S. Carolina voters OK expanding investments

This article was written by Joel Chernoff with reports from Douglas Appell, Mark Bruno, Barry Burr, Vince Calio, Doug Halonen, Emily Newman and Cecily O'Connor.

The South Carolina State Retirement System, Columbia, will be able to invest in international equities and private equity for the first time now that voters approved an amendment to the state constitution.

Reynolds Williams, chairman of the South Carolina Retirement System Investment Commission, which oversees the $26 billion pension fund, expects the fund will invest up to 20% of its assets in international stocks and 5% in private equity under a new asset allocation expected to be adopted this spring.

The South Carolina referendum was the most significant, but by no means the only, pension- or investment-related issue during the Nov. 7 elections. In Iowa, for example, Democratic Governor-elect Chet Culver ran on a platform encouraging the $20 billion Iowa Public Employees' Retirement System, Des Moines, to invest 1% of its total private equity allocation in in-state venture capital.

Meanwhile, Republican candidates in Illinois, Maryland, Massachusetts, New York and Oregon who favored, among other things, replacing public defined benefit plans with defined contribution plans, all lost. In Rhode Island, however, voters re-elected Republican Gov. Donald L. Carcieri, who said he would consider switching new public employees to a defined contribution plan.

The Democratic candidate for governor in Alaska, Tony Knowles, who favored reinstating the state's defined benefit system for new public employees, was defeated by Republican Sarah Palin. Sources said Ms. Palin is open to discussing the issue. Ms. Palin's press secretary, Curtis Smith, didn't return calls seeking comment.

The defined benefit vs. defined contribution debate was far more subdued this year than last.

"Broadly, my take is that voters have rejected candidates who ran on a platform of promoting privatization of pensions," said Daniel Pedrotty, counsel in the AFL-CIO Office of Investment, Washington, which strongly supports public defined benefit plans.

However, Daniel Clifton, executive director of American Shareholders Association, Washington, which advocates adoption of defined contribution plans, said: "There was a tidal wave against Republicans in general, which could have been more of an overwhelming factor than" the DB-vs.-DC issue.

Mr. Clifton said shifting to defined contribution systems is becoming a non-partisan issue, citing a proposal this summer by New Jersey Gov. Jon Corzine, a Democrat, to introduce a defined contribution plan for new employees.

"Elections are going to come and go, but the long-term trend is moving in this direction," he said.

Here's a rundown of state results.

After a defeat in 2002, the constitutional amendment to allow investment of public retirement assets in international equities and private equity captured 70% of votes on Nov. 7. The amendment still needs legislative ratification, but insiders consider that a mere formality.

"We supported it very strongly and it removes the last obstacle on investments for us," said Mr. Williams. "We are no longer restricted from any material investment opportunities." South Carolina still has a cap on how much it can invest in equities, at 70% of total assets. Currently, half of the fund is invested in U.S. equities.

Mr. Williams said the commission likely will carve out a 10% to 20% allocation to international equities and a 5% allocation to private equities. It plans to adopt a new asset allocation in the first quarter of 2007 that might also include first-time allocations to alternatives, including real estate and hedge funds.

He said fund officials likely will hire external managers to run the new mandates.

Mr. Culver said Iowa PERS should invest 1% of its total private equity and private debt allocation, which combined are targeted at 10% of the fund, in the state. His main opponent, Republican Jim Nussle, opposed the idea as too risky.

The Culver proposal would encourage venture-capital managers at the Des Moines-based system to invest a portion of their portfolios in Iowa companies.

Currently, the Iowa system has only $3.2 million invested in venture capital in Iowa, according to Donna Mueller,, chief executive officer at Iowa PERS. "It probably would take a while, a couple of years, to invest 1%," said fellow Democrat Michael L. Fitzgerald, who was re-elected state treasurer and also serves as an Iowa PERS trustee. Mr. Fitzgerald, who said he has discussed the proposal with Mr. Culver, said the in-state investment program would be voluntary for the system's venture capital managers. It would not require legislation, he added.

John Hedgecoth, policy director for the Culver campaign, said, "The funds would be invested for the benefit of the people of Iowa and state economic development." Creating new businesses would provide more tax receipts to mitigate increases in pension contributions and avoid tax increases to help pay for contributions to the retirement system, he said.

Mr. Culver's plan would give Iowa PERS discretion on how to carry out the proposal, Mr. Hedgecoth said.

