Investment managers for the state’s teacher retirement fund received more than $8.2 million in bonus payments this year, more than double what top employees in every other state agency combined have received since 2007, a Dallas Morning News analysis has found.
The performance pay comes as 300,000 retired educators have gone a decade without a pension increase and as the state grapples with a huge budget shortfall that could cost tens of thousands of teachers their jobs. The bonuses went to 54 top employees who direct parts of the $100 billion fund.
Officials with the Teacher Retirement System of Texas say the incentive program helps attract and keep some of the top investment talent in the nation. They point out that the system’s portfolio was the top-performing large public investment fund in the nation last year and that the incentives are based on specific criteria and earned only by surpassing high benchmarks.
Critics question whether such bonuses are appropriate during a budget crisis—especially when the system’s investments haven’t returned to where they were before the stock market nosedive and recession, even though the funds have beaten benchmarks set by the system’s governing board.
Sen. Kevin Eltife, a Tyler Republican who serves on the Senate’s Business and Commerce, Economic Development, and Finance committees, said the Legislature should consider ending incentive pay and replacing it with competitive salaries.
“You can hire fund managers and people right now in this environment, pay them good salaries, be competitive with the private sector and I do not think it’s a requirement in this environment to pay incentive for these fund managers,” he said.
Eltife pointed out that basing so much pay on beating the market encourages managers to take risks for the highest potential returns—a questionable move with state pension funds.
“The whole issue goes back to the go-go days of the ‘90s—the roaring markets, the high leverage,” Eltife said. “I’m no longer interested in reaching out and getting the ultimate return on our money. I’m more interested in the safety of our money.”
R. David Kelly, a Dallas real estate investor who leads the Teacher Retirement System’s board, said the fund has rules that do not tolerate high risk and maintains a diversified and balanced portfolio that deals in real estate, equities, bonds and commodities—not just stocks.
Fund managers receive lower salaries than they could get from private firms, so the incentives are needed to keep talented staffers, who exceeded targets by $2.3 billion last year, Kelly said.
“If we don’t pay out incentive compensation when you had clearly superlative performance, it sends a bad message and it causes people to ask just how big a discount are they willing to work for,” he said.
Texas is one of several states giving millions in bonuses even while slashing budgets for education and health care.
“I can’t justify it,” said Rep. Sylvester Turner, a Houston Democrat who is vice chairman of the House Appropriations Committee. “I don’t care how well things have performed in their investment portfolio. Anyone would be hard-pressed to justify those types of bonuses, at this particular time, in this particular state.”
Still down for decade
The annual return on the retirement system’s investments increased substantially in 2010, the first time since 2008 that it made gains. But it was not enough to make up for losses in the past several years.
The market value of the system’s investments dropped from more than $111 billion in 2007 to $87.7 billion in 2008. While billions disappeared, the fund still outperformed its benchmarks because the system lost much less than comparable investors, officials say.
In 2008 and 2009, the two years the fund operated at a loss, managers still earned bonuses of $2.2 million and $4.3 million, respectively. Those payments were deferred until the positive returns of 2010 and are part of the $8.2 million in incentive checks written in January.
The board authorized an additional $1.5 million in 2010 bonuses, which will be paid out if 2011 continues to show a positive return.
Dean Baker, co-director of the Center for Economic and Policy Research, a liberal Washington-based think tank, said it’s hard to justify handing out bonuses after just a year of positive returns.
“If you’re not punishing them for failing to miss the dip—most people did, being fair—they didn’t cause the stock market to rebound,” he said. “You had to almost be a moron not to have good returns last year.”
Baker suggested such bonuses can encourage state employees to take risks they shouldn’t. “If it pays off, they’re golden,” he said. “If it doesn’t pay off, then I don’t think they fire people very often.”
Ann Fuelberg, executive director of the Employees Retirement System of Texas, which handles pensions for state workers outside of education, said that while the risks aren’t the same as in the private sector, her employees have performance standards and metrics that they have to meet.
“And remember, the state has at-will employment, so there is not a contract,” she said.
The teacher retirement fund’s bonuses are based on benchmarks tied to a mixture of funds, and managers must beat annual and three-year performance expectations.
When board members unanimously approved the bonus payout in December, they noted that teachers haven’t received benefit increases. The multimillion-dollar incentive pay “is going to create some probably stinging headlines,” member Charlotte Renee Clifton of Snyder said then.
