Professor Elam

Texas Recedes

 

You may be of the notion that both Texas and Texans have
been relatively unaffected by this recession thing going round the rest of the
country. Not so fast. Whether you realize it or not, you probably experienced a
real loss in the stock market.  It
is not surprising the politicians have not told you about it.

Tens of thousands of Texas teachers depend on the Texas
Teacher Retirement System. No wonder, teachers do not contribute to social security,
remember that.

A retirement system promising specific benefits in the
future makes assumptions on what its retirement fund will earn.  Those earnings are necessary to hit a
future target.  Hitting that target
allows the benefits to be paid. If the fund falls short of the target, the
promise of a specific payment cannot be met.

Texas Teachers Retirement assumes it will earn 8% per year.
However according to Bloomberg, it has earned 2.6% the last ten years. How much
difference is that?

8%	3.5%	2.5%
Assume $100	Assume $100	Assume $100
$215.89	$!41.06	$128.01
Less 27%	Less 27%	Less 27%
$157.60	$102.97	$93.45

 

The above table shows what a single amount of $100 would
become at three different interest rates. The first, 8%, is what Texas assumed.
The money nicely more than doubles. The second rate of 3.5% is about what the California
Public Employees Retirement System CALPERS earned the last ten years. The third
column is what the TTRS actually earned, actually 2.6%, quite a difference eh?

But it gets worse, much worse. Last year TTRS actually lost
27%, so it retained 73%. This means by my arithmetic that TTRS is actually
below where it started ten years ago. So no net progress has been made at all.

In the meantime of course, thousands of teachers believe
that they can retire with the promised benefits. Teachers are now being urged
to continue working, no wonder. The only way out is to deliver far lower
benefits or turn TTRS into a Ponzi social security scheme where new hires pay
the old. It is conceivable that if the new hires learn what has happened they
will insist on opting out. Indeed that would make more sense; let everyone
contribute to his or her own managed 403b plan, good luck!

Meanwhile, some 82,000 Texans have run through their 59
weeks of unemployment benefits. Governor Perry has rejected Federal Stimulus
money since its acceptance requires extending benefits even further. This is
quite simply the difference between California and Texas thinking. Unemployment
is a bridge between jobs, not your new job.

Frankly this explains the strength of the US Dollar while
the FED prints so many. California has run out of Dollars.  Debt or the implied promise of payment
requires dollars. And if the company or government is out of them, there is a
demand for dollars.  And so
California now prints its own fiat currency, IOUs. The Golden State has moved
from paying tax refunds to vendors with this ‘new currency.’  How long can that last?

The silence concerning TTRS is truly deafening.  Are any teachers starting to ask
questions?

 

More from Dennis Elam
at http://www.professorelam.typepad.com/markets.