Be Alerted to Updates to This Page

Subscribe to the Inside Line

99% of these updates are originally sent to Inside Line subscribers. If you aren't receiving the Inside Line and would like to, please click here.

Legislative Updates

Legislative Update No. 110, Session 80
By Tim Lee, Executive DirectorPrinter Friendly ||| Print as PDF

October 9, 2008

Opinion Plentiful on New TRS Fiduciary Counsel

State Legislators and TRS Representatives Weigh In

No question that there have been many controversial decisions made at the TRS pension fund over the past few months. The mood of many TRS retirees right now is uneasiness and an intensified scrutiny on how the pension trust fund decision makers are working to protect the fund’s assets during these challenging times.

One of the decisions that has garnered comment from many sources including TRTA, the active educator organizations, state legislative officials, state and national media is the hiring of new fiduciary counsel Roel Campos.

Former SEC commissioner, Mr. Campos and his law firm were hired by the TRS Board in July of 2008. The decision to hire Mr. Campos is controversial for several reasons (depending on who you ask or what you read), but can be summarized by the following:

The TRS Board of Trustees cast several split votes before finally choosing Mr. Campos and his firm Cooley, Godward, and Kronish.
Mr. Campos and his law firm are criticized for not having sufficient experience advising public pension plan board of trustees on fiduciary issues as they have no other public pension fund clients. Until TRS entered into a relationship with Campos and Cooley, Godward and Kronish they had exactly zero public pension plan clients, now they represent the 6th largest public pension plan in the country.
Mr. Campos and his firm are often sited by numerous legislators, including Senator Robert Duncan, as not being able to render legal advise without first evaluating their own potential conflict of interest. This is due to the number of private funds that Cooley, Godward and Kronish already represent.
TRTA members and many others question why any legal advisor or person connected to the TRS pension fund could cost as much as $750 per hour (as many TRTA members remember, this is the reduced rate!).
Some are questioning Mr. Campos's involvement on the SEC and the decisions that were made by his fellow commissioners and him that may have allowed for the questionable lending or business practices that are being blamed for today's spiraling marketing conditions.
TRTA members want to know what reasons were really sufficient enough to change direction from the previous fiduciary counsel with dozens of public pension fund clients and years of experience to the new firm.

TRTA members are very concerned about these reports and questions being raised. As additional background information for TRTA members on this issue, several web site news sources are provided below for your additional reading.

Legislators Speak Out

As mentioned above, State Senator Robert Duncan is a vocal advocate for learning more about why TRS decided to end their relationship with their previous fiduciary counsel and why Mr. Campos ended up getting the job, especially at a substantially higher cost than the previous firm.

Senator Duncan is not the only legislator asking questions about this issue. In a letter dated October 3, 2008, State Representative Mike Villarreal asked the TRS Board to respond to his questions about this recent transition. A copy of Representative Villarreal's letter is provided for your review.

Important Letters for Your Information

The Teacher Retirement System Board of Trustees Chairman James Lee and Mr. Roel Campos have both responded to these questions with their own response. A copy of those letters are also provided for your review.

These uncertain times have made many TRS retirees and active employees uneasy about the state of their public pension plan. TRS has had a tremendous track record over the past decade of working to protect the pension fund through a solid investment strategy, working with the Texas Legislature to provide timely and accurate data on the fund’s financial condition or investment strategies, and working with TRTA and other constituent groups in a way that has informed and educated their members on TRS happenings.

TRS seems to be going through some very challenging times and the down market is not helping calm the concerns being issued by TRTA members and other interested individuals, as well. Speculation over politically motivated toll road legislation, the hiring of a new deputy director that has not yet had a chance to prove himself as a TRS employee but one who has been criticized for being a former employee under Governor Perry, other issues such as divestiture, overall pension fund asset allocation with the new TRS investment structure, and many other issues may prove to be difficult hurdles for the TRS Board to overcome or explain. The most significant question being asked could be why all of these changes all right now. Perhaps as important a question may be what other major shifts are the TRS Trustees considering (including investment policy changes or other controversial topics).

TRTA does not have the answers to all these questions, but these issues are being pursued with state legislators, TRS representatives, and other state decision makers. TRTA is your voice in the Texas Legislature and with the TRS Board. We hear your concerns and are taking them to the appropriate sources. Answering these questions and reassuring our members that their pension plan is safe and is being managed in the best interests of the TRS members without ANY undue political influence.

TRTA is encouraged by the additional communication coming out of TRS including the two recent all-member conference calls hosted by TRS staff, as well as a number of town-hall style meetings that TRS will host in the coming weeks (TRTA will post more information on these meetings when it is available). These are encouraging activities, but additional TRS communication has been needed for years and this does not ultimately alleviate the concerns being expressed by TRTA members.

Make no mistake, TRTA will never stop working to protect the traditional defined benefit pension plan for all current and future TRS retirees. These efforts will not stop no matter what party controls the legislature, who occupies the Governor’s mansion, or what trustees have been selected to serve on the TRS Board.

Below is a copy of the TRTA Legislative Agenda for the coming session.

TRTA Core Belief: Public education employees have been assured of a traditional defined benefit plan as a part of the Constitution of 1937. A traditional defined benefit retirement plan provides public employees a guaranteed pension that will last their entire lives. A privatized plan does not guarantee these public servants the retirement they need and deserve. Therefore, TRTA strongly supports and will oppose any legislative action, such as a privatized plan to modify or eliminate the defined benefit retirement plan for educators as it was established in the Texas Constitution in 1937.

