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TRS Responds to "Death Spiral" Comments
In response to my last comment on whether pensions are the next AIG,
Dave Urbanek, Public Information Officer at the Teachers’ Retirement
System of the State of Illinois (TRS), sent me this message:
Please remove your post of Tyler Durden’s inaccurate analysis of the Illinois Teachers’ Retirement System. It is not excellent. It is wrong.
TRS is not in a death spiral. We’ll still be operating and paying pensions for years to come.
We could potentially
sell $3 billion in assets if the Illinois General Assembly does not
come up with its annual contribution to TRS. The state owes us $2.35
billion. Two other state pension systems are also selling assets until
the state makes its payments to them. That is the only reason we are
selling assets.
We are not selling assets
because we are on the risky side of any investments, as Mr. Durden
claims. Here are the facts: We could potentially sell $3 billion in
assets. Last year our investment income totaled $4.6 billion – a 13
percent return. We did not lose money. We have $33 billion in total
assets. We will pay $4.1 billion in pensions and benefits during the
current fiscal year. Do the math. We are not in a death spiral.
What
Mr. Durden doesn’t say – and won’t because it ruins his story – is
that TRS sold $1.3 billion in assets last year for the same reason: The
General Assembly hadn’t yet come up with its annual contribution. The
state ultimately sold bonds and made the payment, and we not only got
our money back from the assets we sold but did not have to sell any
further assets.
Repeating Mr. Durden’s incorrect rants on your blog is highly irresponsible.
I
thank Mr. Urbanek for his response and I am glad TRS is not in a
"death spiral". I never claimed they were, just that they're forced to
liquidate stocks at the worst possible time and are taking riskier bets
to cover their shortfall. In particular, did TRS sell billions of
derivatives (mostly CDS) to bet on a rising market/ collapsing spreads
(aka the AIG trade) and are they still betting on a drop in Treasuries (rise in yields)?
What
remains to be seen is how TRS and other mature public pension plans
suffering from ever widening deficits will respond to long-term
structural issues plaguing the pension industry. Tough choices lie
ahead, and there are no simple solutions to the pension crisis.
I will update this comment if further information is provided by TRS. You can also click here to get more information on TRS's investments and click here to access their publications, including their latest comprehensive annual report.
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+1, my exact thoughts. The fact this clown doesn't get that, affirms TD's original point even further.
I think I need to jump back in here.
The key point is: "Why did TRS have to sell assets to make pension payments?"
The answer, which TRS provided, was that "The State did not make its pension contributions on time", but then went on to state "But when the State sold bonds, it then caught back up with its contributions".
BINGO !
When a bankrupt entity has to BORROW to make payments to a pension fund, it is NOT "caught up". The problem has merely been kicked down the road for a time, until either the taxpayers revolt or the state becomes completely insolvent and can no longer borrow to "fund" pension contributions.
I agree that TD's piece did not touch on that particular aspect of the problem, but if the TRS is indeed in a death spiral, that is the proximate cause.
When, not if, the state of Illinois loses its access to the credit markets, TRS will collapse like the soggy house of cards it is.
I look forward to hearing more from LK on this.
You comprehended errantly the scope of Tyler's rant, while Urbanek did not: TRS is not as Tyler argued "in a death spiral", but perhaps outside the scope of Tyler's rant IL is insolvent. Death Spiral means forced liquidation due to margin calls, such that the selling increases the margin calls; a very good example of "death spiral" is Williams Sonoma founder Lester's liquidation of virtually all his company stock, where his selling drove the stock down over 60% increasing thereby the margin call.
I'll answer for them, with, "all of it". TRS is currently busy eating their gluestick, but I'm sure they'll get back to you after nap time.
Leo.....
Fuck 'em. Keep calling it like it is. Let them work it out as they spiral out of control. Enron wasn't in a death sprial either....until they were. Math is math.....
Excellent is debatable. Wrong? Please prove. Your crappy arguments below don't really help, but rather make me lean towards the fact they are correct.
Years? Like 2? What percentage of the pensions? From whose coffers?
I guess the state owing you money is awesome, kind of like a rainy day fund, too bad by the time they get around to paying you that $2.35 billion might buy a loaf of bread. However, other state pensions doing the same thing makes me feel much better about it. But if selling assets is the fix, why don't you just go ahead and sell them all? And how much is the state going to owe you this year? And where are they going to get the money again?
I'm real bad at math, but if you have $33 billion in total assets now. And you made a 13% return last year which was 4.6 billion, that means last year you had 35.45 billion. So looks like you sold assets last year, and are going to this year. Maybe you didn't lose money, but sure looks like you are liquidating. Nothing to see here.
