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Legislative Updates

Legislative Update No. 5, Session 81
By Tim Lee, Executive DirectorPrinter Friendly ||| Print as PDF

February 7, 2009

Bumpy Start to Budget Process
Senate Finance Committee Reviews TRS Budget Information
The Teacher Retirement System of Texas (TRS) investment portfolio has lost more than 27% in total value, or about $32 billion since September 1, 2008. This information left the Texas Senate Finance Committee troubled by how the world economic downturn has impacted the pension fund.
The purpose of committee’s hearing was not primarily about the pension trust fund investment losses. Friday’s hearing focused on the 2010 and 2011 biennial budget request for TRS. This is the first step in a long budget process that will help determine how much state appropriation will be provided to TRS in the coming biennium.
Many TRTA members will remember that last session the state appropriation was raised to 6.58 percent. This was the first percentage increase in state funding to TRS in 12 years. This session, the base-line budget recommendation for TRS from the Legislative Budget Board (or LBB) is 6.4%.
In overall dollars, the total baseline budget proposal to TRS from the state, active employee contributions, and employer contributions tops $4 billion. Though the baseline budget proposal for the state is 6.4%, the proposed appropriation is $236 million more for the coming biennium. LBB testified that this increased dollar amount is attributable to statewide active employee payroll growth in which the state appropriation is based upon.
No question the amount of state dollars going to the fund is increasing, but the lowered contribution level as a percentage basis is reduced in this proposed budget. How will this impact the fund’s actuarially soundness? The answer will not be known until later in the session after TRS has an opportunity to do their February 28, 2009 valuation (a snapshot of the fund’s value and investment performance that is required in legislative years to help decision makers with TRS budget issues). Mr. Ronnie Jung, TRS Executive Director, said that the February 28 valuation may show that a state contribution of 9 to 10 percent may be needed to make the fund sound in the coming biennium.
Incentive Compensation Plans
A major focus of the Senate Finance Committee’s comments with all Texas public pension plans this week during their hearings has been about incentive compensation plans for fund investment staff. TRS, ERS, and other public pension plans have recently implemented incentive compensation plans as a way to be more attractive employers for what, until recently, was a fairly competitive employment environment. TRS and the other pension plans argue that the private sector had been able to provide better salaries and higher levels of incentive compensation (bonuses) to their investment managers and, therefore, the turnover at the public pension plans was high.
Well, the times are changing. What was thought of as a reasonable incentive compensation plan just 6-8 months ago now seems ridiculous especially since TRS has lost so much money with their investments. TRS testified that to-date $622,000 has been paid to various investment employees and that another $450,000 is “owed” to employees. TRS testified that the bonus money that has been paid or deferred was earned in the previous year, and that since the fund has a negative return on investments for the current fiscal year-end that no incentive bonus dollars have been earned.
The Senate Finance Committee asked TRS to review their incentive compensation plans and to return to the committee in month to express what changes may be made to the incentive compensation plans, or if no changes are being recommended to defend that position. Senator Steve Ogden spoke out about how TRS annuitants may feel about fund managers receiving incentive compensation in years when the fund had a negative return on investment. “We need to apply some common sense” to this process, Ogden said.
TRS does have about $21.5 million in the proposed budget for incentive compensation over the 2010 and 2011 biennium (or about $10.75 million per year). TRS testified that for that money to be paid, TRS would have to hit 100 percent of their earnings goals. This is not a likely scenario given the current economic condition, but if the fund is able to pay these bonuses due to market gains, TRS earnings would be substantial (testimony today suggested that it would add more than $2.5 billion in added fund value). TRS testified that budgeting for the bonuses under the incentive compensation plan does not mean they will be paid, but not budgeting for the bonus structure would also create transparency problems in the next biennium.
The issue of incentive compensation is far from resolved and TRS committed to reviewing its policy on this issue at their TRS Board of Trustees meeting next week.
Leased Space
TRS was also criticized for entering into a lease agreement for additional office space to house their investment division outside of the TRS building. Senator Duncan wanted more definitive answers on how TRS rationalized and executed the lease agreement without legislative authorization. TRS testified that the board has this authority under state statute to determine if an expenditure of TRS dollars is in the best interest of the fund and can enter into agreements such as this without legislative consent.
Keep in mind that all administrative costs for the TRS pension fund are paid for with your pension trust fund dollars. The state does not bear TRS administrative costs, but the Senate Finance Committee does provide oversight on how the dollars are spent for such administrative costs (this helps ensure TRS is operating within the means they described to the Texas Legislature).
TRS agreed to review this situation, as well, and committed to help reconcile the issue during this legislative session. The approximate budgeted cost for the leased space is $6 million.
 What about the Retirees
With all the focus on the investment loss, the new leased space, the incentive compensation package, and the overall budget requests for TRS, you may be wondering what was said about helping retirees this session. Not much.
TRS testified that their actuary recommended that no benefit increases be funded with system assets and that anything in the form of an annuity increase or additional annuity payment would have to be funded through separate legislative appropriation. What does that mean? Well, it means that the State Legislature will have to authorize and pay for any benefit increase through what is known as general revenue funds.
Tim Lee, TRTA Executive Director, testified that retirees have now gone 8 years without a permanent increase in their retirement benefits. The passage of the 13th check was greatly appreciated last session, but a 13th check does not do much to help offset the inflationary pressures so many TRS retirees are dealing with.
TRTA also testified that not increasing TRS-Care premiums over the last four years has been helpful. The baseline budget request does provide sufficient funding for the TRS-Care plan so that retirees will have another 2 years without seeing their premiums increase. This is welcome news, and TRTA will work hard to ensure that this level of funding for TRS-Care does remain in the final budget.
The bottom line is simple, retired public education employees need more money. TRTA will work diligently this entire legislative session to help meet that need.
Update on Email Advocacy
More than 3,500 TRTA members responded to yesterday’s email advocacy campaign by sending an email to the Texas Senate Finance Committee (keep in mind that this was in a very short window of opportunity). This is simply amazing! Thank you for your effort and willingness to participate in that legislative awareness campaign.
Some TRTA members did have difficulties with getting the link to work correctly, but you will be happy to know that TRTA is already taking the necessary steps to ensure the next email advocacy campaign will work more smoothly.
TRTA will continue to refine this service all session and will become more strategic in using email advocacy as a way for each legislator to hear from their own constituents. Your efforts are much appreciated and they are making a positive difference on these important issues.
Conclusion
The Senate Finance Committee budget hearing sets in motion a long, and hopefully productive, process that TRTA will monitor and be engaged with all session. There is no doubt that times are tough and that the country’s economic circumstances present numerous challenges. TRTA is meeting with Texas Legislators every day and pushing a legislative agenda that focuses on helping retired education employees.
Your help this session is critical and your efforts already this session are making a difference. As was said in today’s hearing, this is not the time to panic and TRS retirees’ pensions are safe, BUT we must remain active and engaged throughout the entire session if we hope to be as successful as we want and need to be. TRTA is your voice in the Texas Legislature, and we will do all that is possible to help you this session.
TRTA’s power and influence comes from the membership. It is important to keep you updated on how TRTA is doing with membership growth. Right now, TRTA is still gaining members and is on the cusp of breaking the 70,000 member mark! Please encourage your fellow retirees, active colleagues, friends and family to be engaged by joining TRTA. We appreciate all your membership efforts.
As always, thank you for your support of the Texas Retired Teachers Association.

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