Retired Pelham City Schools Superintendent Jim Arnold takes up a topic today of interest to many educators -- their retirement funds and where the money can be invested and by whom.
By Jim Arnold
There’s a wolf in the closet. He’ll stay there until after the Nov. 4 election, but somebody will open the door for him once the votes are in. Count on it.
Both candidates for governor have expressed an interest in letting this wolf out, and once out he won’t go back in again. The lure of $59 billion, regardless of the source of those funds and especially in the ethically challenged Georgia system of politics, is just too much for politicians to ignore.
The Teachers Retirement System of Georgia is the state’s largest public pension with nearly $59 billion in assets. While the Legislature has now enabled pension funds to invest up to 5 percent of their assets in alternative investments, the law excludes the TRS.
Both candidates might hem and haw and say they would only use the money “with the backing of teachers and the TRS board of directors,” but that’s Georgia politics at its finest. Tell the voters what you think they want to hear before the election, and forget you ever said it once you’re in office.
The Georgia Chamber of Commerce supports the idea. They say the move to allow TRS to invest up to 5 percent of its total in alternative funds would secure the highest returns possible for public workers, and that Georgia is the only state that does not allow TRS funds to be invested in alternative investments. Remember what your mother said when you wanted to do whatever it was that “everyone else was doing.” That should apply doubly to adults, but usually doesn’t.
The New York Times reports that the $26.3 billion Pennsylvania State Employees’ Retirement System has invested about 46 percent of its assets in these riskier alternatives, and over the last five years has paid $1.35 billion in management fees and reported an annualized return over the same period of 3.6 percent. The median return for public pension systems is 4.9 percent and the target return required to meet financing requirements is 8 percent
In Georgia, prohibited from alternative investments, TRS has earned 5.3 percent per year over the same period and paid about $54 million in total fees. TRS is recognized as one of the public pension funds that every other public pension fund wants to be, and provides stability and peace of mind for teachers who have retired and those that expect to retire.
The Pennsylvania State Employees’ Retirement System has more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds. A sampling of those pension funds with a third to half of their money in hedge funds, real estate and private equity reported returns that were over one percentage point lower than those funds that avoided these riskier, more volatile investments. Not only were the returns significantly lower, the fees charged for those investments were more than four times what the others paid. Lower returns and higher fees is not a good combination unless you are an investment banker.
The dirty little secret about public pension fund investments is they are required to be transparent in their investments, and their transactions are subject to the Freedom of Information Act. Many of the best performing venture capital funds will not take money from public pensions because they do not want their portfolios made public knowledge, and, as a result of this need for obfuscation, public pensions generally get to choose from lesser performing funds that don’t see transparency as an obstacle to performance.
In 2012, Gov. Deal supported Senate Resolution 782, but later withdrew his support after a backlash from teachers, both working and retired. The resolution, still in committee at the end of the last legislative session, would allow a study committee of 17 members, all appointed by the governor, to investigate doing away with the defined benefit system in place for TRS and moving to a contribution system.
Part of the resolution also calls for the committee, without the governor really being involved, of course, to suggest removal of the restriction that now prevents up to 5 percent of TRS funds from being used for investment in venture capital funds.
State Sen. Carter also suggested a proposal to give state pension funds, including TRS, the freedom to invest in alternative investments and venture capital. He later backed away from the idea and said he would never consider such a thing without the approval of the TRS board and teachers. Deal criticized Carter's plan.
The real issue here, given the Georgia Legislature’s lack of willingness to engage in meaningful ethics reform, is not really one of providing money for startups and venture capital but protecting it from the deleterious effects of rampant cronyism.
There is no way, as I see it, to keep politics out of investment decisions regardless of the positive or negative financial effects on pension funds. Allowing politicians to reward donors through the allocation of access to venture capital from state pension funds without regard as to whether the investments made financial sense for contributors to that fund would be the epitome of folly for teachers who depend upon that fund for their current or future retirements.
Yes, I am one of those, and, no, I do not trust any politician to ignore large pots of money whether it belongs to them or not. I’m hoping that wolf stays in the closet, but I’m also watching the doorknob closely to see if anybody puts their hand on it later. After the election. When the votes are in. When nobody’s watching.
Be careful who you vote for next month. A politician who needs your vote is one thing; an unscrupulous one who already has it is quite another.
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