Use of public pension funds sparks debate $15 million from Md. system invested in start-up companies

February 16, 1992|By David Conn | David Conn,Annapolis Bureau

ANNAPOLIS ETB — Annapolis -- The Connecticut state pension system invested in mortgage programs for low-income residents. In California, pension money went to help area housing developers. And in Kansas, the public employees retirement system lent some of its money directly to area companies, a few of which ultimately went bankrupt.

In Maryland, the first and only nibble at what is known as "economically targeted investing," or ETI, came in November. That was when the Maryland State Retirement and Pension Systems decided to invest $15 million in the state-created Maryland Venture Capital Trust, a 2-year-old fund whose purpose is to invest indirectly in start-up companies in the state. The system has $14.1 billion in assets.

Economically targeted investing takes a public pension system one step beyond its traditional mission of earning the best possible return for its members with the least possible risk. With ETI, the pension plan's secondary goal is to spur economic growth in a state or region.

As long as they are able to limit risk and retain a competitive return on investment, supporters say, economically targeted investments do no harm and can help an ailing economy.

But detractors point out that if those investments really had low risk and high rates of return, the marketplace would be funding them anyway. The pension plan should be sacrosanct, they say, one of the few governmental functions completely safe from the hand of politics.

"If these investments can go to the market, if they're prudent, then they'll get funded," says Steven Sass, a Federal Reserve Bank of Boston economist. "So ETI is either irrelevant, or it's a concession."

It's understandable why states would be tempted to look to their pension systems in times of budget crisis. Public pension systems around the country hold more than $875 billion in assets, up from about $600 billion five years ago.

There have been blatant examples of pension raiding to help balance budgets. Last summer, for instance, Illinois' governor and Legislature agreed to take $21 million from the state's five public pension funds. And in a move that still awaits a federal court ruling, California Gov. Pete Wilson seized $1.6 billion from the state pension plan last July to help bridge a $14 billion budget gap.

But supporters of ETI are careful to distinguish pension raiding from economic investing.

California's Institute for Fiduciary Education completed a study of ETIs in 1989 and reported the most common categories of investment: Two-thirds of reported ETI money was in residential housing loans; almost 9 percent went toward other real estate investments; 7.7 percent went to venture capital investments; 5 percent went for small-business loans; and the rest went to a variety of fixed-income and stock programs.

The Massachusetts plan is a classic example of ETI. State Treasurer Joseph D. Malone, when he unveiled the program in September, said its goal was "to help create jobs and encourage economic growth."

The plan envisions a total of $300 million in investments, or 5 percent of the $6 billion Massachusetts State Teachers and Employees Retirement System Trust.

Two programs have been launched. One, called the Middle Class American Dream program, provides $125 million toward mortgage loans for those who otherwise wouldn't qualify, said Dierdre Coyle, a spokeswoman for Mr. Malone.

The other program will pick out $50 million in high-quality business loans from banks that the federal regulators have taken over and will pool them for resale in the secondary market.

Ms. Coyle said the investments are safe. The mortgage program, for instance, is backed by the AAA-rated Federal National Mortgage Association. And the programs satisfy an important criterion of the retirement trust -- to fill a capital need that the market wouldn't otherwise satisfy, she said.

In setting out five investment criteria, including providing a market rate of return and minimizing local risk, the Massachusetts plan is at least a step ahead of the Kansas Public Employees Retirement System, or KPERS.

In 1986 and 1987, the now $4.4 billion KPERS embarked on what ultimately became a $200 million debacle. The plan involved buying debt notes from companies, making direct loans and pursuing venture capital opportunities in Kansas and Missouri.

The program led to what became a $68 million investment in Home Savings Association, of Kansas City, Mo., which the federal government declared insolvent in March. By last fall, about $200 million in losses were uncovered, the KPERS director resigned, and lawsuits were filed against more than 100 involved in the program.

Not all ETI programs end up the way the KPERS plan did. Those who responded to the Institute for Fiduciary Education gave a "better than neutral" rating to 46 percent of the programs and said they were "very satisfied" with 18 percent. Only 13 percent of the programs earned a less than neutral rating.

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