Solid gains over the past year at Texas’ two largest public pension funds yielded sizable bonuses for investment officials, newly released information shows.
The $23 billion Employees Retirement System of Texas earned a 10.1 percent return and will give bonuses of $2.7 million, which is paid out over three years.
Strong investment returns, however, can’t compensate for the chronic underfunding and demographic trends that have contributed to the fund’s troubled financial position. The state employees’ fund will run out of money to cover promised pension benefits by 2052 if nothing changes.
Texas’ $117 billion pension fund for public school and university employees will pay out more than $6.7 million in investment bonuses based largely on that fund’s recent returns. The outlook is sunnier for the Teacher Retirement System of Texas in the wake of recent changes by lawmakers that shored up its bottom line.
Britt Harris, chief investment officer for the teachers’ fund, will pull down a total of $374,000 on top of his $480,000 annual salary to oversee the retirement dollars of 1.3 million members. Harris has been among the highest-paid public pension employees in the country in recent years, according to Bloomberg News.
More than 100 other employees in the investment division also earned bonuses for an average payout of $46,919 for 2013. The total includes half of the bonus amounts earned in both 2012 and 2013, a split intended to hold on to employees.
Officials at the retirement system credited the incentive compensation program for drawing experienced investors from the private sector. And their contribution was valued at an additional $1 billion in the fund over the past three years beyond what the markets have produced.
Retirees understand that the bonuses are aimed at attracting and retaining top investment professionals to the teachers’ fund, said Tim Lee, executive director of the Texas Retired Teachers Association. But he added that the bonuses might be a bit too hefty and based too much on subjective factors.
“We think this is a best-practice that TRS has effectively employed to get some of the best and brightest minds working with our TRS fund. That said, it does not hurt to keep analyzing these policies to ensure our TRS retirees that this policy is mostly a reflection on performance and not on subjective peer review,” Lee said.
The fund delivered an 8.9 percent investment return as of Aug. 31, 2013, beating its 8 percent target. It now has 81 percent of the assets needed to cover the promised pension obligations over the long term and is still absorbing some of the huge losses from the financial collapse of 2008 and 2009.
But the fund is on a better financial footing than it has been in over a decade because of changes made by the Legislature last spring. Those changes increased contributions — from employees, the state and, for the first time, most school districts — and modified benefits, such as raising the minimum retirement age to 62 for employees with fewer than five years of service.
A year ago, the discussion centered on when the retirement fund would run out of money. “Now we are discussing when the system might once again be fully funded,” the fund’s actuarial consultants wrote in a recent report.
As a result, the fund has crossed the financial threshold where state law allows it to give some retirees a 3 percent cost-of-living adjustment. They last received a permanent bump in their pension checks in 2001.
The situation is bleaker at the Employees Retirement System, whose 321,000 members include state workers (outside of higher education), elected state officials and retirees.
A recent comparison of the two state funds showed their investment returns, contribution levels and benefits have remained about the same since 2001. But differences in the makeup of the members and a reduction in the state workforce over the past decade have left the employees’ fund in a pickle while the teachers’ fund is on the upswing.
The problem at the employees’ fund is fixable, according to the fund’s consultants. They recommended a measured approach that includes some mix of changes to benefits and contributions. They also cautioned against relying upon annual investment returns beyond 8 percent.
No decisions will be made until at least 2015, when the Legislature next convenes.
Kate Alexander has covered the state budget since the 2009 legislative session and written extensively about state taxes and spending; state employee pay; and pensions and school finance.
TEXAS PENSION FUNDS
Teacher Retirement System of Texas
Assets: $117 billion
Investment return: 8.9 percent
Long-term outlook: Actuarially sound for the first time since 2001 due to changes in contributions, benefits
Employees Retirement System of Texas
Assets: $23 billion
Investment return: 10.1 percent
Long-term outlook: Runs out of assets to cover pension obligations in 2052 without changes to contributions, benefits