Current Pension Topics
TRS Making Out Like Bandits

By JOEL L. FRANK

We all know how difficult it is to please everyone when preparing the city and state budgets (annual spending plans). Well, in this era of very low interest rates, it is stunning to realize that the voluntary salary reduction 403(b) Plan, administered by the Teachers' Retirement System of the City of New York, guarantees 8.25-percent interest to its participants through June 30, 2009.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net .

The illegal rationale for this guarantee is the fact that the 403(b) Plan is administered by the TRS Board of Trustees, and thus comes under the Constitutional guarantee that the benefits derived from a public-employee pension fund are contractual in nature and may not be "diminished or impaired."

This would be a proper application of the "impairment clause" if not for the fact that the TRS 403(b) Plan is not legally part of the TRS Qualified Pension Plan (QPP). The law requires all Teachers to be members of the TRS QPP. The law, however, makes TRS 403(b) Plan membership completely voluntary.

How dare the UFT and the city conspire to make believe that TRS 403(b) Plan membership is mandatory and a part of the QPP and thus, subject to the "impairment clause" of the New York Constitution? This is scandalous. This illegal application of the "impairment clause" to its 403(b) Plan compels the TRS to pay at least 7 percent in guaranteed interest to 403(b) Plan participants forever. At the discretion of the Legislature it may go above 7 percent, but never below it. It has been set by the Legislature at 8.25 percent since July 1, 1988.

This despicable illegal agreement has, for years, forced the city to go into the taxpayer's pocket in order to credit the TRS 403(b) Plan participant with 8.25-percent interest. This is the result of illegally obligating the New York taxpayer to pay more interest than the TRS can earn on Wall Street. As of Dec. 31, 2006, TRS 403(b) Plan participants knew that their $6.65 billion would earn 8.25 percent in interest for 2007.

But no fixed-income security is paying 8.25-percent interest. Five percent is the approximate market rate. But that is not appropriate for TRS 403(b) Plan participants, so the taxpayer has to pay the difference, or 3.25 percent. For 2007, this taxpayer subsidy (welfare payment) will amount to more than $216 million (0.0325 x $6.65 billion). How many schools can be built with $216 million? How many more Teachers could be hired with $216 million? How many more apartments for the needy/elderly could be built with $216 million? How much more of a Cost-of-Living-Adjustment could be paid to retirees with $216 million? How much of a tax cut would $216 million support?

How much did this illegal and scandalous application of the "impairment clause" cost the taxpayer over the past 10 years, 20 years? Mr. Spitzer and Mr. Bloomberg: you figure it out, but first wash your hands.

I call on the Legislature to repeal the law that guarantees 8.25-percent interest to 403(b) Plan participants through June 30, 2009. Additionally, I call on the Legislature to completely dissolve the TRS 403(b) Plan's Fixed Interest Fund and to direct the TRS Trustees to transfer the $6.65 billion to the TRS 403(b) Plan's Variable B Fund. The Variable B Fund is a fine Stable Value Fund where interest earned is set by the marketplace, not by politicians and labor lords and rubber stamped by a brain-dead Legislature.