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Retired Teachers Get an Education in Life Insurance

In Texas, a firm would profit off the policies, and a state retirement plan, not families, would be the beneficiary.

January 25, 2004|Scott Gold | Times Staff Writer

HOUSTON — Outraging the education community, Texas is considering allowing a large financial firm to take out life insurance on retired teachers, cafeteria workers and bus drivers. A state retirement plan would be the beneficiary of the policies, the financial firm would make millions on the transaction, and families of the retirees would get nothing.

Former U.S. Sen. Phil Gramm, now an executive at UBS Investment Bank of New York, is promoting the proposal. State officials stressed that they are only considering the idea. But they pointed out that the plan could raise millions of dollars for the financially strapped Texas Teacher Retirement System, one of the largest public pensions in the nation, while the state would assume little risk.

Many education workers, who learned about the concept after meetings between Gramm and top Texas officials, say the proposal is morbid and potentially a bad business deal. They say Texas would effectively wind up with a financial interest in the timely death of its retired education workers.

"It is gruesome and ghoulish," said Patricia Olney, 67, a retiree in Brenham, Texas, who taught for 27 years. "They want to profit off our deaths, and we don't appreciate it."

UBS executives project that they could earn tens of millions of dollars on the Texas transaction. Sources close to Gramm say he has made it clear in meetings with state officials that he and his company view Texas as a pilot program. If the concept works, UBS hopes to take the insurance program nationwide.

Gramm, a Republican senator from Texas for 18 years who stepped down in 2002 and became a vice chairman of USB, declined to comment for this story.

Some officials close to the negotiations say UBS and state officials have been stung by the rapid and widespread backlash from education workers, and say the proposal's chances are shaky because of the negative response.

Robert Black, spokesman for Texas Gov. Rick Perry, cautioned that there is no concrete plan at this point. But he said Perry is "open to discussing any idea" that could funnel money into the teacher retirement system without cutting benefits or raising taxes. If they move ahead with the concept, state officials pledge to issue insurance policies only for teachers who agree to participate.

"The governor has instructed his staff to think outside the box and cultivate ideas and concepts," Black said. "We don't know if it would work. But that's not going to stop us from exploring an option."

Representatives of the retirement system say their balance sheet has suffered with the souring economy and because of bad investments, including a loss of more than $30 million when Enron Corp. filed for bankruptcy. The system, which administers pension and health-care benefits for retirees, could face a shortfall of $1.4 billion by 2007.

State officials say that in 12 to 15 years, the insurance program could raise $700 million for the health-care fund directed by the system, which provides benefits to about 200,000 retired public school and higher education workers.

Howard Goldman, a system spokesman, said he could not discuss the idea until a formal proposal was offered. The retirement system's nine trustees, who are appointed by Perry, have not taken a position on the concept.

"I would think that UBS would be the best source to contact," Goldman said.

UBS issued a statement calling the proposal one of "dozens of new and innovative products" it produces each year, and said it is "exploring the feasibility" of piecing together the financing package for "various state and local government entities."

According to UBS executives and documents used by Gramm in his presentations, the financing arrangement would work like this:

UBS would float bonds on the market. Proceeds would be used to buy annuities, probably through UBS PaineWebber Inc., which, like UBS Investment Bank, is a division of UBS Warburg. The annuities would pay for insurance premiums for policies taken out on retired education workers. When the workers die, proceeds from the insurance would be used to retire the bonds, among other things.

Portions of the money left over would be funneled into the Texas Teacher Retirement System's health-care fund. The profit margin would hinge in part on assumptions made about mortality rates for people 75 years and older.

Texas education workers say the proposal mirrors what critics often deride as "dead peasant" schemes, in which companies seeking a tax break buy life insurance on rank-and-file employees and name themselves beneficiary of the policies.

The phrase "dead peasant" is believed to have its origins in a 19th century novel by Nikolai Gogol called "Dead Souls." The novel explores the inequities suffered by serfs at the hand of landowners and focuses on a swindler who attempts to make quick money by buying the ownership rights to dead serfs and selling the rights before the buyer realizes the serfs are dead.

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