Teachers and Their Retirement Problems

Public School Teachers are the Glengarry Leads

A majority of people struggle to prepare financially for their retirement, but public school teachers and employees face a particularly difficult set of circumstances.

I’m enough of a fiscally hard-assed finance guy to think that every public school teacher should self-fund his or her retirement to supplement their pension plan, which for people in my state is the Teachers Retirement System of Texas (TRS).  Unfortunately, there’s the grim reality facing many teachers about how hard this is to actually do. I learned a lot recently from my teacher friends about why that’s so.

My friend Dina Toland has worked as a public school teacher in Texas for 23 years and described the typical way she and her colleagues obtain their “retirement advice.”

First, a representative salesperson for an insurance or investment management company gets invited, for some unclear reason, to a faculty and staff meeting, where they have a captive audience from which they can collect email sales leads by offering raffles or some other minor incentive.

The salespeople then attempt to schedule one-on-one teacher meetings using these leads, at which the pitch usually involves scaring teachers about their insecure retirement and the need for certain specific investment products. Thus made anxious, teachers are often urged to invest in variable annuities, which I consider one of the four horsemen of your personal financial apocalypse because of their high fees, illiquidity, low returns, and generous sales commissions for these same salespeople.

TRSDina was convinced to buy into this mess when she was a young teacher just starting out. Ironically, the salesperson herself was so inexperienced that she convinced Dina and her cohort of similarly clueless young teachers to take out too much money from their paychecks, such that they all had trouble paying their bills in subsequent months. Besides taking too much money, they all bought into these terrible variable annuities. As Dina says, how would they have known any better?

This problem afflicting teacher retirement planning isn’t limited to Texas. The New York Times ran an excellent 6-part series last year with provocative and true headlines like “Think Your Retirement Plan is Bad? Talk To A Teacher” and “An Annuity for the Teacher – And the Broker” about precisely these difficulties, featuring public school teachers in Connecticut who were sold products with this combination of high fees, low returns, illiquidity, and hefty commissions for insurance salespeople.

My friend David Nungaray, in his 6th year of teaching and administration in public schools in Texas, has a similarly discouraging story.

Early in his career, a representative salesperson of an insurance company was invited to speak to new teachers like him, at which he was of course urged to purchase an annuity. He did, to my chagrin when I later learned what had happened. This year he resolved to open up his 403(b) employee-sponsored retirement account, the next big option for self-funding one’s retirement.

Helping my friend David set up his 403b account was anything but easy and straightforward. David is himself extremely competent. But we agree this would never have gotten done without both of us working hard to do it.  As a first step, David asked six of his colleagues in the public school system – chosen by David for their seeming prudence and likelihood to have a 403(b) account – if they had any advice for him. Only one of the six had ever signed up for a 403b account. Not an auspicious start. David then contacted his school district to look for help. Could David get any investment advice from his school district? No. The human resources department at his school district referred David to TCG Group, which administers all employees’ 403b plans for his school district, as well as many others in the state. The TCG Group website provides a list of 51 approved annuity and investment firms, with links to contact them.

“Shit Sandwich”

David had no idea which investment firm to pick. Could TCG Group help? No, that’s not their job. They are 403(b) plan administrators only.

As a side note, I tried for three days to have a substantive conversation with folks at TCG Group, for the purposes of this post. Let’s just say they were as helpful and open with me as they were with David.

The next step was to pick an investment firm and to open an account. I helped him do that. Having done that, he returned to TCG Group to give them instructions to have 403b contributions deducted from his paycheck. Of course, then he needed to select an investment, or series of investments, at his chosen investment firm. That’s easy for me to help him with, so I did.  But this hand-holding happened over the course of four weeks, with many barriers along the way. The barriers would have deterred a less determined employee, especially one without a friend willing to do it, in a non-conflicted way, for free.

Of course any of the investment firms could have “helped” him too, but he might have ended up with terrible annuity-like products totally inappropriate for the retirement account of a teacher still in his twenties. I’m all for self-funding and self-reliance as a theory, but I’ve become concerned about the reality of doing this well, for most teachers.

The stakes are high because most public school teachers in Texas – like those in many other states – can not count on Social Security in retirement, as 95 percent of school districts opt out of the federal system. So teachers fall back on the TRS and do little else.

