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Legislative Updates

Legislative Update No. 119, Session 80
By Tim Lee, Executive DirectorPrinter Friendly ||| Print as PDF

November 25, 2008

Special Message from TRTA
Plus: TRS Provides Position Paper on Economic Issues
The Texas Retired Teachers Association is YOUR voice on issues pertaining to your TRS retirement. This association works closely with the Texas Legislature, the Governor’s Office, elected leaders in State government, and the Teacher Retirement System to bring you the most complete and up to date information possible about your TRS pension program.
As part of TRTA’s commitment to you, a copy of the most recent TRS position paper on the economic crisis and its impact on your TRS pension fund is provided below.
This week as all of us think about the many reasons we all have to be thankful, I want to express my sincerest gratitude to all of you that have said “yes” to joining TRTA. Did you know that this year TRTA has already surpassed its highest membership total ever in the organization’s history? TRTA has almost 66,000 members this year with another 6 months to go before this membership year is over. THANK YOU!
Going into one of the most challenging legislative sessions in TRTA’s history has motivated many new members to join TRTA. These economic times are tough, and TRTA is here working for you to help ensure that your pension program is safe and that it is protected from any change that may impact the fund for future retirees. TRTA will also do everything in its power to work with the Texas Legislature to provide you with some form of benefit increase this coming session. Times are tough for everyone, but TRS members that have not had a raise in over 8 years are hurting even more than some in the Texas Legislature may realize. TRTA will be your voice on these and many other important issues this coming session.
If you have not renewed your TRTA membership or if you have not yet joined but want to be involved in TRTA efforts to help you and thousands of other TRS members (both retired and active), please feel free to contact the TRTA office at 1.800.880.1650. TRTA membership dues are only $25 for the year. The TRTA staff will be happy to assist with your membership needs.
Again, thank you for making TRTA the largest and loudest voice on TRS issues. On behalf of the TRTA Board of Directors and the TRTA Office Staff, I want to extend to you warm wishes this Thanksgiving week.
--end TRTA message—
TRS Position Paper on Market Conditions
November 19, 2008
The situation
The United States is in the midst of one of the most severe equity market declines of the past 50 to 100 years. This decline is due primarily to a massive global deleveraging stemming from an overextension in mortgage lending in the real estate market. The effects have come primarily through the financial sector and are spreading to other areas of the global economy. In the first week of October 2008, most stock markets experienced the largest single weekly decline since the 1930s. Every sector and every country in the world dropped, and the TRS portfolio declined along with the global markets.
Portfolio diversification worked
The current decline in world financial markets is precisely the reason why the TRS Board of Trustees elected to begin further diversifying the investment portfolio about a year ago. The intent of this strategy was to move assets away from the U.S. equity market into a variety of other areas. Those areas include U.S. treasury bonds, inflation-linked bonds, private equity, real estate, hedge funds and commodities, all of which have helped diversify the portfolio during this period of market turmoil. The idea was to better diversify and protect against economic events like the one that we’re experiencing now – without reducing TRS’ long-term target return of 8 percent.
The current economic environment should end any debate about the need for that diversification. Unfortunately, a change of this magnitude with a fund of this size takes several years to implement. The current decline occurred one year into the transition process and so additional time is needed for the Trust to reach the full long-term diversification that it is seeking.
How long will the downturn last
If history is a guide, the nation may be nearing the end of this stock market downturn. The nation has reached the 12-month mark since the Oct. 12, 2007 stock market peak. Historically, the declines often associated with these circumstances average 13 months, so we are approaching the tail end of that period. TRS also knows that unprecedented government actions are being implemented all over the world, that valuations on many major markets are now below their historical norms and that interest rates are also low. So, while no one really knows when markets will peak and when declines will end, there is reason for hope.
TRS Fund is Healthy
While the portfolio’s value has declined, it remains very large and can easily accommodate payments that are required for years to come. As of August 31, 2008, Trust assets were valued at $105 billion. In the months since then, they have obviously declined. As of the end of October trust assets were valued at approximately $82 billion.
However, it is important to remember that we operate a defined benefit plan, not a defined contribution plan. Pensions are therefore not directly impacted by short-term changes in the stock market.
TRS is a long-term investor and, unfortunately, these kinds of conditions are periodically a part of any investor’s experience. At times like these, it is most important to react in a calm, disciplined and objective manner.
Rest assured that the Trust has a world-class team of investors who do nothing but work on this portfolio every day. That group is more than 100 people with 45 MBAs, 25 CFAs and several PhDs. They also know that in the end it’s all about performance. TRS is the steward of other people’s money, and this is one of the most competitive industries in the world.
Proactive steps
TRS has huge advantages in the management of its plan that many pension plans don’t have. The size of the Trust, its long-term investment horizon and its liquidity are all factors that are helping it weather these tough economic times. We have restructured the Trust to reduce its dependence on any single factor. As an added precaution, TRS has put into place additional policies and procedures to closely monitor the shifting financial markets in order to fine-tune current investments as necessary. For example:
·         Over the previous few months, TRS has developed a restructuring plan for its hedge fund portfolio to orient it more to an absolute return strategy that is expected to generate a positive absolute return regardless of stock market performance.
·         TRS has funded five new external fund managers, who are already adding value to the team, and have an additional 10 managers lined up for November. TRS also is adjusting the size of fundings to reflect the new economic conditions.
·         The investment team is running valuation models daily instead of monthly so that it can rebalance TRS’ investment portfolio, if needed.
·         In the wake of this market downturn, the investment staff has identified unique investment opportunities that are only available to larger institutional investors. The Fund’s reputation as a world-class investor brings these opportunities to our doorstep on a daily basis.
·         TRS is managing our credit risks proactively.
·         So far, TRS is still 100 points ahead of its benchmark for investments.
 
Closing Thoughts
The TRS trust fund is large, diversified, focused on the long term and reasonably liquid. Only 50 to 60 percent of the TRS investment portfolio is negatively impacted by the current financial situation. The remaining 40 to 50 percent is doing well. Although the Fund’s value has declined, TRS is well-positioned to take advantage of the current situation and invest cheaply in assets that should provide a healthy long-term return. TRS is totally focused on getting through the current downturn, maintaining a disciplined, long-term vision and restoring the Trust to a higher level once this downturn ends.

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