Chet Culver, who swept to victory in the election for governor of Iowa on Nov. 7, now will have a chance to carry out a campaign proposal to have the $20.49 billion Iowa Public Employees' Retirement System invest 1% of its $2 billion private equity allocation in venture capital in the state.
Twenty states, in fact, have some kind of provisions either in law or policy involving in-state investment of public pension fund assets, according to Samuel W. "Skip" Halpern, president, Independent Fiduciary Services Inc., Washington, The tally is based on IFS research three years ago.
In general, the provisions are designed to bolster economic activity or serve social or political goals, Mr. Halpern said.
"My impression is (in-state mandates) are growing," Mr. Halpern said. "But to reach a conclusion I would want to be able to survey it over time. I also think even with these types of programs, there is a pretty wide perception of the need to carry out fiduciary duties at least from the perspective of trustees and staff."
In-state investment mandates might be an acceptable idea "if the fund board and staff have a goal of maximizing the economic benefits to the fund itself," Mr. Halpern said. "If they go about pursuing these types of programs that way, they probably won't sacrifice return or take excess risks. But that requires great care and carefully followed practices and policies."
"My impression is unless there are adequate checks and balances in place, there is considerable political risk that can overcome what is a sound decision from an investment and fiduciary perspective," Mr. Halpern said. "But some states have installed those checks and balances."
Laws and policies aren't always necessary to make in-state investments. The $224.2 billion California Public Employees' Retirement System, Sacramento, had 10.44% of its assets in California investments as of Sept. 30, according to its website, which updates the in-state breakout every month. "There are no laws that require in-state investing, and our board has not set any particular percentage of in-state investing," said Brad Pacheco, spokesman. "The board considers the secondary objective of promoting economic growth and well-being to the state when it is not in conflict with the board's trust duties of loyalty, care, skill, prudence, diligence and diversification."
Mr. Culver plans to encourage Iowa PERS to make such investments, but he will leave discretion to the fund consistent with its fiduciary duty on risk and return.
Economic development should be better tackled elsewhere. Governors and state legislators ought to inquire how their oversight is aiding or hurting the state's economic appeal. Through years of shortchanging contributions, some state public funds have built huge deficits, which ultimately will require a shift of state revenue or tax rise to fund the shortfalls. That looming cost certainly weighs in any analysis of states by prospective or existing businesses seeking to expand in the state. Iowa PERS is in better shape than most state funds. It was 89% funded in 2005, when it had $18.7 billion in assets, according to its latest report. That's above the 86.6% average of state systems surveyed by the National Association of State Retirement Administrators. But it is still underfunded, and the state recently had to raise the contribution rate paid by both employers and employees.
If economic development is slow, there is probably a market reason. Governors and state legislators should look at tax policies, infrastructure and educational standards, among other issues, to see if and how they contribute to harming the economic climate. But pension funds? Leave the investment with fiduciaries and professionals for the sole benefit of participants.