But the best things for retired teachers, she said, “is to ensure we have a rock-solid investment team.”
Board member Robert Gauntt of Houston said the bonus money cost each teacher in the program $7—well worth it, he said, because the earned returns for the fund worked out to $1,500 per retiree.
Still, as of the end of last year, the system’s investments has fallen short of its own goal of 8 percent returns over 10 years.
Bonuses are paid out of gains from investment income, not what the fund receives from working teachers and from state revenue.
Topping the list of retirement system bonuses paid this year was Thomas “Britt” Harris, the agency’s chief investment officer, who got $565,792 on top of his $480,000 annual salary. The agency’s investment fund director, Chi Chai, added $521,512 to his salary of $300,000.
And 32 other investment fund directors, portfolio managers and traders got six-figure bonuses in January, ranging from just over $100,000 to more than $300,000.
Harris was the only retirement system executive to get a six-figure bonus payment in 2010—$108,000. Harris, whose mother is a retired Texas teacher, waived a $168,000 bonus payment in 2009 after the market tanked.
Tim Lee, executive director of the Texas Retired Teachers Association, said his members are concerned about contracts that allow for such bonuses, particularly since benefits for teachers have been stagnant.
Lee said he respects fund managers and appreciates the work they do, but the incentives leave him and others with a feeling of “almost, maybe disgust.”
He noted that the fund is still considered “actuarially unsound,” meaning that with its current assets, the fund could pay only 81.2-cents of each dollar owed in benefits over the next 30 years.
Retired teachers cannot get a boost in benefits until the fund is deemed actuarially sound.
“When you look at the performance of the Teacher Retirement System, it’s been good,” Lee said. “Has it been outstandingly better than anybody else? That would be a stretch.”
House Pensions and Investments Committee Chairwoman Vicki Truitt, R-Keller, said the fund is bouncing back quickly and could be sound in the next few years.
She said she is not concerned with the incentives because they have helped produce the strong results of the past year.
“We want the best advice we can get and to ensure the best returns for our investments,” Truitt said. “You get what you pay for.”
In all, teacher retirement system officials have received almost $9 million of the nearly $13 million in bonuses paid to top state employees from 2007 through early 2011. The News’ analysis examined bonuses for executives and those in the five top pay grades.
The only comparable incentive compensation has been in the University of Texas Investment Management Co. That fund awarded $1.15 million to Bruce Zimmerman, its chief executive and chief investment officer, and almost $4 million to other employees late last year.
The UT fund is privately administered and was not included in The News’ analysis.
Half of Zimmerman’s bonus, and about a third of the employees’ bonuses were deferred and tied to performance over the next three years.
The Treasury Safekeeping Trust Co., which manages and invests funds for several state agencies, has handed out more than $1.2 million in bonuses since 2007—most of that in the last two years.
The Texas Education Agency has distributed more than $573,000 in bonuses since 2007, the vast majority in 2010. And bonuses for workers at the Employees Retirement System of Texas totaled just shy of $355,000, with the smallest annual payouts in 2010 and 2011. That fund’s assets are about one-fifth the size of the teachers’ pension fund.
Executives with the General Land Office got $167,755 in 2009, all listed as one-time merits bonuses. And in 2008, employees of the attorney general received about $203,000 in bonuses.
But of the top 100 bonus payments granted throughout state government since 2007, two-thirds went to Teacher Retirement System employees. The trust company was next, with 21 of the top bonuses.
The Employees Retirement System, the fund for retired state employees, does not pay “incentive compensation” unless there is a positive return on the trust fund and employees have demonstrated that they’ve actively managed their responsibilities.
“And they have to beat our policy benchmark,” Fuelberg said. For example, in fiscal year 2010, she said, the fund had a return of 6.65 percent, but the policy benchmark was 6.8 percent, “so people can’t earn incentive compensation.”
Fuelberg noted, however, that some organizations pay out bonuses even when they don’t see a positive return. “If, say, you had a return of negative 1 percent, but the market went down 3 percent, because of the investment expertise ... you didn’t lose more money, and so you’re adding value to the fund.”
As at the teacher retirement fund, employees are assessed on 1-year performance, but also over a three-year cycle.
“Even though our incentive compensation is relatively small compared to the industry, paying it out over time gives people incentive to remain on the payroll, to remain at the agency,” Fuelberg said. “You have to be on the payroll to get it.”