Message
From the
Chair

Retirees
in Action...

The Switch
to
Digital TV

Safety Tip
Put Your Keys
Beside Your Bed

Burial Plots
at a Discount

Beauty vs. the Beast

The U.S. is going through the worst economic crisis since the 1930s (Beast). While most members are continuing their well deserved and hard-earned retirement lifestyles (Beauty) without any special concern, some members have contacted us seeking assurance that their retirement income is secure.

In a recent news article, it was noted that in 2006 only about 18 percent of Americans were covered by a traditional defined benefit pension plan (Beauty). The 75,000-plus Teacher Retirement System (TRS) retirees who are collecting their pension and the 100,000-plus in-service members who are earning their pensions are in a much better financial position than those with no pensions. There is enough money in the reserves of the retirement system to pay every retiree her or his benefit for the rest of her or his life. It doesn’t matter if you live to be 100, as 143 of our current retirees already have: you’ll get that check for the rest of your life.

The basic formula of pension funding is that contributions plus investment earnings pay for benefits plus fund expenses. TRS fund expenses are kept to a minimum by economy of scale and careful management. Contributions are made by both the employee and the employer. Investment returns provide the rest of the money needed to pay the fund's obligations. The employer’s contributions are linked to the investment returns of the fund. When earnings are good, as they are most of the time, the employer’s contribution goes down. When earnings are poor, as they are now, the employer’s contributions go up. One of the city’s highest fiscal obligations is its contribution to the pension fund, and it always makes the contribution. The city continues even in these tough economic times (Beast) to make it required contributions (Beauty).

The last audited account balance of the Pension Fund, June 2008, was over $35.6 billion. This money is invested in a broadly diversified portfolio of investments, which includes domestic and international stocks; bonds of various kinds, such as government, corporate, mortgage-backed, enhanced-yield and Treasury Inflation Protected Securities (TIPS) bonds; Real Estate Investment Trust (REITS); private real estate; and private equity. These investments are made by highly regarded institutional money managers. The Teachers’ Retirement Board (TRB) retains independent consultants to help it select and monitor these investment managers. Such a broadly diversified portfolio is designed to protect against the volatility of the current economic situation.

As the value of some of the asset classes go down, others go up. While we have undergone losses in this current climate, the diversification of our portfolio has meant that the losses were not as great as in portfolios that are not as widely diversified.

I want to remind you of a protection that exists that I hope we never have to fall back on. There is a provision of the New York State Constitution that states that a pension benefit cannot be “diminished or impaired.” There never has been a time in New York City history when this has had to be tested. Even in the direst fiscal crises, like the one in the mid-1970s, not one pensioner missed even one check. Beauty conquered the Beast.

Tax-Deferred Annuities (TDA)

About 40,000 retirees have their TDA either annuitized or deferred. For many, this is the largest fiscal asset they own outside of their pension benefits. These accounts can be invested in six investment funds, known as the Passport Funds.

Two of the funds, the Fixed Return Fund and the Stable Value Fund, are not volatile. The Fixed Fund, which is co-invested with the Pension Fund (see above), is currently guaranteed to pay an 8¼ percent rate of return. The Stable Value Fund is not invested in stocks; it is invested in short-term interest-bearing accounts. Its recent returns are in the area of 4 percent per year.

The other four funds are more volatile and are more subject to the vagaries of the current economic situation. The funds are the Diversified Equity Fund, the International Equity Fund, the Inflation Protection Fund and the Socially Responsive Fund. These funds, while subject to the current market turmoil, are well-positioned to weather it. They are all managed by experienced investment professionals, who are monitored by the TRB and its consultants. All of these funds are broadly diversified and none of them invests more than a small amount of money in any of the companies you read about that are in trouble.

Returns in these funds may go up or down and nobody knows when. The Diversified Equity Fund (formerly known as Variable A) is 40 years old. In these 40 years, the return has been positive for 30 of them and in 10 of the years the return has been negative. There has not been a time in the past when the fund did not regain its losses.

Please rest assured that the UFT members of the Retirement Board, as well as other board members, TRS’s staff, the Comptroller’s office and TRS’s consultants, will continue to monitor the funds closely.

The Beauty of a defined benefit pension plan generating income for life is very comforting when the Beast of an economic crisis rears its ugly head.