C. S. Thachenkary served for more than three decades as an associate professor in the J. Mack Robinson College of Business at Georgia State University before retiring at the end of 2015. In this essay, Dr. Thachenkary discusses the Teacher Retirement System, which has been in the news lately.
Last week, the AJC's James Salzer reported:
The Atlanta Journal-Constitution has learned that next year the government may have to put in almost twice that amount, eating up much of the new revenue the state expects to take in to pay for increased public health care and education costs, and possibly teacher pay raises.
The Teacher Retirement System's board recently voted to increase the "employer," or government, contribution rate to the fund by almost 25 percent starting July 1 of next year. That rate — a percentage of employee payroll — will have more than doubled since 2012. State officials will factor that into the budget lawmakers have to vote on during the 2018 General Assembly session, which begins in January.
State officials are estimating the bump could require an additional $375 million to $400 million contribution by taxpayers into the fund — on top of the more than $1.5 billion a year paid in now. That's likely the largest one-year infusion of money into the program ever.
With that background, here is Thachenkary's essay.
By C. S. Thachenkary
The AJC's James Salzer reported last week that the state Legislature may need to allocate $400 million more to its Teacher Retirement System next year. This will be on top of the $223 million the state added to the fund this year.
In 2015, TRS had a funding ratio of only 79 percent. This ratio suggests that for each dollar of pension benefit TRS owes to its members, it only has 79 cents to meet that liability. A ratio over 1.0 indicates it can cover all benefits. Ratios below one suggests the opposite. Ratios in the 90 percent range are considered strong. The American Academy of Actuaries suggests that pension funding objective should be 100 percent. That is, full funding: one dollar in assets for each dollar in liabilities.
Georgia’s TRS used to be much healthier. In 2006, it had a funding ratio close to 97 percent allowing it to be ranked amongst the best managed in the country. How did we drop down to its current low level?
The great recession of 2008 is one factor. But the stock market has rebounded since. The Dow Jones Industrial Average had hit a low of about 6,500 in March 2009. Today, the Dow stands at almost 21,200, a more than three-fold increase. The broader index of S&P 500 has shown similar improvements. By 2016, the markets had registered three-fold increases.
However, after losing nearly $8 billion in the great recession, TRS assets have grown from $42.9 billion in 2009 to $65.6 billion in 2016. This represents growth by a factor of 1.5, not the three-fold increases we have seen in the broader stock market.
TRS does not put all its assets in stocks. Wisely, it does use a balanced portfolio of stocks and bonds. This ratio has grown in recent years reaching over a 70 percent/30 percent split for a number of years, but falling back to 68 percent/32 percent in 2016. (TRS is allowed to allocate up to 75 percent in stocks and 25 percent in bonds.) This is one factor that needs scrutiny.
That is, for a fiduciary account, is TRS taking a riskier exposure to the equity market than is desirable? Is a more “conservative” allocation of 60/40 percent or even lower warranted? (TRS cherishes “conservatism.”) For a 70/30 balanced portfolio, TRS averaged just over 6 percent compounded annual growth from 2009 to 2016. This is not significantly better than what an individual investor with a passive bent could have obtained by simply buying a mutual fund with similar asset allocation.
In 2016, TRS paid over $15 million in personnel and administrative expenses and $38 million in investment fees and expenses. (Over $59 million in total, including commissions.) TRS portfolio managers are amongst the highest paid employees in the state. Legislators need to ask if the fund expenses are justified relative to fund performance?
A final point to consider is this. In 2003, TRS adopted an investment return of 7.5 percent to calculate its actuarial liabilities, well above its recent average annual growth rate. If a lower rate is assumed, it could have an adverse impact on the valuation of accrued liabilities and possibly distort the reported funding ratios.
Overall, the time has come for the Legislature to examine the fund’s management and its performance, investment fees and expenses, asset allocation strategies, and actuarial assumptions used to value accrued liabilities. Clearly, remedial actions are needed to put TRS on a stronger footing so it can meet its members’ pension obligations while not causing a growing burden on the taxpayers of Georgia.
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