Every few years, the idea circulates at the Capitol that it sure would be a good idea to start using the state’s pension money to invest in exotic business ventures.
During the Roy Barnes administration, there was a proposal to amend state law so that the money in public pension plans could be steered to such private equity investments as leveraged buyout funds, venture capital funds and timberland.
A few years later, during the Sonny Perdue administration, several bills were introduced that would have authorized the retirement systems to put billions of dollars into similar investment alternatives.
None of those proposals made it into law, but the urge to gamble with the state’s pension money never goes away. Our governor and legislators cannot long resist the temptation to play around with those funds.
This year, one of the smaller state pension systems – the Georgia Firefighters’ Pension Fund – was allowed to put some of its money into alternative funds that invest in startup business ventures and the debts of financially ailing companies.
Gov. Nathan Deal recently told the Georgia Research Alliance he supports ending the ban on alternative investments for the other pension systems, which is a sure indication that such legislation will be passed next year.
Supporters of these exotic investments contend they will earn higher returns for the pension plans than the more conservative stocks and bond funds that draw these systems’ investments. The billions socked away in state pension funds can also boost economic development by providing venture capital for startup businesses, supporters say.
They rarely mention that these alternative investments carry much higher risks as well – upping the odds that the pension plans could lose the money they invest in these business schemes.
The two largest plans are the Employees’ Retirement System (ERS) and the Teachers Retirement System (TRS). They use their nearly $60 billion in total assets to pay monthly benefits to more than 150,000 retired state employees and teachers. I don’t think these retirees would feel very good about knowing their future pension checks are being gambled on startup business ventures.
When the diversification of pension funds was first discussed more than a decade ago, the chairman of the ERS board of trustees identified another troublesome possibility. “The main problem is people who start to apply pressure to the governor or other politicians because they’re starting a venture capital fund and they want to get $10 million or $20 million in state money,” said Michael Kennedy. “We want to take as much politics off the table as possible.”
Let’s think about this as well: We have a governor whose track record as an investor is not one that would normally inspire confidence. Deal lost more than $2 million in a failed business started by one of his daughters, and is still trying to pay off the debts associated with that venture.
The governor now thinks it’s a good idea to invest state pension funds in startup business ventures. If I were a retiree, I might have some questions about that.
Keep in mind that our retirement systems traveled this high-risk, high-reward path before and lost quite a lot of money.
From October 1998 to November 2001, the state’s two largest pension systems spent $166 million to purchase more than 2.5 million shares of stock in the high-flying Texas energy company Enron, thinking they would get better returns on their money than they would from more conservative investments.
Unfortunately for our pension plans, Enron’s management ranks included a fair number of con artists and hustlers who ran the company into one of the largest bankruptcy filings in American history in December 2001.
Enron’s stock price quickly plummeted from more than $90 a share to 25 cents a share. Georgia’s retirement plans ended up with net losses of $127 million from that attempt at “diversification.”
That’s essentially what Deal and the other proponents of raiding the pension funds want to do now – allow the systems to make similar kinds of high-risk investments in hopes that they might earn larger returns on their money.
Perhaps it will work this time. If it doesn’t work out, however, then a lot of retired teachers and government employees could be facing a very uncertain financial future.
(Tom Crawford is editor of The Georgia Report, an internet news service at gareport.com.)