Perry's handling of Texas pension, health care funds is questioned

The Fort Worth Star-TelegramOctober 3, 2011 

Gov. Rick Perry is making headlines with his attacks on Social Security and Medicare, blasting their fiscal stability, likening them to Ponzi schemes and calling them a "monstrous lie to our kids."

But the tables are being turned on the Republican presidential contender as scrutiny increases of his handling of Texas' public pension funds and the $1 billion healthcare fund for Texas teachers.

Those public pensions have a combined unfunded liability of $41 billion, and a half-dozen funds, including the state's two largest, have promised benefits that they will never be able to pay under current financing models, according to records compiled by the Texas Pension Review Board.

What's more, the $1 billion supplemental healthcare fund for Texas teachers is predicted to go bankrupt by 2014.

Critics say Perry has not made a priority of improving the solvency of the funds. Instead, he removed a state official who was alerting the public to the growing obligations and appointed to the board of the state's largest pension his campaign donors and other political allies. The governor also pushed controversial investments.

"You shouldn't play politics with other people's retirement," former Texas Pension Review Board Chairman Shad Rowe said in a recent interview.

Perry says Texas pension funds are in better shape than most public pensions nationwide. State law sets operational standards for such systems as the Teacher Retirement System of Texas, said Lucy Nashed, a Perry spokeswoman.

The governor did not answer a question from the Star-Telegram about recommendations to improve state pensions' financial outlooks.

Texas is better off because the state clamped down on cost-of-living adjustments and unsustainable benefit structures for pensions of state workers and teachers, said Craig Hester, vice chairman of the board of the Employees Retirement System of Texas, the state's second-largest public pension fund.

"The governor's absolutely correct in that," Hester said. "The Legislature has been good, and I think these [pension] boards have been good about doing what we can to protect the liability side of the balance sheet."

Accusations of political meddling have centered on the board of the $111 billion Teacher Retirement System, the state's largest public pension system, with more than 1 million active and retired members.

At the TRS, the governor appoints three board members who are investment professionals and chooses the other six members from among slates submitted by groups including the State Board of Education, active TRS members, retirees and public higher education officials.

Nashed said the governor selects members based on qualifications and desire to serve. Keith Brainard, director of research for the National Association of State Retirement Administrators, said Perry's appointments have been solid.

Critics say the governor's appointments reflected his political agenda.

"The governor tried several times to get control of the board," said Linus Wright, an undersecretary of education in the Reagan administration and former Dallas schools superintendent.

Wright, who served on the board for 12 years, remembers when the governor pushed to have the TRS invest in state toll roads. The word was that an official from the governor's office tried to "strong-arm" TRS staff members to support risky deals involving Trans-Texas Corridor infrastructure projects.

"I had a real problem with that," said Bill Barnes, Fort Worth chairman of the 20-member legislative committee for the Texas Retired Teachers Association. "I don't think toll roads make the best investments."

Wright said the 2008 effort was defeated, although others say deals related to toll roads were later done in the guise of real estate investments.

A year later, a TRS employee said, millions of dollars in investments favored by Perry appointees had been approved. The whistle-blower said "political influences" had marred the decisions. A second TRS employee independently raised concerns.

An outside legal firm was chosen to examine the allegations. Its investigation uncovered no definitive evidence that any trustee improperly influenced investment decisions. But the credibility of the investigation was called into question: It was conducted by a former SEC commissioner whose law firm, some legislators said, could have had conflicts of interest because the firm may have had the same clients that were seeking TRS business.

Then, the TRS lost millions on derivatives investments, and a teachers group said Perry's fingerprints were all over the deals. The group sued the TRS, but a judge dismissed the suit in July 2009.

Moves into alternative investments such as hedge funds and private equity were among teachers' concerns. In 2004, the TRS had committed more than $3.3 billion to such investments. Today, almost one-fourth of its portfolio is dedicated to alternatives.

Among those pushing early moves into the investments was Perry appointee and Houston investor Jim Lee, then chairman of the TRS board.