If you are one of the over 1.5 million Texans who are members of the TRS, you should ask at least two big questions about your retirement. First, as my main safety net, is TRS financially strong? Second, will payments from TRS be enough to cover my needs in retirement, personally?

If you are not a member of the TRS, then as a citizen and taxpayer you should hope that state leadership is also asking important questions and having a good dialogue around these challenges and solutions. In a subsequent post I’ll talk about the finances of TRS, and that dialogue.


A version of this post ran in the San Antonio Express News and Houston Chronicle


Please see related post:


Public Policy Debate on Teachers Retirement in Texas (upcoming)


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Houston We’ve Got a (Pensions) Problem

danger_will_robinsonHouston’s three public pensions may not be in total distress today, but some of the instrument panels are beginning to flash orange.

One of the warning signs is the hit to the city’s credit-ratings earlier this year, as

Moody’s Investors Service downgraded the City of Houston’s debt on March 16 2016.

You might guess that the main problem with the City of Houston’s credit rating is the slowdown in the oil services business, and that’s certainly a short-term issue.

But Moody’s specifically cited large unfunded pension liabilities as one of the four main reasons to downgrade city debt to Aa3 and keep it on “negative outlook,” calling the liabilities “among the highest in the nation.” Lacking a plan to address the pensions, Moodys wrote in March, could lead to a further downgrade in the city’s bond rating.

moodys_houstonLet’s review some statistics on the pensions for firefighters (acronym: HFRRF), police officers (acronym: HPOPS), and municipal employees (acronym: HMEPS).

Things to monitor

Remember, the first two things to monitor, with respect to the health of a pension plan, are the funded ratio – roughly how much of future payments are already covered by investments – and years to amortization, otherwise known as the time needed to pay down debts. I’ve previously said that an 80 percent funded ratio is considered ok, although closer to 100 percent would be preferred. For years to amortization, a 15 to 20 year time frame seems manageable, while 40 years to infinity invites state monitoring and restrictions.

So what do we worry about the Houston plans in particular when we see the funded ratio and the years to amortization?

Here are the two measurables on the three Houston pension plans:

HFRRF – 86.6 percent funded ratio, 30 years amortization

HMEPS – 54 percent funded ratio, 32 years amortization

HPOPS – 79.8 percent funded ratio, 23 years amortization

Honestly, using just those measurements, only the HMEPS funded ratio makes me worried. If you’re not frightened by the first two measurements of funded ratio and amortization – and when I look at them I don’t personally get panicked – the next thing to monitor gets trickier.

You see, the firefighters’ and municipal workers’ plans assume an 8.5% annual return on investments, while the police plan assumes an 8% return. Not only do all three assumptions seem too high, but the first two plans are complete outliers. In a survey done by the National Association of State Retirement Administrators in early 2016, only 1 out of 127 plans assumed an 8.5% return. So, Houston firefighters and muni workers have an aggressive – actually my preferred word would be unrealistic – set of assumptions.

Last Fall, the Chairman of the HFRRF Todd Clark defended their outlier return assumptions in the Wall Street Journal, saying “We strongly believe, and past history shows, we can continue to achieve the 8.5% long term.” Clark resigned in July. HFRRF Executive Director Ralph Marsh declined to comment on my questions about the assumed return, or others posed about their pension fund.

houston_we_have_a_problemThe last 20 years’ average pension returns were 7.47 percent, according to the Wall Street Journal.

As a finance guy, I wish I could intuitively explain to the non-finance reader the uncomfortable tingly feeling in my toes that I get about that math. The effects of being wrong by just 1 percent, compounded over decades in a pension plan, are huge. We can see some of the scary implications from a presentation done by the Houston plans for the Texas legislature in June.

In that presentation, they showed that if you shift the return assumptions on Houston’s police and municipal employees down by 1 percent, suddenly the police pension plan only has a 54.6 percent funded ratio, while the municipal employees plan goes to a 49 percent funded ratio. So, like, only half the money needed to pay out retirees is currently available in the plans. Ugh. The instrument control panel not only shows blinking green lights turning into red lights, but sparks are starting to shoot out of the dials. Danger Will Robinson!

Now you start to get a sense for why Moodys downgraded the City of Houston in March, and why the Chairman of the Pension Review Board is trying to sound the alarm on Houston pensions.

