How to Do Investment Fees the Right Way - TRS and Its TDA Fund

TRS is one one the five NYC pension funds, the one that covers NYC teachers. Actually TRS is two funds, a defined benefit fund (DB) and a defined contribution fund (DC). TRS calls its DC fund the TDA Program. The TDA program is funded by payroll deductions (approximately $1.0B/year) from the teachers. This fund is teachers' money, not tax payers' money. Well not really. The DB fund guareantees a 8.25% and 7% rate of return on fixed income assests in the TDA fund. But that is another story for another day.

The following list is the closing balances of the two funds as of June 30th of following years:

• Year - DB Fund - TDA Fund
• 2020 -- $59.3B -- $37.0B
• 2021 -- $78.3B -- $43.0B
• 2022 -- $64.0B -- $42.2B
• 2023 -- $67.9B -- $45.4B

You can see from the numbers that the TDA fund runs a tighter ship than the DB fund. The TDA fund grew by 22.7% over the three years while the DB fund only grew by 14.5%. Eeven though the TDA rate of return is is impressive compared to the DC fund, what rally is superhuman is the investment fees that the TDA fund pays versus the DC fund. See the fees for the two funds over the four years listed below:

• Years - DB Fund - TDA Fund
• 2020 -- $290.8M -- $0.6M
• 2021 -- $405.7M -- $13.7M
• 2022 -- $535.3M -- $24.2M
• 2023 -- $518.9M -- $11.2M

How does the TDA spend so little on fees and does so much better that the DB fund???

Finally Someone Noticed the Skim at TRS

This month the Citizens Budget Commission discovered a city funded subsidy for the teachers TDA fund at the NYC Teachers Retirement Fund (TRS), better late than never.

In 2013 I stumbled on the fact that TRS had a persistent negative cash flow.

Then in 2014 someone reminded me of something I sort of knew but never understood the full impact.

I can not understand how the city allows this massive benefit to exist. It puts the entire TRS retirement structure at risk. The teachers have a very respectable pension benefit. This subsidy to the TDA program is irresponsible in that it pulls assets, $1.2B in FY-2015, out of the pension fund every year. I can see how the teachers love this benefit but if all the other city workers find out about this, there will be hell to pay.

Note: the skim for FY-2016 is $1.354B.

TRS - Permanent Handicap - TDA Transfer

Last year I wrote about a persistent negative cash flow at the NYC Teachers Retirement System (TRS).

Just recently someone pointed out to me the impact of something I vaguely knew about but not really. Every year TRS pulls money out of the pension fund and transfers it to the TDA plan that it runs separately from the pension plan. The TDA plan is a defined contribution plan, a 403(b) plan in IRS speak. Information about this transfer is buried in the TRS annual CAFR. The city, however, has never identified the transfer in its annual CAFR. That is until FY-2014.

This is why TRS has had a negative cash flow for the last 15 years. In the last eight years (2007-2014) TRS has paid $33.3B in benefits but $6.8B went to the TDA plan and not pension benefits. The employers' contributions for the 2007-2014 period were only $19.2B. This is a big problem. It is never discussed publicly. I have no idea how Bob North, the TRS actuary, values this liability for the TRS pension fund. This is a huge leak in the funding pipeline for the TRS pension plan.

If you look at the table below it appears that North is reporting a funding level for TRS based only on the liability based on the pension benefits paid and ignores the TDA transfer.

Funding Status for TRS and NYCERS for FY-2013

System	Actuarial Assets	Actuarial Liabilities	Funding Level	Members	Pensioners	Pension Benefits Paid	TDA Transfer
NYCERS	$42.4B	$65.3B	65.0%	212,347	137,987	$3.9B	$0.0B
TRS	$33.6B	$57.7B	58.2%	132,017	76,539	$3.6B	$1.1B

TRS Benefit Payout Since 2007

Fiscal Year	Employer Contributionds	All Benefits Paid	Pensions Paid	TDA Skim	Other Benefits Paid	Pension Paid %	TDA Skim %	Other Benefits %
2005	$1.23B	$3.13B	*	*	*	*	*	*
2006	$1.32B	$3.34B	*	*	*	*	*	*
2007	$1.60B	$3.58B	$2.89B	$0.55B	$0.14B	80.7%	15.4%	4.0%
2008	$1.92B	$3.78B	$3.02B	$0.65B	$0.11B	79.9%	17.2%	3.0%
2009	$2.22B	$3.78B	$2.92B	$0.77B	$0.10B	77.2%	20.4%	2.6%
2010	$2.48B	$4.12B	$3.20B	$0.82B	$0.10B	77.7%	19.9%	2.4%
2011	$2.47B	$4.33B	$3.38B	$0.85B	$0.10B	78.1%	19.6%	2.2%
2012	$2.67B	$4.49B	$3.44B	$0.95B	$0.10B	76.6%	21.2%	2.3%
2013	$2.86B	$4.67B	$3.54B	$1.05B	$0.08B	75.8%	22.5%	1.7%
2014	$3.00B	$4.58B	$3.82B	$1.15B	nr	76.9%	23.1%	*
2007-2014	$19.22B	$33.72B	$26.21B	$6.78B	$0.73B	*	*	*