State Priorities

Pension Increase—TRTA will work to introduce legislation that provides a pension increase to retirees.
TRS Funding—TRTA will work to introduce legislation that increases the State contribution to the TRS pension fund.
TRS–Care Permanent Health Care Fund—TRTA will work to introduce legislation that calls for the creation and funding of a new permanent TRS–Care health care trust fund.
TRS Board of Trustee Elections—TRTA will work to introduce legislation that allows TRS annuitants to directly elect their trustee to the TRS Board of Trustees.
TRS Board of Trustee Composition—TRTA will work to introduce legislation that allows an additional dedicated retiree position on the Board.

Federal Priorities

GPO/WEP—TRTA will work to repeal the two Social Security (SS) provisions known as the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP).
Paying Health Care Premiums with Pre–Tax Dollars—TRTA will work to pass federal legislation allowing public education retirees to pay their health insurance premiums with pre–tax dollars.

Concluding Comments

Clearly, the present market conditions will make it more challenging to achieve some of the goals listed below, but TRTA does plan on and will pursue with every resource available a permanent increase in retiree pensions, an increase in the State contribution to the TRS pension trust fund, the continuation and improvement of the TRS-Care program and more.

Your continued support and membership in TRTA will help make these efforts more effective. Please encourage other retirees to think about joining in these plans to help protect and improve their pension benefits.

As always, thank you for your interest and support of TRTA. Please send your questions and comments to tim@trta.org

Letter from Roel Campos to TRS Board of Trustees Regarding NY Times Article

Dear Trustees:

I know Ronnie informed you of stories that appeared in this morning’s New York Times and in the Austin American Statesman. I believe Jim’s letter to the editor of the Statesman provides clarification of the misperceptions created by that story. I felt like it was important to give you context for the information contained in The New York Times story. While many of the facts in this story are correct, as is usually the case, it lacks context to explain why I and my fellow Commissioners voted unanimously on the provision presented to us by the leadership and staff. I hope I can provide further clarification below.

Background

In 2004, the executives of the nation’s five major independent banks approached the Securities Exchange Commission (SEC) and lobbied for weeks. Because the banks wanted more favorable regulatory treatment in Europe, they had determined to organize themselves individually under a holding company structure and voluntarily submit to SEC oversight. The SEC’s oversight authority from Congress was unusual in that it was a “voluntary” system. In other words, if at any time the investment banks did not like the SEC regulations, they could simply quit and “opt out.”

The investment banks demanded that the SEC’s traditional “net capital rule,” requiring a capital reserve for the broker/dealer (execution of trades), not apply to the other aspects of their operations. The investment banks argued that in fact the SEC did not have authority to require capital reserves for the non-broker/dealer portions of investment banking (underwriting, lending, asset management). Moreover, the banks argued, they were in a life and death struggle with the colossal global banks and would be in a comparative disadvantage if the net capital rule were to apply. The investment banks argued that their own concern about reputation risks and prudence would keep them for being reckless. Further, they pointed out, the SEC’s staff would be able to monitor at the parent level the overall risk management by the bank and study the risk models that were used.

Unanimous Vote

After much study, the SEC’s staff was totally supportive of the request from the investment banks. They pointed out that there were not many options, given the limited authority of the SEC and the banks’ ability to walk away from any oversight. The investment banks were essentially saying that they would not be able to be competitive, they would lose business to foreign banks, and jobs would be lost in America. The Staff was enthusiastic about the monitoring program at the parent level. It assured the Commissioners that it would work and that the monitoring program would be robust. Accordingly, all five Commissioners voted in favor of the request.

Given what I knew, the analysis presented to me by the SEC staff and their strong recommendation in favor, I believe I voted responsibly that the net capital rule would only apply to the broker dealer operations. There was no support for doing anything differently. No opposition or concern was ever brought to my attention, either before the vote or after.

The irony is rich. At precisely the same time the SEC, was receiving much criticism for imposing too much regulation, with Sarbanes Oxley and other rules. In hindsight, several things would have helped tremendously. First, the SEC needed full authority from Congress to regulate the investment banks. Voluntary regulation is like letting your child change the curfew whenever he or she wants. Secondly, the risk management models for the investment banks were badly flawed. SEC examiners had no better tools to supervise. Of course, the staff had no authority to tell the banks to slow down and not borrow so much. Thirdly, the investment banks showed no restraint or self control and used the mantra of “business knows best,” and “government does not understand what we do.” The SEC staff monitors never saw their authority to include being able to demand that business be conducted differently. In hindsight, it would have been best if the SEC staff had brought to the Commissioners’ attention the amount of leverage and their concerns about the quality of debt. However, in my opinion, if there had been a confrontation about risk taking and how much debt was prudent by an investment bank, the SEC would have lost. Money was being made, Congress was not interested, and the SEC had no power to enforce. Such a bank would have opted out complaining about “over-regulation” and found plenty of support.

The current financial crisis was caused by many factors, as we will discuss in our “Chalk Talk” on Monday. In the last four years, there are probably dozens of other decisions made by the SEC, the Fed, and other agencies that can be second guessed as having contributed to the current crises. To imply, as was done in this article, without thorough research, that this event was pivotal, is naïve and misleads readers.

I hope this helps you better understand the circumstances under which I and my fellow Commissioners rendered our unanimous decision. I would be happy to discuss this with you individually if it would be helpful.

Respectfully yours,

Roel Campos

Return to Legislative Updates