invested?

Gubernatorial challenger Bill White raised the spectre of investment wrongdoings at the agency near the end of the campaign, resurrecting a 2009 “whistleblower” memo from a former TRS employee who had concerns about irregularities in investment approvals. The employee claimed that staff recommendations regarding investments were frequently overridden by Chief Investment Officer Britt Harris for political reasons.

TRS hired an outside consultant to investigate the allegations, choosing an individual who brought his own baggage. Roel Campos had previously been hired as fiduciary counsel for TRS, but later withdrew because of concerns over potential conflicts of interest.

In the end, the Travis County District Attorney, after conducting interviews with the employee, did not identify any criminal violations, and closed the case. The employee resigned and remains on paid administrative leave.

With Ronnie Jung retiring, who’s going to be the new executive director?

Jung announced his retirement last summer, effective July 1, 2011. The board has conducted a national search for his replacement, but the process has recently been delayed with little in the way of explanation (the board’s December meeting may shed some light). The board had hoped to hire someone by the beginning of 2011, so that he/she could learn the ropes by “shadowing” Jung throughout the legislative session.

Board members have discussed the type of individual who should be hired, with some members, including Chair David Kelly, appearing to favor someone with private sector financial/investment experience. Others, including the employee representatives on the board, have argued that experience in government would be beneficial, and that with an agency full of investment staff and with financial experts comprising a majority of the Board of Trustees, management skills, experience with the Legislature, and communication skills should instead be at the top of the list of criteria.

The five individuals named as finalists represent a mix of public and private sector backgrounds, but the delay in narrowing down that field has led to speculation that one or more additional names may yet be thrown in the hat.

Are the investment staff going to be making big bonuses this year?

Possibly. Years ago, TRS implemented an incentive program for investment staff, tying their pay to performance as measured against benchmarks. Staff have earned bonuses over the last three years, but the bonuses have not been paid because the overall fund returns were negative. Now that the fund has experienced positive returns, those accrued bonuses are scheduled to be paid in February. Final numbers aren’t yet available, but the amount is expected to total several million dollars.

I’ve heard [insert your local rumor here] – is that true?

TCTA gets a number of calls and emails every year with questions about the latest rumor. Sometimes there’s a kernel of truth, but often there is no apparent basis for the rumors. Here are some we’ve heard lately:

Capping retirement benefits. There has been no public discussion at the state level about limiting the benefits a member is entitled to upon retirement.

Early retirement incentives. School districts are prohibited from offering early retirement incentives, and TRS would likely oppose any such proposal at the statewide level (early retirements have a negative financial impact on the fund). With concerns about reductions in force in some districts, administrators and other employees might welcome a repeal or waiver of this prohibition so that veteran employees could choose to retire rather than be laid off, but at this point it has not been proposed.

Reduction in the multiplier. We’re not aware of any proposal to reduce the benefit formula multiplier from the current 2.3%.

Health insurance changes. We have not heard a proposal to cut funding for TRS-ActiveCare. However, we may see the end of TRS-ActiveCare level 3. The premiums have become so expensive that only those employees with high medical costs are purchasing it, which increases the plan costs and makes the premiums even higher; thus, TRS staff are expected to recommend elimination of the program.

TRS-Care funding. There may be an attempt to lower the state’s 1% contribution rate this session, but no such legislation has been filed to date.

What should we expect during the legislative session?

As of print time, few TRS-related bills have been filed, but we expect to see a number of bills of interest by the end of the filing period in March. Among the proposals likely to be on the table:

Conversion of TRS to a defined contribution plan. This one may not materialize, but several other states have considered restructuring the defined benefit plan (in which retirement benefits are guaranteed at a certain level and benefits are adjusted as needed to meet that level) to a defined contribution plan (in which only contribution levels are guaranteed, and individual retirement accounts are set up - similar to a 401(k) program). If such a proposal is made in Texas, it might apply only to new employees, maintaining the existing retirement plan for current employees.

Increased employee contribution/decreased state contribution. The budget crunch has lawmakers considering every possible avenue for sources of revenue and/or cost savings. Increasing the current 6.4% employee contribution would help the fund, but does not help the state budget. It is likely that the proposed budget will include a decrease in the state’s 6.644% contribution, possibly even as low as the constitutional minimum of 6%. No word yet on how such a decrease would be reconciled with the law prohibiting the state from contributing a lower rate than employees; decreasing the employee contribution in addition to the state’s would have an even more harmful effect on the financial health of the pension fund.

Another attempt at a retiree benefit increase. The TRS fund still can not afford a benefit increase for retirees, and it seems unlikely that legislators will try to come up with the hundreds of millions of dollars needed for such a raise. However, retirees have gone a decade without an ongoing benefit increase (though a bonus was paid in 2008) and will continue to lobby hard for a raise.