Teachers groups again were distrustful and felt Lee was too heavily influenced by the governor, Wright said.

Lee resigned in January 2009 after questions were raised about $100,000 in gambling debts at a Las Vegas hotel casino. He said publicly at the time that he was leaving to start a business.

Lee did not respond to repeated requests for comment.

Perry immediately appointed Wright chairman. His appointment calmed choppy waters, and some teachers said they felt they had an advocate.

But less than a year later, Perry replaced Wright with R. David Kelly, a Dallas real estate investor.

"I was disappointed," Barnes said of Wright's removal. "He represented us well."

Both Kelly and Lee have been on finance teams for Perry's re-election campaigns; Lee is one of Perry's statewide campaign finance chairmen. The governor recently appointed Lee to the Texas Higher Education Coordinating Board.

Kelly could not be reached for comment.

Wright said he felt the governor had yanked him as chairman because of his longtime support of TRS Executive Director Ronnie Jung.

"He has been wanting to eliminate Ronnie Jung as executive director five or six years now," Wright said. "He felt Ronnie was in the way of blocking his recommendations."

But Wright said Perry's influence seldom held sway. "The rest of the board has always been able to vote [Perry appointees] down," he said.

Also in 2009, retired teachers, fed up with the political board battles and a decade without cost-of-living adjustments, pushed for legislation to add another retiree to the TRS board. But the governor vetoed House Bill 2656, saying it would "dilute" the board's financial expertise.

The governor disappointed retired educators again during the 2011 legislative session. Some blame him for not doing enough to keep their supplemental healthcare fund in the black.

More than 250,000 retired teachers participate in TRS-Care, a $1.3 billion, pay-as-you-go trust fund managed by the TRS. It is expected to use up its $900 million cash reserve this coming year. TRS-Care could be in the red by more than $580 million by 2014, "worst-case" projections show.

"It would have been best if we could have maintained full funding for this plan if we would have had gubernatorial support on that issue," Retired Teachers Association Executive Director Tim Lee said.This year, the TRS board replaced Jung. The new leader, Brian Guthrie, was a Perry budget aide.

The governor also appoints seven of the nine members to the state's pension overseer, the Texas Pension Review Board, which keeps data for 188 defined-benefit pension systems with about $200 billion in assets. The board is authorized only to alert pensions to problems and has no enforcement authority.

Rowe, a Dallas money manager first appointed to the board in 1997, worked to create greater accountability and transparency in public pensions.

He was first appointed chairman by Gov. George W. Bush in 1999. Perry reappointed him in 2004.

As chairman, Rowe criticized pensions that were late in filing financial reports and scolded those that used what he called "overly aggressive" assumed rates of return that gave a false impression of their finances.

Concerned about unfunded liabilities, Rowe told the public that pension systems were "a ticking time bomb." He pushed the board to create an "alarm system" that could pinpoint when systems were veering into trouble.

Rowe also criticized the TRS' foray into hedge funds and alternative investments, saying that they lacked transparency and that most boards would be ill-equipped to unravel their complexity.

"I just don't think you should be making wild bets with other people's money," he said.

With lobbying from Rowe and the help of state Sen. Steve Ogden, R-Bryan, the review board got more money to hire staff members, including an actuary to analyze pensions' underfunding status, said Chris Hanson, the agency's executive director.

In 2007, Rowe called on the attorney general's office to help examine the Employees' Retirement Fund of Fort Worth after a city auditor's report showed several problems, including excessive fees and employees spiking their pensions by loading up on overtime in their final years of work.

Perry removed Rowe as chairman in June 2008, a year before his term was to expire. Rowe left the board in 2009 and was not reappointed.

Perry spokeswoman Allison Castle said the governor thinks board leaders should pursue the best interests of the state "and not pursue their own personal agenda." Castle did not elaborate.

In a Sept. 26 e-mail to the Star-Telegram, Nashed wrote that Rowe was replaced because his term had expired, "as is routine."

This report includes material from the Star-Telegram archives.

To read more, visit www.star-telegram.com

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