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Legislative Updates

Legislative Update No. 105, Session 80
By Tim Lee, Executive DirectorPrinter Friendly ||| Print as PDF

September 16, 2008

Market Meltdown Hits TRS
Impact on Pension Fund Being Assessed
The news of Lehman Brothers and the selling of Merrill Lynch to Bank of America caused havoc on Wall Street. Many TRS retirees and active employees wonder tonight how badly their retirement system will be hit in this recent wave of bad news from the financial sector. 
Still more education retirees and active employees also wonder about the impact of the TRS decision to enter into an investment partnership with Lehman Brothers to manage $1 billion in TRS assets. More directly, TRTA members are asking if that $1 billion was completely lost when Lehman Brothers filed for bankruptcy.
To the point of the $1 billion that TRS and Lehman were partnering on, that money is said to be secure and NOT caught up in the Lehman bankruptcy issues.
The Teacher Retirement System of Texas (TRS) has released the following statement on its website:
How is TRS Affected by Lehman Brothers' Filing for Bankruptcy?       
First, it's important to note that the vast majority of TRS' investments with Lehman Brothers are part of a strategic partnership agreement that became effective on July 1, 2008. These funds -- about 1 percent of the total TRS portfolio -- are (1) in TRS' name, (2) held in a separate trust with TRS' master custodian, State Street Bank, and (3) remain securely under TRS control. These funds are neither held by nor comingled with Lehman Brothers. In other words, Lehman Brothers is acting in our behalf to invest these funds in a wide variety of financial instruments. We do not believe that a Lehman Brothers bankruptcy will have any impact on these invested funds. While TRS does have direct investments in Lehman Brothers, they represent less than one-tenth of 1 percent of the TRS portfolio. TRS will continue to monitor developments closely and we are taking action to minimize any impacts to the fund.
We have every confidence that our highly diversified fund is well-positioned to absorb fluctuations in the market and thereby best serve the long-term financial interests of our members.
The TRS and Lehman Brothers investment partnership may indeed have some protections established by the retirement fund to help minimize potential fallout from this situation; however, a reporter for the Austin American Statesman (Mr. Robert Elder) is reporting that TRS may suffer additional financial loss after the fund began increasing its financial interest in Lehman starting back in March 2008.
Mr. Elder reports on his web site (www.statesman.com/publiccapital) that:
(Securities and Exchange Commission) filings show the retirement system ramped up its holdings starting in March, when Lehman traded near $50 per share. At the time, the system held about 1 million shares in Lehman.
The retirement system then went on a buying spree, upping its stake to 4.3 million shares by June 30. During those four months, however, Lehman fell to below $20 per share, a drop of 60 percent.
Monday, Lehman shares lost 94 percent of their value to close at 21 cents.
The teacher fund didn’t disclose how many shares it currently holds, but by Friday the system had reduced its holdings to 2.4 million shares, worth $8.8 million. If the fund owned that many shares at the close of trading Monday, they would have been worth about $507,894.
The system also held $15.8 million in Lehman bonds as of Friday.
The Texas Retired Teachers Association (TRTA) is tracking this situation closely. TRTA will work with TRS to learn more about both the Lehman investment partnership and if the $1 billion in TRS investments is as protected and accessible as the TRS statement above suggests.  TRTA will also delve more into how much the System has lost due to the pension fund's “buying spree” of Lehman shares that is reported in Mr. Elder’s column.
No doubt that these will be trying times for the public markets. Current TRS retirees can rest somewhat easier knowing that their pensions are protected by the well-funded and track-proven TRS pension trust fund. One of the most important aspects of your retirement plan is that it is a “defined benefit” traditional retirement plan. Unlike a “defined contribution” privatized plan, drastic sell-offs like the one seen today will not disrupt or dissolve your pension payments.
As TRTA members know all too well, though, large downward market trends do have a tendency to make it much more difficult for pension increases to occur for current retirees. With gas, food, and just about everything costing more, and retirees living in 2008 on pension incomes still stuck back in 2001, the last thing that retirees need right now is another excuse for not getting a real raise in their pension benefits.
TRTA also works to protect the pension fund for all future public education retirees. Thus, TRTA members who know friends and family that are still active in public education can communicate to them that TRTA is doing all it can to monitor this situation and are deeply involved in all activities that promote the long-term preservation of their TRS pension plan benefits.
This situation is still so new and TRTA will continue to offer insight on further developments as they happen. 
As always, thank you for your strong and dedicated support of the Texas Retired Teachers Association. Please send questions and comments to tim@trta.org.

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