Right so if the General Assembly did come up with it's annual contribution, why in the hell do you have billions less in assets than last year? So the state borrowed money and that made it all better? And if you didn't have to sell any "Further" assets, where the hell did they go, and why the hell did you have to sell assets in the first place if you made 4.6 billion and only had to pay out 4.1 billion. What am I missing?
Yes responsibility is exactly what you should be lecturing on.
Good post. Notice he stated TRS would pay out $4.1 billion in benefits with $4.6 billion revenue...how much do they pay in maintenance costs on these assets? What about salaries, investment management fees (since they have 60 firms handling their investments) and rental payments, as well as any other typical business costs?
TRS could be hemorrhaging money when other factors are added to the expenditure side of the ledger.
"We have $33 billion in total assets. We will pay $4.1 billion in pensions and benefits during the current fiscal year. Do the math."
OK, you have to pay out approx 1/8 (12%) of your total assets every year to satisfy the pension demands. Now this is a rather back-of-the-napkin analysis, but won't you have to make at least 12% ROI just to tread water? This while the Dow has made 0% since Jan 1st this year?
hmmm (doing math)...
Had to sell assets to cover payouts...
Fewer assets, lower potential returns...
Likely have to sell more assets next year...
lower potential returns
Could someone define Death Spiral to me?
"Inconceivable!"
"I don't think that word means what you think it means."
I STRONGLY object on the grounds that it's DEVESTATING to my arguement!!!!
One Hindenburger with cheese please! With a large order of curly DEATH SPIRAL fries Leo! And make it snappy dammit!
As of March 31, 2010:
U.S. Equities $10,277 For reference, March 31 SPX was at 1174, trading at 1050 today. 11% drop.
International Equities $6,853 For reference, March 31 Stoxx Global 1800 was at 221, trading at 210 today. 5% drop.
Fixed Income $5,915
Real Return $3,121
Real Estate $3,239
Private Equity $2,792
Absolute Return $1,225
Short-term Investments $301
Total Fund $33,723
Balance at March 31, 2010: $4,408,364,580
So, just in their top 2 categories, they likely lost about $1.5 billion since the end of 1Q.
Dear: Teechurz
The Compyooterz Ate Yoor Seed COrn
Sorry
From: My Mom
PS Everything Is OK, OK? OK. :*)
DEATH SPIRAL DEATH SPIRAL DEATH SPIRAL DEATH SPIRAL DEATH SPIRAL DEATH SPIRAL DEATH SPIRAL DEATH SPIRAL DEATH SPIRAL
You hear that Google? DEATH SPIRAL!
Let's slow down, take a deep breath and look at this like mature, grown up Mature Optimists (giggle).
Most large public plans tend to be underfunded, the trustees of which are by and large public appointees with backgrounds other than that of investments, and the iinvestment boards thereof political captives of their own public administration financial/social sub-culture.
So, why in the world would anybody suspect at the least, that there could be any problems at all in the land of financing overly-generous employee benefits (both pension and health) in hostile economic environments.
There appear to be amongst us deniers that all is well in heaven and upon earth who in the words of Mr. Gibbs, likely are in serious need not only of drug testing, but robust 12 Step Programs.
Quitcher Bitchin'. All's well that ends in hell.
As with all these pension funds, I look at the returns expressed in that table and think:
Why? o! why? are you not indexing your stock and bond allocation, firing all the humans and letting the computers run it for 5bp per year?
Mr. Urbanek,
Your financial reporting is pure fantasy. Good luck trying to get the hand job from the Governor. He may have run out of KY.
He escaped from Kentucky? My grandpappy did that, too! Managed to quit monshinin' and got an honest job managin' the airport at Mena, Arkansas.
Of course no mention of the plan being underfunded by 61%. The TRS philosophy: The faster you fall behind, the more time you have to catch-up....
It it just me, or is anyone else just plain amused by watching TRS get after Leo for bringing up bad news.
Good post.
I actually find it ironic, but in a good way.
not just you. lol
Urbanek could have picked on Tyler directly. Maybe this is a veiled attempt by Urbanek to sneer at Chinese Solars? </sarcasm>
Project Mayhem, bitchez.
These balls are ice cold.
<ahem>
Just one comment - mark to market not just your dreams, then maybe we would take Mr.Urbanek seriously. Selling winners and keeping losers at book value is not the best way to calm doubters.
Selling winners and keeping losers at book value is not the best way to calm doubters.