Efforts to reverse last year's freeze of the state's public employees and teachers defined benefit plans were dealt a serious setback by the defeat of Mr. Knowles, who attracted 41% of the vote to Ms. Palin's 49%.

A projected unfunded liability of $6.9 billion for state pension systems led the Alaska Retirement Management Board, Juneau, to sharply increase employer contribution rates, leading to outcries across the state. Ms. Palin has supported outgoing Gov. Frank Murkowski's proposal to allocate the state budget's $500 million surplus to next year's pension contribution.

Incumbent Democrat Gov. Rod Blagojevich handily won re-election, despite criticism of the combined $45.7 billion deficit of Illinois' five state pension systems, and a suggestion from Republican challenger Judy Baar Topinka, the state treasurer, that the state study the use of defined contribution plans to replace them.

Laurence Msall, president of the Chicago-based Civic Federation and a member of the Illinois Governor's Pension Commission, said Mr. Blagojevich is open to any pension solutions.

In fact, Democrats won a supermajority in the state Senate, further insulating the Legislature from pressure to address the public funds' underfunding, said Martin Noven, deputy treasurer. "The treasurer's concern is that it's more likely now than ever that the underfunding will continue."

Republican Anne M. McCarthy lost her bid to become Maryland state comptroller, winning only 40.2% of the vote compared with Democrat Peter Franchot's 59.6%. During the campaign, Ms. McCarthy had said the tradeoffs between defined benefit and defined contribution plans should be studied.

Following the Nov. 7 election, Mr. Franchot said he was a strong supporter of Maryland's defined benefit plan system. "There's going to be stability and continuity to the oversight of Maryland's pensions," he said.

Kerry Healey, the GOP gubernatorial candidate whose platform included a call to introduce a defined contribution plan for new public employees, garnered a dismal 35% of the vote in losing to Democratic opponent Deval Patrick. Ms. Healey, current lieutenant governor, had argued that introducing a defined contribution plan would save taxpayers hundreds of millions of dollars.

Republican gubernatorial candidate John Faso garnered only 29% of the vote in his race against Democrat Eliot Spitzer. In his campaign, Mr. Faso advocated replacing New York state's defined benefit plan with a defined contribution plan for new employees. Mr. Spitzer supported keeping the DB plan.

Meanwhile, incumbent New York Comptroller Alan Hevesi, sole trustee of the $145 billion New York State Common Retirement Fund, Albany, won re-election against Republican Christopher Callaghan, who had argued for replacing the defined benefit plan with a defined contribution plan. Mr. Hevesi advocates keeping the state's defined benefit plan.

Mr. Hevesi has been under investigation by New York state regulatory agencies for using a state worker to act as a chauffeur for his wife for the past four years. Mr. Hevesi, in his campaign ads, admitted to "acting stupidly" and has since paid back $84,000 to the state. While current New York Gov. George Pataki has said he will investigate Mr. Hevesi's actions, one organization predicted that nothing will come out of that investigation.

"We don't think Gov. Pataki will do anything to displace Mr. Hevesi," said Nicole Gelinas, a legislative liaison for the Manhattan Institute, a New York-based political watchdog for state governments. "We think he won't do it out of respect for the current administration. Also, given Mr. Hevesi's popularity, he won't be removed from office."

Mr. Hevesi has publicly stated on numerous occasions that he will not resign from office. He garnered 60% of the vote against Mr. Callaghan's 35%.

During his gubernatorial campaign, Republican Ron Saxton had talked about shifting current and future state workers to a defined contribution plan. But Mr. Saxton won only 43% of the vote, compared with 51% for Democratic incumbent Ted Kulongoski, who had supported 2003 reforms of the $57 billion Oregon Public Employees Retirement Fund, Salem. Those reforms created a hybrid plan for new state workers.

"It's unlikely there will be further major changes to PERS because, with the governor's leadership in the first term, we fixed the problem in the system and the costs are declining," said state Rep. Greg Macpherson, an employee benefits attorney with Stoel Rives LLP, who helped fashion the reform.

Even though supporters of Democratic challenger Charlie Fogarty alleged that Mr. Carcieri would take away their pensions if re-elected governor, Mr. Carcieri still won by a 51% to 49% margin, said Jeff Neal, a spokesman for Mr. Carcieri.

Mr. Neal said he believes Mr. Carcieri will study a shift to a defined contribution plan for new public employees during the coming year, but any change wouldn't affect benefits promised to either retirees or those with more than 10 years of public employment who are vested in the system.