Tennessee’s pension faces headwinds

Confidence high despite low returns

USA TODAY NETWORK — Tennessee

When her husband’s retirement savings plummeted during the financial crisis, Rutherford County kindergarten teacher Emily Mitchell took comfort in having a guaranteed pension plan through her job.

Like many teachers — and many of more than 370,000 members in the state’s public pension fund — Mitchell, 53, sees the plan as a key benefit to a job that comes with long hours and salary limitations.

“It’s something we educators take for granted,” she said. “It was there for the teachers before us and I just assume it will be there for me.”

That pension, known as the Tennessee Consolidated Retirement System, has posted anemic returns and missed investment targets for two years in a row, weighing on its ability to meet obligations to state Stephen Frohsin workers, teachers and retirees.

In 2015, the fund generated returns of 3.3 percent, falling short of its 7.5 percent target. In the most recent fiscal year, ending June 2016, the pension earned 2.8 percent.

Despite the two years of lackluster results, Tennessee Treasurer David Lillard says the state’s pension remains healthy and that the stronger returns in previous years help cushion the recent blows. In 2014 and in 2011, for example, the TCRS more than doubled expectations, reaping nearly 17 and nearly 20 percent returns.

“The liability horizon we invest for is a very long-term horizon,” Lillard said. “Unless you are an extremely badly funded pension, you have an ability to ride out any downturns that may occur.”

Across the nation, public pension funds have struggled as interest rates stay at record lows, people live longer and lower contributions from past years haunt current returns. Moody’s Investors Service estimates unfunded public pension liabilities totaled $1.3 trillion in 2014.

In fact, Lillard calls the pension’s strength “a point of pride for Tennesseans” and his confidence in the state’s pension is not unfounded. The state has a AAA bond rating from Standard & Poor’s, Fitch Ratings and Moody’s, and TCRS is ranked as one of the top four funded pensions in the nation by the Pew Charitable Trusts. As of last year, Tennessee was 99 percent funded, according to Lillard’s office, compared to the national median of 59 percent funded, reported by Moody’s.

Even so, Tennessee’s investment return over the past 10 years is 6 percent, failing to meet the 7.5 percent target.

“We are the best house in a bad neighborhood,” said Stephen Frohsin, a principal at Woodmont Investment Counsel in Nashville.

The problem troubled states, led by Illinois, New Jersey and Kentucky, are facing stems from not meeting obligations in previous years to solve budget issues, said Tom Aaron, a Moody’s vice president. By not contributing adequately, achieving assumed rates of return becomes even more challenging.

“It’s basically like borrowing from the pension fund,” Aaron said. “When that is repeatedly done over a multiyear period, all of a sudden, the cost to make up for the underfunding grows very rapidly and can be very burdensome.”

At stake are other state services — public safety, social services, education — that are at risk when more money is needed for pension obligations.

For Mitchell, who has taught in Rutherford County for 13 years, the state pension plan is a source of confidence — not stress.

“The pension is a huge positive,” Mitchell said, recalling the hit her husband’s retirement plan took in the Great Recession. “In 2008 and 2009, we lost a lot of money in his pension . ... It was very stressful.”

Mitchell said she has not set a retirement date and she doesn’t see one in the coming years. When she does decide to leave the profession, her goals are modest: She doesn’t want to be a burden to her three sons.

“I like being independent,” she said. “I like being able to pay my own way.”

While she is not encouraged by the state’s recent returns, she said she trusts the pension is an unwavering commitment to her and other state employees.