Public pension funds play supporting roles in state elections

Public pension plans are being hit with a mixture of ethics complaints, ballot initiatives and election contests, with candidates using pension reform as an appeal to voters.

Ethics complaints are center stage in New Jersey and North Carolina. Earlier this month, the New Jersey State AFL-CIO filed a complaint with the New Jersey State Ethics Commission, asking for an investigation of actions by Robert Grady, chairman of the state's investment council. The council oversees the state Division of Investment, which, in turn, manages investments for the $80.6 billion New Jersey Pension Fund, Trenton.

The AFL-CIO alleged Mr. Grady “has chosen to invest pension funds into hedge funds and private equity firms after their principals have made political contributions that benefit the governor (Chris Christie) and the Republican Party,” according to the complaint signed by Charles Wowkanech, president of the New Jersey State AFL-CIO.

Christopher Santarelli, a spokesman for the State Treasury Department, called the complaint “nothing more than a cheap political stunt.”

New Jersey's pension fund also is playing a role in the race for governor in Massachusetts between primary winners Martha Coakley, the Democratic attorney general, and Republican Charles Baker.

A memo in May to the New Jersey Treasury Department from the investment council said Mr. Baker reportedly made a $10,000 contribution to the New Jersey Republican State Committee in May 2011. Later that year, the division committed $15 million to a fund managed by General Catalyst Group Management LLC. Mr. Baker is “entrepreneur in residence” at General Catalyst. “This has raised the question of whether Mr. Baker is an "investment management professional' under the State Investment Council's” political contributions policy, the memo said.

This policy prohibits the division from investing in a fund managed by an investment management firm “if , within two years prior to such investment, specified political contributions or payments to a political party have been made or paid by the firm or its investment management professionals,” the memo said.

In North Carolina, the State Employees Association of North Carolina petitioned the Securities and Exchange Commission to investigate if a money manager violated so-called pay-to-play rules in dealing with the $90 billion North Carolina Retirement Systems, Raleigh.

The association's complaint said SEC rules might have been violated by Charlotte-based Carousel Capital's co-founder and former White House Chief of Staff Erskine Bowles, who with his wife, Crandall, hosted a fundraiser in 2011 for state Treasurer Janet Cowell, the sole trustee of the pension fund. Also in 2011, Carousel Capital, which managed some North Carolina pension fund investments, won a contract for the state's Innovation Fund.

Schorr Johnson, a spokesman for Ms. Cowell, said the complaint was “without merit.”

He said Ms. Cowell's office verified with outside legal counsel that neither Mr. Bowles, a senior adviser with Carousel, nor his wife was covered by the SEC pay-to-play prohibition. “Political issues have no role in investment decision-making,” Mr. Johnson said.

At the ballot box this fall, pension issues won't be as prevalent as they have been in recent years, said Keith Brainard, the Georgetown, Texas-based research director for the National Association of State Retirement Administrators.

One issue that caught his eye is Proposition 487, a ballot initiative asking voters in Phoenix to make new civilian city workers eligible for a 401(k) plan instead of a defined benefit plan from the $2.2 billion City of Phoenix Employees' Retirement System.

Supporters and opponents of the proposal, called the Pension Reform Act, have disagreed sharply over the long-term cost of Proposition 487.

“There are some real nuances” in the proposal, said Steven Kreisberg, the Washington-based director of collective bargaining for the American Federation of State, County & Municipal Employees. “If this passes, voters will be in a world of hurt (because) it will spike contributions from taxpayers.”

Voters in Rhode Island will decide in November whether Gina Raimondo becomes the state's first woman governor. As state treasurer, Ms. Raimondo was the architect of a pension revamp that took effect in July 2012.

The law created a hybrid DB/DC plan, raised retirement ages and suspended cost-of-living increases for the $8 billion Employees' Retirement System of Rhode Island. Ms. Raimondo's duties include serving as chair of the State Investment Commission, which establishes Rhode Island's investment policies.

Several public employee unions and a coalition of retired workers sued to overturn the law. Rhode Island Superior Court Judge Sarah Taft-Carter in December 2012 ordered mediation. A settlement proposal was announced in February, but it was rejected by a police union in April.

Ms. Raimondo's efforts angered public employee union officials. Still, she prevailed in the Democratic primary on Sept. 9, in part because the unions split between Angel Taveras, the mayor of Providence, and H. Claiborne Pell, the grandson of the late U.S. Sen. Claiborne Pell.

“She might not have made it if labor had been unified,” said Maureen Moakley, professor of political science at the University of Rhode Island, Kingston. Ms. Moakley said Ms. Raimondo received votes from people who thought the pension changes were necessary and who didn't have sympathy for public employee unions.

If Ms. Raimondo wins the general election, her victory could have “a huge ripple effect” in other states that have troubled pension systems, said Wendy Schiller, associate professor of political science and public policy at Brown University, Providence. “Other Democratic leaders will have a little more courage to take steps” in advocating pension law revisions.

NASRA's Mr. Brainard disagrees. “Almost every state has enacted some pension reform in the last four or five years, going across the political spectrum,” he said. “I don't see any impact outside of Rhode Island.”