Push for broader public pension plans

The move by the firefighters’ pension plan comes as advocates are again gearing up to change Georgia’s laws beyond this one pension plan. They are hoping to allow at least one of the state’s two largest public pension plans to also buy alternative investments. The state’s entrepreneurs and venture capitalists have long wanted the broader policy to allow them to tap into the two pension plans’ $68 billion in assets.

In a meeting last month of the Georgia Research Alliance, Gov. Nathan Deal told the technology group that he is willing to look at reversing the state’s long-standing prohibition against alternative investments for the rest of the public plans.

Entrepreneurs say the pension plans’ restrictive policies — which generally allow only conventional investments such as stocks and bonds — have starved the region of capital needed to make Georgia into a vibrant technology birthplace like California’s Silicon Valley or North Carolina’s Research Triangle Park.

Home-grown ventures, which have to look elsewhere for startup money, are easily lured away by other states, stunting Georgia’s future job growth, said Mike Cassidy, president of the alliance. Without Georgia’s backing, local venture capital funds also have a hard time wooing money from other states’ pension funds, he said.

“We’re losing out on job gains,” said Cassidy. “We’ve got to open some new sources of capital.”

But for a variety of legal, ethical and political reasons, it’s unclear that another attempt will soon open Georgia’s big state pension funds to such investments, or, if successful, that it would significantly increase local investments in local ventures.

One of the biggest hurdles such a proposal will likely face is stiff opposition from the employees and retirees who are covered by the two big pension plans, the Teachers Retirement System of Georgia and the Employees’ Retirement System.

They have defeated several previous attempts over the past decade to change the law.

“We’re dead set against it,” said Tim Callahan, spokesman for the Professional Association of Georgia Educators. He said the 81,000-member teacher group is “very protective” of the $53.9 billion pension fund, which is partly funded by payroll deductions from teachers’ pay.

He doesn’t buy some experts’ arguments that alternative investments would boost the state pension plans’ returns and lower their risks through diversification.

“You can take it to Vegas one weekend too, and that would diversify the portfolio,” he said.

The crash of the financial markets in 2008 and 2009 has probably strengthened state employees’ and retirees’ opposition to the idea, said Rep. Howard Maxwell, chairman of the House retirement committee.

“It scares them. The stock market’s already doing so bad,” said Maxwell, R-Dallas. The retirement funds are “what they’re living off of.”

Indeed, in a 2010 bill, legislators had initially planned to allow much broader use of alternative assets, but it was whittled down to the Georgia Firefighters’ Pension Fund, whose officials asked for the option.

Maxwell doesn’t rule out a broader move someday. “As far as I’m concerned it’s just another tool for the investment managers,” he said. “There’s good alternative investments out there.”

Most states now invest roughly 10 percent of their pension money in alternative investments because “you can reduce the risk and overall volatility,” said Keith Brainard, research director for the National Association of State Retirement Administrators, or NASRA.

Hedge fund and commodity traders’ returns often go up when the stock market goes down, for instance. Also, over the long run, experts say, venture capital and other private equity funds often outperform common stocks, although risks and expenses are higher.

By avoiding alternative investments, “the taxpayers in Georgia are the ones who are suffering the consequences of a flawed policy,” said Brainard, through higher taxes to make up for lower, more volatile returns.

Georgia’s largest public pension plan, however, appears to have done well without alternative investments. The Teachers Retirement System had a 21.3 percent return for the 12 months ended in June — comparable to the median return of 21.6 percent for pension funds of all states, according to TRS and NASRA. TRS outperformed funds in other states during the past five years and 25 years, and had comparable performance in the past 10-year and 20-year periods.

Secret stakes

The Georgia Firefighters’ Pension Fund’s actions show that adding private equity to the state’s portfolios won’t necessarily help local ventures. The pension plan so far has committed to invest $18.5 million in two private investment pools managed by Harborvest Partners in Boston and WP Global Partners in Chicago.

The pension fund, which hopes the move will boost its long-term returns, can eventually shift up to 5 percent of its $580 million portfolio into several types of alternative investments, including leverage buyout funds, private stakes in companies and debt of companies in financial distress.

The pension plan’s executive director, James Meynard, said he chose the two out-of-state funds “because they both have historically high returns.” He said both funds indirectly have invested some money in Georgia ventures in the past, but that wasn’t a factor in choosing the money managers.

For the next year or two, however, it could be hard to check on how the firefighter pension’s foray into alternative investments is going, due to secrecy rules included in the 2010 law authorizing alternative investments.

The firefighters’ pension doesn’t have to publicly disclose the alternative asset money managers’ identities for six months, Meynard said. How much was invested, or when, or what investment return they earned, doesn’t have to be disclosed for a year.

Meynard said he believes the information temporarily is being shielded to prevent “undue interference” by other investors in the fund’s startup ventures.

But Howard Pohl, an investment consultant with Chicago-based Becker Burke Associates, which advises public pension funds, said that level of secrecy is unusual.

Pohl said he wasn’t aware of public pension funds that don’t disclose who their money managers are. “You ought to know who you’re investing in,” he said.

The firefighters’ pension fund, which is mostly funded by a 1 percent state tax on property insurance premiums, covers about 19,000 full-time and volunteer firefighters. The little pension fund, which has a 10-person staff and a 1915 Ford Model T fire truck in its office, might seem like an odd organization to go into esoteric investments like distressed debt and “funds of funds,” which are one-stop shops that invest in several private investment pools.

But before he joined the pension fund nine years ago, Meynard, now 67, headed Bell South’s pension fund until his retirement in 1996. There, he oversaw a $28 billion pension portfolio that invested in a wide variety of alternative investments, including timberland, venture capital, hedge funds, commodities and real estate.

“It’s another arrow in the quiver to diversify returns,” said Meynard. “Our fiduciary duty is to invest solely in the interest of our [pension plan] participants.”

And that fiduciary duty, experts say, boils down to choosing investments and money managers based solely on their track records, expected investment profits and overall risk levels — not whether the investment could boost the state’s economy or create new jobs or businesses in the state.

So-called “economically targeted” investments within a state are usually a bad idea, said Pohl, the investment consultant. Such investing not only may violate pension managers’ fiduciary duties, but may lead to less diversification and dubious investments made under political pressure.

Such worries led a joint committee of Georgia’s lawmakers and investment officials to conclude in 2002 that private equity investments were “unsuitable” for the state’s large pension plans. And the committee strongly condemned using pension money to foster economic development, and worried that the state’s pension controls were too weak.

“Issues of liquidity, staffing, fees and expenses, politics and governance” make private equity too risky, the committee decided.

The committee cited some disastrous real estate investments the teachers’ pension plan made in the early 1960s in Atlanta and Jekyll Island.

The failed real estate investments — a category now barred — “have engendered pension participant mistrust of investment initiatives promoted by elected officials,” the committee stated.