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Despite slow year, state funds
solid for the long run

In for the Long Haul

2001 was a tough year for investors. The slowdown in the economy that started in late 2000 culminated with a plunge in October after the September 2001 terrorist attacks.

So, should state employees who pay into the Employees Retirement System of Texas (ERS) and the Teachers Retirement System (TRS) be concerned about their retirement investments? What about the funds invested for the Texas Tomorrow Fund, TexPool and the tobacco endowment funds? Officials for all of those funds say that despite a down year, the investments are solid and prepared to weather the storm.

According to ERS executive director Sheila Beckett, as of August 2001, the system's investments showed a loss of 6.9 percent. But Beckett says the loss is not a cause for concern.

"It's a defined-benefit plan," Beckett says. "An individual's retirement benefits are not dependent on investment performance." A person's benefit is based on a formula of the person's highest 36-month salary multiplied by their years of service times 2.3 percent, not how much the person has contributed to the system. Gains from investments are used to pay for benefits increases, which must be approved by the Legislature and the system's board of trustees.

"We remain fully funded even with disappointing returns," says Beckett. "We're here for the long term. In the long run, a single year of low or high returns will not have great impact."

TRS also bore the brunt of a down market. According to Howard Goldman, director of communications for TRS, as of June 30, 2001, the market value of the TRS fund was $81.7 billion, 5.7 percent less than the fund's value on June 30, 2000.

Like ERS, TRS is a defined-benefit pension plan. Participants receive benefits based on a formula, not contributions or investment performance, and regardless of the market, retirees receive their benefits.

"TRS's investment objectives are focused on funding pension liabilities over the long term," Goldman says. He notes that through most of the 1990s, "returns were exceptional, well over our long-term expectations." As a result, even with the recent losses, the pension trust fund is three times larger than it was in 1990.

No worries
The Texas Tomorrow Fund, TexPool and the tobacco endowment funds also experienced disappointing investment returns.

According to Andy Ruth, director of special programs for the Comptroller's office, for the fiscal year ending August 31, 2001, Texas Tomorrow Fund investments lost 1.8 percent, after earnings of 11.6 percent in 2000 and 13 percent in 1999. But participants purchase guaranteed contracts that are unaffected by fluctuations in investment performance.

Pool your money
TexPool and the tobacco endowment funds also are not in danger from the slow market. TexPool, a state-sponsored investment fund for local governments, invests funds conservatively, but enables investors to withdraw money within 24 hours without penalty if they need it in an emergency.

Susan Anderson, the chief investment officer for the Comptroller's office, says this kind of liquidity provides a safety net. If an investment begins to perform poorly, it can be sold quickly. The tobacco endowment fund, created in 1999 from the proceeds the state of Texas was awarded from a multi-billion dollar tobacco lawsuit, dropped 4.7 percent in the fiscal year ending August 31, 2001, but they are considered long-term investments.

"You're going to have up years and down years," says Anderson. "Typically, we look at these funds on a 10-year basis."

Suzanne Staton