As the Securities and Exchange Commission, Congress, regulators and shareholders attempt to clean up corporate practices, there is plenty of similar work to do at the pension fund level at many states and municipalities.
Public officials, whether public pension fund trustees or elected officeholders, should be outspoken in their criticism of corporate problems. After all, billions of dollars in public employee pension funds are at stake in the stocks of corporate America. But these officials shouldn't get sanctimonious. They also need to look inward, because they face some significant reasons for complaint themselves.
The key areas for improvement include poor financing of fund operations, poor funding of liabilities and lack of transparency.
While these problems pale in comparison to such egregious cases of corporate misbehavior as Enron Corp. and WorldCom Inc., they must be addressed. Public funds must be better financed, and they must be required to report to employees and the public more completely and in a more timely fashion. The blame for the inadequate funding generally lies with the state legislature or other public body that has authority over the funding. The blame for the inadequate transparency often lies with the top people overseeing funds.
Some states don't even provide enough money for the public pension fund staff to manage their investments properly, so they have to rely on brokerage commissions, that is, soft dollars, to pay for necessary services, risking suboptimal execution of trades and potential conflicts of interests.
Testifying before a Department of Labor hearing a few years ago, Roland Machold, then director of the New Jersey Division of Investments, Trenton, said because his operation didn't get enough funding from the state Legislature, it used soft dollars to pay for such needs as investment research, consulting services, performance measurement and travel. As a result, he strongly supported the continued use of soft dollars, albeit also supporting full disclosure of all commissions, a clear definition of eligible services, and close monitoring and accounting for all commissions, according to a DOL report.
Some of the public funds that recently have filed suit against corporations over egregious accounting or other misleading practices have deep problems of their own. The Illinois State Teachers' Retirement System, Springfield, for example, filed suit against WorldCom. Yet the system's plan is only 68% funded, ranking as one of the worst state plans, according to a Wilshire Associates Inc. study. According to the system, the state Legislature is committed to "rectifying the past underfunding," putting the system on a 50-year funding plan.
In terms of transparency, officials at some public funds decline to provide timely information about asset allocation, investment managers and other investment-related issues, such as how they are voting shares in corporate proxies proposals. Often the annual reports issued by public funds don't provide the detail, and often are dated. The opaque and dated nature of many public fund reports could easily hide WorldCom-sized problems.
Even the funds hailed as leaders in pension fund management and corporate governance, such as the California Public Employees' Retirement System, Sacramento, can be inexplicably stubborn. For instance, CalPERS refused to provide any information about a lawsuit it filed in 2000 against Hyatt Corp. charging the company with illegal purchasing activities and falsifying audited financial statements.
In short, the timing couldn't be better for public officials to correct the faults in the management of public retirement plans.