State, local races could affect pension funds, managers, retirees

A number of state and local pension plans around the country could see changes in the near future, depending on who is elected in a number of races on Nov. 6.

Elections involving state treasurers and two gubernatorial races have the potential for the greatest impact on state pension plans as changes could be in store for North Carolina, Oregon, Indiana and Montana.

Janet Cowell, who as North Carolina treasurer serves as sole fiduciary to the $74.5 billion North Carolina Retirement Systems, Raleigh, is opposed in her re-election bid by Republican Steve Royal, who wants to increase oversight of external money managers and find ways to reduce management fees.

Ms. Cowell is seeking lead-plaintiff status in a lawsuit against the underwriters of Facebook Inc.'s May initial public offering to lend a “strong voice” on poor corporate governance practices at technology companies. Mr. Royal questions why a long-term public investor would choose to make investments in technology-based IPOs, which have not performed well in the past few years.

Mr. Royal, a certified public accountant who runs his own business, said in a telephone interview he wants a full independent audit of the pension system to ensure assets are being managed appropriately and with the lowest fees possible.

“We don't need to be trusting Wall Street ... we don't need to do all this out of house,” Mr. Royal said.

While the retirement system paid nearly $300 million in fees last fiscal year, investment fees were 39 basis points of total assets, which was about the median for the public pension industry, Ms. Cowell said, and is a slight drop from the system's 2009 levels of nearly 41 basis points.

About 65% of the defined benefit plan is managed externally, said Julia Vail, spokeswoman for Ms. Cowell.

Any changes to investment policy would need approval from the General Assembly and Ms. Cowell said she will request to shift money out of fixed income into opportunistic and distressed credit. The system had a 94% funded status, in large part because of its high fixed-income allocation, but she said the “math doesn't work” anymore with low interest rates. She is also looking to build on the real assets portfolio and said she would request the ability to do more internal management of assets.

Mr. Royal would like to see more internally managed portfolios as well, and more investments related to businesses in the state. He also said an increase in investments in alternatives only leads to greater risk and higher fees.

Mr. Royal said if the downward trajectory of the pension system's funded status does not improve, he could see a movement to a defined contribution plan. Ms. Cowell said the DB system has worked well and the creation of a DC plan would create greater costs to the state for the next decade.

The retirement system was 96% funded as of Dec. 31, 2009, 106% at the end of 2006 and 108.4% at the end of 2002.

In Oregon, Republican nominees for state treasurer and secretary of state are pushing for significant reform to the $57.9 billion Oregon Public Employees Retirement Fund, Salem, including moving completely to a defined contribution plan for new employees, while the Democratic incumbents support reform, but with less-drastic measures.

The Oregon treasurer sits on the Oregon Investment Council, which oversees more than $70 billion in assets, including PERS. It is not responsible for setting benefit levels or employer contribution rates.

Republican treasurer challenger Tom Cox has a four-stage reform proposal for Oregon PERS that would see all new hires placed in a defined contribution plan as the first stage, followed by freezing benefit accruals for existing employees and placing them into a DC plan. The third and fourth stages are to issue pension obligation bonds to give employers relief and allow them to spread out future payments; and boost worker productivity efficiencies that will result in budget savings. He also wants to raise the retirement age for new employees, cap cost-of-living adjustment payments and eliminate pensions for legislators.

The incumbent, Ted Wheeler, is looking for the PERS board to evaluate lowering the pension fund's assumed rate of return of 8%. One suggestion to cope with the rising costs from a lower rate of return would be to increase the system's amortization period. He also wants to cap COLAs and eliminate the ability for out-of-state retirees to collect reimbursements for Oregon income taxes that they do not actually pay.

During his tenure, Mr. Wheeler has reduced management fees, including negotiating lower private equity fees.

