From what has been an uphill battle for about six years, West Virginia's state pension assets will finally be allowed to be invested in equities.
South Carolina and Indiana now are the only states that ban state funds from investing in equities. But in both states, initiatives are under way to change that.
The West Virginia law, passed by the state Legislature in early March, establishes the West Virginia Trust Fund, a separate entity from the state. West Virginia's constitution bans equity investments by the state; but by creating a separate entity, the constitutional ban does not apply because the trust, a non-profit, non-stock corporation, no longer is under state jurisdiction.
This means that by July, nearly $4 billion in pension assets at the West Virginia State Board of Investments, Charleston, will be transferred to the West Virginia Trust Fund. Although it is not a federally regulated plan, the trust fund will be working under the same prudent man rule outlined in the 1974 Employee Retirement Income Security Act, which requires trustees to act in the best interest of plan participants, to diversify the assets and to obey plan documents.
And by 2000, the fund will be allowed to invest 60% of its assets in equities and 20% of its assets in foreign securities. The assets now are invested entirely in high-quality bonds.
"Over the years, and especially this past year, several legislators worked hard to champion the cause," said Craig Slaughter, executive director for the State Board of Investments. "We met with (various interest) groups and tried to get them to understand the need for this."
The assets of the current investment board are managed by: Investment Advisors Inc., Minneapolis $1.8 billion; Western Asset Management, Pasadena, Calif., $915 million; Lincoln Capital Management Co., Chicago, $906 million; Fischer Francis Trees & Watts, New York, $127 million. Although he did not know what was going to happen with the current managers, Mr. Slaughter said there was no reason not to retain them.
Mr. Slaughter said he didn't expect any manager changes immediately after the assets were transferred to the trust fund. He added the trustees may commission an asset allocation study prior to making any manager changes.
But everyone involved in the process has a lot to do in the next few months to get the new trust fund running, said Dana Eddy, the governor's general counsel.
Already, Gov. Gaston Caperton, a Democrat, has sent the names of his three nominees for the trust fund board to the state Senate for confirmation. The remaining four trustees have not been decided on yet, but all need to be confirmed by early May, said Mr. Eddy. The other four trustees are selected by the governor from a list provided by the leaders of the state House and Senate.
Each trustee will get an annual stipend of $5,000, an additional $500 for each meeting, plus expenses.
The new board will probably look to the state board of investment staff to help get started, Mr. Eddy said.
Each of five beneficiary groups will be allowed one "delegate" who will be allowed to attend the board's monthly meetings, Mr. Eddy said. In addition, each beneficiary group will be allowed to have three representatives, plus its delegate present to help design the fund's investment policy for the upcoming year.
No executive director has been hired for the trust fund yet, and Mr. Slaughter said he had not decided whether to apply for the job.
"What we're trying to do is emulate the private sector," Mr. Eddy said. "Any pension fund manager would want to sit down with its members and ask whether" their objectives were the same as the board.
"Now, our system is much, much stronger this way - with respect to protecting the integrity of the fund," said Dick Shelton, legislative director to the Public Employees Retirement Association, Charleston.
The board will come up with a list of equities that the fund can invest in each year. At the onset, the fund will only allowed to invest 20% in equities; from July 2, 1997 to July 1, 2000, the fund can hold 40% in equities; by July 2, 2000, it can invest 60% of its assets in equities.
Mr. Eddy didn't think this was restrictive because it allows the fund to adjust from a 100% debt portfolio.
"It also gave a comfort level to some of the (beneficiary) groups," Mr. Eddy said. "We didn't see how it would impinge upon the funds."
The fund can only hold 20% of its portfolio in international securities, and cannot hold more than 75% of its portfolio in corporate debt instruments. Also, the fund is prohibited from holding more than 5% of assets in any one company.
Mr. Slaughter said he and other groups had been trying since about 1990 to get legislation passed that would allow equity investing. Last year, a bill was defeated in the Legislature that would have overturned the state's constitutional ban. The state Supreme Court dealt a second blow to the retirement system when it ruled last year that the state funds must abide by the constitutional ban on equity investments.
Meanwhile, South Carolina and Indiana officials are taking steps that would allow their pension funds to invest in stocks.
James Holly, chief of staff for South Carolina Treasurer Richard Eckstrom, has been meeting with as many state legislators as possible. Two bills are moving through the state House and Senate that would overturn an 1895 constitutional amendment banning state funds from investing in corporations. If the bills pass the General Assembly, a referendum will go before the voters in November. If the bills fail, the state treasurer will have to wait until the next general election in 1998 to push the issue.
"I think the treasurer has done a good job in educating the public on the need to move to equity investments," Mr. Holly said. "We're very optimistic that the General Assembly understands the need for the change."
In Indiana, voters will decide in November whether the state should invest in equities. Bob Newland, investment officer for the Indiana State Teachers' Retirement Fund, Indianapolis, said voters rejected it in 1986 and in 1990; he is hopeful that voters will approve the referendum this year and allow the funds to be invested in equities.
"We've had a lot of good (press) about it so far," Mr. Newland said. "Our best asset has been the market itself."