City Budget Constraints

You see, the next big problem is that fixing pension shortfalls begin to eat into city budgets, a process already underway in Houston.

Josh McGee, who serves as both the Vice President of the Laura and John Arnold Foundation – a Houston think-tank focused on public finance, as well as the Chairman of the Texas Pension Review Board – points to a worrisome trend for Houston’s city budget.

houston_pensionIn 2001, required pension contributions made up just 6.7 percent of general fund revenue, or the amount of money in the city budget not otherwise allocated to specific purposes. By 2015, the required pension contributions have climbed to 19.2 percent of the general fund.  The trend here, tracked by McGee, has been steadily upward.

McGee compares Houston’s situation today with Chicago’s situation a decade ago. In Chicago, the comparable pension payment to the general fund rose from 19 percent to a stunning, and devastating, 54 percent today.

That means city leaders can’t decide to pay for stuff in a city without dedicating half their discretionary budget to fill in holes in pension plans – money already owed to workers, for work already performed. You have to rob Peter to pay Paul. Chicago is in a terrible bind today, and McGee openly worries Houston will follow down that path without a course correction.

So what happens if these plans stay in trouble? Realistically, political leaders don’t just say “Whoops” and send a shrugging emoji to pensioners. They especially don’t do this with politically sensitive pensioners like police, fire and city employees.

No. Instead, they fund the plan, and then taxes go up. Or they fund the plan, and other discretionary city services go way down.

The only other fix is to significantly reduce benefits for future employees.

Either way, residents previously blissfully unaware of such boring actuarial minutia as funded ratios, amortization schedules and actuarial unfunded liabilities unhappily begin to care, deeply and late, about such problems.


A version of this post ran in the San Antonio Express-News and the Houston Chronicle.


Please see related posts

The Dallas Police and Fire Pension Mess

Pension Plan Heuristics

The Big Four Texas Pensions



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Dallas Pension Plan – An Example of What Can Go Wrong

dallas_policeI’ve become a bit obsessed with public pensions this month.[1]

As a lesson in how pensions can go wrong, I began looking into the Dallas Police and Fire Pension System.

Dallas’ Police and Fire Pension ranks as the tenth largest in the state and easily qualifies as the most dire, according to the usual metrics of a public pension plan.

Public pensions can confound us through both mathematical as well as political complexity, but let me tell you in simplest terms the depths of the problems of the Dallas Police and Fire Pension System.

One measure of pension-plan financial health – the unfunded liability per member – marked the Dallas Police and Fire Pension system last year as the worst-funded pension in the entire state. “Unfunded liability per member” is a calculation of all the future payments owed to pensioners for past service, that isn’t covered by money in the plan, and then divided by the number of members in the plan. With a whopping $213,712 unfunded liability per member in 2015, Dallas’ pension is far worse than the next large-ish unfunded pension liability per member of $128,576, an unfortunate distinction claimed by the Houston Police Officer Pension Fund.[2]

But that was last year, and things have gotten a lot worse in Dallas.

Ten years ago, the fund reported an 89 percent “funded ratio” – which is a short-hand number for how much of future payouts are covered by invested assets. Healthy pension plans generally don’t have to have all future payments covered, but an 80 to 90 percent funded ratio range feels comfortable, and Dallas’ did.

After the departure of Executive Director Richard Tettamant in mid-2014, fund values in the pension began to drop precipitously. Sudden write-downs of the value of the real estate (31.7 percent) and private equity portfolios (20.2%) followed in 2015.

The FBI raided the offices of the fund’s real estate advisor CDK in April 2016. Meanwhile, the pension fund and CDK filed lawsuits against one another.

As Kelly Gottschalk, the Executive Director who took over in 2015 told me, “Everything that could go wrong with pensions has gone wrong with this pension.”

The funded ratio fell from 64 percent in 2014 to a recently updated 45 percent by mid-2016.

In simplest terms the 45 percent funded ratio means there’s only about half the money in the pension plan that there needs to be for retired police and firefighters.

The losses in investment assets form only part of the pension’s problem. An extremely generous retirement scheme begun in 1999 called a Deferred Retirement Option Plan (DROP) allowed officers of qualifying retirement age to continue to work full-time, while receiving guaranteed pension payments paid into a special account which earned a generous and guaranteed return. They essentially “double-dipped” on pension payments and salary. Some of these benefits are in the process of being rolled back, but the latest attempt to do so has resulted in further litigation. Naturally, nobody likes giving up a good employment deal that they’ve been promised.