+1,000
Ah, yes, the Bear Stearns and Lehman defense, just days before BOOM!
Why, I believe every word that a broke state moving money from right pocket to left pocket with an IOU in the right pocket, then moving the money from the left to the right and the IOU going from right to left and...Who's On First?
Well, o.k., so in 2009 "1.3 Billion," and now 2010 the state owes you "2.3 Billion..." So then what about 2011? 4 Billion? What about all of the other shit the state is supposed to pay for, and not to mention, as was the whole point of the article, the fact that you liquidating your crap positions will send economic shocks throughout the system.
For once, just once, I mean, I would give my left nut for this, I want some "high up" government stooge to just come out and say, "We screwed you guys...screwed you with a thorny spinning dildo that goes by the name of 'Broken Promises', but now you got two choices, you can either hate us for it, or you can stitch up your ripped a-hole, put some ice on it, and fix this filthy mess."
You lose TRS.
I've never seen austerity described so eloquently.
never trust any government, you should know better.
http://covert2.wordpress.com
I love looking at return histories like this - having worked at an endowment for 26 years. They basically have added no meaningful value over the last ten years versus the benchmark +3.1% vs. 3.0%. Their private equity investments are the only sector which has added value - done really well. They really suck over the last five, and it looks like they managed to get into absolute return/hedge funds just in time for 2009. Ouch. The good news is the benchmark for those two strategies will be going down, as CPI + 5%, will be 5%, and Treasuries +4%, will be 4%.
Illinois, I hope you are satisfied with your .1% annual outperformance, for the money you pay these guys, and please pay your private guys more.
"I thank Mr. Urbanek for his response and I am glad TRS is not in a "death spiral"."
Obtain the nuts to retract that statement and state was is glaringly obvious. They are, in fact, in a death spiral.
"The state owes us $2.35 billion."
"We could potentially sell $3 billion in assets."
"We will pay $4.1 billion in pensions and benefits during the current fiscal year."
"Do the math."
You know, I'd personally not brag that someone owes me $2.35 billion and doesn't have the capacity to actually pay it. OK, my cousin just called and said that he'll pay me $1mil next week. So I'm really rich, right? Oh, he hasn't got a job, but he'll work this out, he's a genius. So, can I get a loan here for my peeps? I'm good for it next week.
This is not a death spiral, its a death plummet. Straight line to H*LL
He keeps talking about contributions to come from the general assembly......
Sorry but you are on your own for a couple, err many years.
Contributions to come from the general assembly = FUMES
The Fed, the states and all the public pensions can open a futures market trading in FUMES...
Virtual currency Nirvana...
Urbanek states that they made $4.6 billion in investment income while paying out $4.1 billion in benefits. So, if you have a $500 million surplus, why would they have to sell anything at all, regardless of whether or not the state made its payment? (which it has to borrow? too sweet!)
Sounds like their "income" isn't really any income at all, but rather some mark to fantasy accounting fiction.
Urbanek better hope that the PPT isn't on vacation the day he needs to liquidate.
Both the State and the TRS are reorganizing as Bank Holding Companies, so they can have direct access to the Fed's discount window, and they can sell all their assets to Ben and Timmah at the full mark-to-fantasy price. As a bonus, the Feds will own 80% of IL.
See, no problem! We can pay pensions for years!
Wow, stirring up a hornet's nest. I don't think he really refuted anything at all, and kept repeating the same quasi-argument over again.
Me thinks you doth protest too much...
High pension payouts to retirees will need to be adjusted down. Any bets on that happening?
David Crane of the WSJ reports, Dow 28,000,000: The Unbelievable Expectations of California's Pension System:
In other words, the pols borrowed on behalf of the sheeple and turned it over to the pension fund. What happens when those bonds come due?
The chin out rebuttal is the Chicago way
As I said in the other thread, I don't see how it's material why they're liquidating. 'Oh, the big pocket has a hole in it, but there's still plenty of money in *this* smaller pocket, so we might have to use some of it while we wait to be refilled from the bigger pocket.'
All that matters is, believing that Illinois is a dead state walking, traders can look at their larger leveraged positions and lean on them, wait for them to puke. That's the death spiral. The claim that it's not trading losses doesn't affect that outcome.
No rumor is confirmed true until officially denied....confirmed!
So, TRS is expecting the state to repay them -- I expect rain to be wet, but there's no clouds in the sky today!
Word.
Beat me to it. Only the terms were disputed, premise is the same.
Who is Illinois fooling, Jimmy Hoffa?