Prudence with pension funds

February 26, 1992

The Maryland State Retirement and Pension Systems' decision to invest $15 million in a state venture capital fund has generated more than a little queasiness in political and union circles around the state.

Critics can't square the idea of risking hard-earned pension dollars on the topsy-turvy fortunes of untested local companies. The maiden $15 million investment, some fear, will be followed by bigger, perhaps riskier deals down the road.

These concerns are understandable. Horror stories abound of backyard investments gone bad. For instance, Alaska's public pension funds underwrote a $165 million mortgage financing boondoggle in 1980. And the Kansas Public Employees nTC Retirement System is still wading through the flotsam of its disastrous attempt to invest in promising local enterprises.

There are, however, distinctions in what Maryland is doing that answer these concerns. Pension managers in Kansas, for example, were pouring state workers' money directly into ill-fated ventures. That, plus progressively lax standards and supervision, set the stage for $200 million in losses.

The Maryland Venture Capital Trust does not foresee potholes of this sort. Rather than making direct investments, it will funnel money into investment pools from which venture capitalists draw to fund companies. This safety latch puts the job of identifying, managing and monitoring investments squarely where it should be -- with seasoned experts. It should also diversify the risk.

This investment signals a willingness by pension trustees to venture beyond bearer bonds and blue chip stocks. In the past year alone, the fund has moved into real estate and international equities. It is now considering a proposal to invest $5 million in a construction financing program that would aid Maryland homebuilders.

Some critics fear these kinds of investments are the wave of the future. But it these investments are carefully made, suitably small and prudently managed, there should be minimal risk -- and the potential of solid returns.

We like what we've seen so far. The investment in the state venture capital trust provides grounding for Maryland's efforts to nurture a vibrant life sciences industry. The hope is to leverage the state pension system's investment with money from other private and public pension systems.

With $14 billion at its disposal, Maryland's pension system has an important role to play in the state's economy. That role, and the trustees' fiduciary responsibility to ensure that the money is invested prudently, need not be mutually exclusive.

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