How to solve a problem of this magnitude?

Gottschalk will present to the board this Thursday the years-long work of a subcommittee trying to puzzle this out. I don’t have a crystal ball into what she’ll propose, except we can guess the only available bailout methods are:

  1. Employees and the City of Dallas start putting in a lot more money every year
  2. The fund borrows more money
  3. Retirees get their benefits drastically cut

None of these will be fun for anyone. None of these will seem fair.

Up until now, Gottschalk says, the City of Dallas has always paid its full share to keep the fund on track financially.

To solve the hole now, she says, the pension is “roughly getting one half of what we need.”

And yet as Dallas City Councilman Philip Kingston, who sits on the pension’s board, told me, “that is politically an extremely difficult argument to sell. That’s going to go over like a lead balloon. I have consistently told my colleagues on the [Pension] board not to expect much.”

Ironically, within a month of being tragically reminded in Dallas of the dangers of being a uniformed officer, we’re about to see their financial bargain get a lot worse, one way or another.

Now, if you’re neither a police nor fire retiree, nor a Dallas taxpayer, why should you really care about Dallas’ failed pension plan? What’s the big deal?

Just this, in two steps. First, their public pension catastrophe could happen in your city or state. Next, if it does happen, taxpayers – one way or another – pick up the tab.

Public finance conundrum

Here’s the start of the classic problem that makes public pension-planning a nightmare, almost inevitably: Decisions made in any year – most importantly the bad decisions – don’t tend to show up as grievous errors until many years or possibly decades later. Fiscally prudent decisions, conversely, take years to “fix” pensions. Meanwhile, there’s a political negotiation going on today, naturally, in setting pension terms for public employees.

Dallas’ situation on the investment side was an unfortunate self-inflicted wound, but I think their broader struggles are symptomatic and shared by many public pensions.

Police, fire, teachers, municipal, and county employees want good benefits in their retirement. In fact, they rightly deserve strong consideration from political leaders as well as from taxpayers. I start with the view that they are all highly deserving of a comfortable retirement.

And yet, small decisions about how generous to be can compound into massive fiscal headaches in future years, long after most political office-holders have left their job. Small errors – or in the case of Dallas, large errors – in investment management can also compound into public liability nightmares over the years.

A few brave political leaders may understand the long-run problem, but they will be pulled in difficult directions by their constituents. Yes, leaders report to taxpayers generally, but specific pensioners can be awfully persuasive right now, this year, with their retirements at stake. Pension beneficiaries don’t have the big picture necessarily in mind, and they are hard to resist.

Ticking financial time-bombs

As a result, public pensions resemble little financial bombs planted underneath our local governments. A few people know they’re there – hidden, ticking – waiting. Pension plan actuaries – the math nerds hammering away like underground gnomes running their sophisticated models – know what’s buried underneath the public square. But who’s really listening to the tapping and ticking?

So these public pensions bombs wait until probably the worst possible moment in the city or state to suddenly rip a hole in our public finances.

This danger inherent in public pensions has no permanent fix. I’m just pointing out that eternal vigilance is not only the price of liberty but also a necessary component of public pensions. So do you want to join my little obsession and work to understand this stuff?

I plan to write a “pension explainer” in a follow-up post so you can know what to look for.


A version of this post ran in the San Antonio Express News.


Please sell related posts:

Public Pension Heuristics – An Explainer

The Big Four Texas Pensions

The Impending Houston Pension Problem



[1] I know, I know, I need better hobbies, and I can’t seem to care enough about Pokemon Go to get past Level Five. And seriously, you guys, public pensions are arguably as important to our future as finding Pikachu. Maybe more?

[2] To look up the data on public pensions in Texas, check out the useful Texas Transparency site.



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In Which I Praise An Outgoing Texas Politician

Editor’s Note: A version of this post appeared in the San Antonio Express News

In Praise of Susan Combs

susan_combsAs we elect a new crop of public officials in Texas this week let’s take a moment to appreciate an outgoing official, Susan Combs, Texas Comptroller of Public Accounts.