Knute Buehler, Republican challenger for Oregon secretary of state, is also calling for a large-scale review and reform of PERS, but hasn't provided comprehensive proposals. He said the state cannot have a meaningful discussion on tax reform until the pension system is first changed. Incumbent Kate Brown has not pushed for pension reform and believes it is a task to be taken on by the state Legislature, not the secretary of state's office, according to her campaign website.

In Indiana, the election could change seven of the nine trustee seats for the board of the $25.7 billion Indiana Public Retirement System, Indianapolis. Democrat John Gregg and Republican Mike Pence, now a U.S. congressman, are vying to replace Gov. Mitch Daniels. The governor appoints three trustees to the pension system board, including the director of the state budget agency. Speaker of the House Brian Bosma and state Senate President David Long, who each appoint two trustees, are also up for re-election.

Mr. Gregg is campaigning on a plan to seek legislation allowing for a percentage of pension assets to be invested in Indiana-based venture capital funds. Both candidates agree a growing state economy will help retire pension debts.

The Indiana system recently lowered its assumed rate of return to 6.75%, the lowest of all major public plans, and made additional contributions to get the pension systems within INPRS to 80% funded.

Also in Indiana, Treasurer Richard Mourdock, who oversees the $388 million Indiana State Police Pension Trust, Indianapolis, is running for a U.S. Senate seat. If Mr. Mourdock is elected, Mr. Daniels would have the power to appoint a replacement to complete the term through 2014. If Mr. Mourdock loses, he will remain as treasurer.

The Montana gubernatorial race features two candidates who want to address pension reform as a top priority in the next legislative session. Republican candidate Rick Hill supports current Gov. Brian Schweitzer's proposals to increase employer and employee contributions to shore up the pension system. Mr. Hill takes the issue further, proposing new employees be placed in a defined contribution plan. Steven Bullock, the Democratic candidate and current attorney general, supports Mr. Schweitzer's plan. The two largest Montana pension funds — the $4.1 billion Public Employees' Retirement System and $3 billion Teachers' Retirement System — face a combined $3.4 billion in unfunded pension liabilities.

Other states with large retirement plans or endowments that could possibly see changes as the result of the outcome of contested races in the election include Illinois, Kentucky and Texas.

James F. Clayborne Jr., trustee of the $11.4 billion Illinois State Board of Investment, Chicago, is seeking re-election as a state senator. He also serves as chairman of the Illinois General Assembly Retirement System, part of ISBI. The Illinois State General Assembly recently discussed abolishing benefits for future members, but did not pass the measure.

Kentucky state Rep. Michael Cherry, who serves as co-chair of the Task Force on Kentucky Public Pensions and the State Government Committee, is not seeking re-election. The pension task force is expected to deliver its report on recommended pension reform on Dec. 7.

All 15 members of the Texas State Board of Education are up for election this year. The board, which controls the content of school books and curriculum in the state, also oversees the $25.5 billion Texas Permanent School Fund, Austin. The race appears to be dominated by curriculum issues, rather than investment concerns.

On a local level, San Bernardino County (Calif.) Supervisor Neil Derry is running for re-election against James C. Ramos. Mr. Derry unsuccessfully proposed a pension-reform measure for the November ballot. The Board of Supervisors tabled the measure. If re-elected, he is expected to keep pushing pension reform. His measure would have raised the retirement age for new county employees and reduced the amount they earn annually toward their pension benefits. Mr. Ramos has been silent on the issue.

Farther south in California, the San Diego mayor's race represents a choice on clashing views on pension benefits and how to implement a voter-approved proposition that places all new hires, except police, in a defined contribution plan. Republican candidate Carl DeMaio was an ardent supporter of that proposition as a councilman and has worked to reduce city worker pay and pension benefits. Democratic candidate Bob Filner opposed the proposition and has long been a supporter of public employee unions, but has said he will implement the new DC plan because of voters' overwhelming support.

Hazel Bradford, Barry Burr, Arleen Jacobius, Christine Williamson and Melanie Zanona contributed to this story.