; Phyllis Feinberg contributed to this story.
AUSTIN, Texas -- Bowing to political pressure from the Legislature, the $81.7 billion Teacher Retirement System of Texas voted to postpone indefinitely an allocation to equity real estate.
The decision comes nearly three years after fund officials first began studying whether to invest in the asset class.
Texas Teachers had about 1% of its assets in real estate as of June 10 -- mostly through properties it acquired through foreclosures on loans.
Lee R. Williamson, one trustee who voted against real estate investing, said the Legislature made it plain there could be problems if the system went into real estate.
The vote, which took place at the July 23 board meeting, was a draw. Four trustees, including Chairman James Simms, opposed investment in real estate, while four others voted for it. Kathryn Stream, vice chairwoman and the ninth trustee, did not attend the meeting.
Mr. Williamson explained his stance: "I felt that the Legislature was opposed to it and that there could be political problems if we went into it. They influence what the fund can do or not do, and I didn't want to do anything that would hurt TRS later. . . . It just seemed practical to stay away."
Mr. Williamson added he didn't hear personally from anyone at the Legislature. But, on a tape of the July 23 board meeting, Mr. Simms said he did. He said the message from the Legislature was: "Don't mess with real estate. It's been communicated to us in writing. It's been communicated to us totally. It's not uncertain in my mind as to what the intent of the Legislature is," Mr. Simms said on the tape.
Susan Hudson-Wilson, chief executive officer at Property & Portfolio Research, Boston, a real estate consulting firm, was hired three years ago to help the board determine what role real estate should play in the portfolio and how to invest in it, should an allocation be approved.
In her presentation to the board at the July meeting, she called real estate an important risk reducer and recommended an allocation of around 5% of total assets.
James P. Cummings Sr., a trustee who voted in favor of real estate, said in an interview that the allocation was put on hold because other trustees believed there were more important issues to deal with first, including staffing problems and an asset allocation study under consideration.
State Rep. Sherry Greenberg, chairwoman of the House Committee on Pensions and Investments, which has oversight for TRS, opposed the system moving into real estate. "I do not support the pension fund investing in real estate. The real estate market is cyclical and can be one of boom or bust," she said in an interview with Pensions & Investments.
The issue received "great discussion during the legislative session and those involved (on the system's board) knew the will of the Legislature," she said.
Moreover, she said, the Legislature received an opinion from the Texas attorney general's office May 5 saying that real property is not a security that the pension fund can invest in, and that doing so would require a Texas constitutional amendment.
A constitutional amendment would require a vote of the Legislature and a vote of Texas citizens.
Sources said that by the day of the meeting, it became obvious that Charles L. Dunlap, executive director at the system, and Mr. Simms had been persuaded by the Legislature to kill the plan. Until then, Mr. Simms had been supportive of moving into real estate, although Mr. Dunlap had not, according to the sources.
In her presentation, Ms. Hudson-Wilson argued that because TRS has a small and shrinking exposure to real estate, the overall portfolio is riskier than it needs to be.
"Trustees' fiduciary accountability is their highest calling," she emphasized.
She reminded trustees they already had voted that real estate would be a useful way to reduce the riskiness of the portfolio and that now was the time.
John Peavey, acting chief investment officer, pointed out that if the stock market takes a tumble, investing in real estate could be a blessing.
"Long term, from everything we've heard from our real estate consultant, our fiduciary counsel and others, this would reduce the risk to the portfolio and add returns," he said.
But as the mood turned sour on the asset class, Mr. Dunlap began to argue there were other areas the system needed to focus on before moving into real estate. He said trustees first had to resolve whether there would be sufficient resources and staff to handle the additional work involved in running real estate portfolios.