As Comptroller, Combs served as a combination tax collector, check writer, and fiscal scold for the state.

Praising an elected official for a job well done is a deeply unfashionable activity, especially for someone like me who’s in the habit of writing critically.

I typically perceive our leaders as flawed vessels powered by ambition and ideology, and that my job is to expose them as such. But I need to praise Susan Combs.

A friend of mine knowledgeable about State politics burst my Combs bubble a little bit last week, arguing that Combs too was fueled by ambition and ideology during her tenure in office.

So be it. She is human.

But I love what she did as Comptroller!

In my personal political theology, every time one department of government lights up the financial darkness of another part of government, an angel earns its wings.[1]

Let me give you some specific examples of how Combs worked for the angels.

Every time one branch of government sheds light on the finances of another part of government, an angel gets its wings
Every time one branch of government sheds light on the finances of another part of government, an angel gets its wings

Things I love about Susan Combs

Combs made state, county, city, and school financial data available and searchable in a way that I don’t recall seeing from any other state.

Combs’ signature move during her time in the Comptroller’s office was to open up information on public expenditure in Texas to the disinfecting light of day.

As her website biography boasts, she put all of her agency’s expenditures on the web in her fourth day of office.

See, that’s what I’m talking about! Normally by the fourth day at a job I’d still be fiddling with the stupid espresso maker, trying not to spill coffee grinds all over the counter again. But Combs posted all of her office expenses online for the world to see.

I love, specifically, her office’s www.TexasTransparency.org website, with databases and special reports on public debt and public taxes.

For the site, Combs’ office requested, compiled, organized and made searchable a myriad of financial data points on Texas finances.

I highlight two of my favorite databases below.


Comparing school building costs across major Texas cities

The cost of public school building construction

More than an ordinary citizen-taxpayer interest, I have a personal interest in the management of public schools in San Antonio, as my oldest daughter attends 4th Grade in San Antonio ISD.

We’ve loved her teachers for the past five years. We like her school community.

But let’s just say I have my doubts about SAISD leadership. I feel that there’s too much emphasis on real estate opportunities among some parts of SAISD’s leadership. Which makes me wonder about the following question:

Are school building costs high in San Antonio?

As private citizens, we have practically no chance of putting together enough comparative data from all over the state to study the cost of building in public schools

But Susan Combs’ office has the power to demand that data and make it available on the Texas Transparency website.


County Indebtedness Per Capita

Uh-oh San Antonio – You’re paying too much

Taxpayers of San Antonio may be interested to know that the cost of school construction is higher here (per square foot) than any other large metropolitan area in the state – higher than Houston, Dallas, Austin, the Rio Grande Valley and El Paso.

I find those statistics particularly troubling, given that real estate and labor costs are generally lower in San Antonio than many of those areas, such as Houston, Dallas, and Austin.

I’d love to hear a plausible explanation for why we’re paying more to build schools here compared with other cities.

County Indebtedness

What other kinds of information does Combs’ data provide?

Would you like to be able to compare the debt-per-person that counties have incurred?

Yup, that’s in a searchable database compiled by Comptroller Combs as well.

Uh-oh, Bexar County – You owe more

You may be interested to learn that the debt per person in Bexar County sticks out like a sore thumb. Our tax-supported debt per person is way higher than the next 5 closest counties in size: Harris County (Houston), Dallas County (Dallas), Tarrant County (Fort Worth), Travis County (Austin), and Collin County (Plano).

Why are we more heavily indebted per person in Bexar County than anywhere else?

By, like, a lot?

I don’t know. Let’s ask our elected officials.

In the meantime, please join me this week in a slow clap for Combs’ career in Austin. I’m impressed.


Please see related posts:


A review of SAISD President Ed Garza’s real estate deals

Ed Garza responds on contracting with VIA

Ed Garza responds on real estate

On SAISD Superintendent candidate Manuel Isquierdo – Do You Believe in Coincidences?


[1] I’ve often praised the yoeman’s work of Neil Barofsky, the original watchdog for TARP money, known by the Norse God – sounding acronym SIGTARP. He did an incredible job of shining light on the darkness of the 2008 mortgage crisis bank bailouts, all while employed as a special Congressionally-mandated investigator under the Treasury department, thereby somewhat restoring my faith in our government’s ability to self-criticize and improve in the future.




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