Statewide races shining spotlight on public funds

Although much of the midterm election attention is focused on control of Congress, there are key statewide races across the country that will influence state pension systems.

Retirement issues aren't a key factor in every one of the 36 gubernatorial elections on Nov. 6, but winners in a select number of states will collectively make decisions that will affect retirement for millions of Americans. Several gubernatorial candidates are advocating a switch to defined contribution plans. And in other elections, voters will weigh in on a candidate's plan to tax the large endowments of private non-profit colleges and universities, as well as state treasurer races that could shape the future of state pension investments.

Here's a look at gubernatorial races to watch:

In Oregon, the $75.5 billion Oregon Public Employees Retirement Fund is a frequent topic of discussion for incumbent Democratic Gov. Kate Brown and her challenger, Republican state Rep. Knute Buehler.

In March, the Oregon Legislature passed a bill championed by Ms. Brown aimed at reducing the system's unfunded liability, which was $22.3 billion as of Dec. 31. The bill set up two new funds, a side account for school districts to be invested alongside pension assets to reduce school district pension contributions, and an incentive fund to match certain lump-sum employer contributions to the pension plan.

The bill also directed the state treasurer to study the feasibility of borrowing money from the Oregon Short Term Fund, a $15.7 billion short-term cash investment pool in which a number of local governments and state agencies participate, to be redeployed into investments. The state treasurer is to report the results of the study to the Legislative Assembly no later than Sept. 30, 2019.

Ms. Brown set up a task force in 2017 to bring down PERS' unfunded actuarial liability and has said she will work with the group to continue that mission, if elected. In November 2017, the task force put out a report recommending a number of measures, including harvesting some of the state's timberland, selling state-owned real estate and privatizing state universities, which could bring in $4.2 billion to $6.4 billion to reduce the system's unfunded actuarial liability.

Mr. Buehler would like to take PERS in a different direction. While protecting pension benefits that have already been earned, he wants to enroll new employees and move current employees to a 401(k)-type plan with an unspecified "reasonable match," cap the salary amount used to calculate benefits at $100,000 a year, and require all state and local government employees to contribute toward their own retirement benefits.

Public employees in Oregon already are required to contribute 6% of their salary into the state's individual account program, a supplemental defined contribution plan that belongs to the employee. Mr. Buehler wants all or at least of portion of that 6% contribution to be redirected to PERS.

In Colorado, Republican Treasurer Walker Stapleton is running against Democratic U.S. Rep. Jared Polis. Mr. Stapleton is proposing big changes to the $49 billion Colorado Public Employee Retirement Association, Denver, including allowing all employees to choose a 401(k)-style plan instead of the current plan, raising the retirement age and reducing the fund's assumed rate of return to 5% to 5.5% from 7.25%, which he said is more realistic.

In June, Gov. John W. Hickenlooper signed a pension reform measure that will increase the contribution rate for most PERA participants by an additional 2% of pay phased in beginning July 1, 2019, totaling 10% for most participants by July 1, 2021; require a three-year delay before receiving a cost-of-living adjustment; and set the COLA cap at 1.5% (the current annual COLA for participants who started receiving benefits prior to Jan. 1, 2007, is 2%), among other measures.

The law will also direct the state to allocate $225 million each year to the pension fund to reduce the unfunded liability (PERA was 61.3% funded as of Dec. 31, 2017, according to the most recent information on the pension fund's website); and establish an automatic adjustment provision designed to fully fund PERA in 30 years.

On his campaign website, Mr. Polis said the law placed too much burden on retirees and that he would "reject efforts to reform PERA on the backs of our teaching professionals and state or local employees in the future."

U.S. Reps. Michelle Lujan Grisham, a Democrat, and Steve Pearce, a Republican, are running for governor of New Mexico. The state has two major pension funds — the $15.4 billion Public Employees Retirement Association of New Mexico and the $13 billion New Mexico Educational Retirement Board. Mr. Pearce said in a statement to Pensions & Investments that "government pensions have stayed generous and lagged many changes. At a minimum, new employees coming into the government workforce are going to have a very different system. Employees many years away from retirement are going to have to see significant changes."

Mr. Pearce also wants the $24.3 billion New Mexico State Investment Council to invest more in the state but has not offered specific figures. The SIC oversees the New Mexico Private Equity Investment Program, which was created in 1993 and is legally authorized to invest up to 9% of the state's Severance Tax Permanent Fund in New Mexico companies. As of April 2017, the program had a target asset allocation of 5% of permanent fund assets, or $235 million, for private equity investments in the state.

Democratic gubernatorial candidate Jay Gonzalez, who is running against popular incumbent Republican Gov. Charles D. Baker, has a plan to tax endowments if elected. His plan calls for a 1.6% tax on the endowments of private, non-profit colleges and universities with endowment assets exceeding $1 billion. The state has nine colleges and universities that fit the description, including Harvard University's $39.2 billion endowment and the Massachusetts Institute of Technology's $16.4 billion endowment.

Mr. Gonzalez said his plan allows for a new investment of $1 billion per year toward education and transportation priorities.

In Rhode Island, public pension reforms proposed in 2011 by Gov. Gina Raimondo when she served as general treasurer and passed into law have become a campaign issue for her challenger.

Joseph Trillo, a former Republican state legislator now running as an independent, voted for those reforms, which included ending cost-of-living increases, raising the retirement age and reducing benefits for future retirees. Now he is campaigning on the promise of giving back part of the 3% COLA cut to retirees, and threatening to appoint a special counsel to investigate what he calls "high-risk" alternative investments made by the pension fund during Ms. Raimondo's tenure as treasurer.

In Illinois, incumbent Republican Gov. Bruce Rauner is running against Democrat J.B. Pritzker, a businessman. The state's five pension funds faced $137 billion in combined unfunded liabilities as of June 30, 2016. Illinois' pension funding ratio was 35.6% in 2016, the third lowest in the U.S.

In June, Mr. Rauner signed a budget into law that allows current public workers to exchange their 3% compounded COLA for a lump-sum payment of 70% of the value and a 1.5% COLA that is not compounded.

Also under the bill, vested former workers can opt to receive a lump-sum payment amounting to 60% of the value of their pension balance. In both cases, the lump-sum payments must be transferred to tax-qualified retirement plans or accounts.

Mr. Pritzker, who has not released a detailed plan to tackle the state's pension issue, is leading Mr. Rauner in the polls.

In other races and ballot measures to watch:

Democrat Shawn Wooden and Republican Thad Gray are vying to be the next treasurer and the principal fiduciary of the $34.2 billion Connecticut Retirement Plans & Trust Fund, Hartford. Denise L. Nappier, state treasurer for the past two decades, announced earlier this year that she would not seek re-election.

Mr. Wooden is a partner at the law firm of Day Pitney LLP, where he currently leads the firm's public pension plan investment practice.

Mr. Gray retired as chief investment officer of private equity manager Abbott Capital Management to seek the treasurer post. Last year, state House Republican Leader Themis Klarides appointed Mr. Gray to serve on the Connecticut Retirement Security Authority, a task force that supervises the implementation of a state-sponsored retirement savings program for private-sector employees.

Arizona voters will decide on Proposition 125, which would allow the state Legislature to make adjustments to the Arizona Corrections Officer Retirement Plan and the Arizona Elected Officials' Retirement Plan. If approved, cost-of-living adjustments would be capped at 2% for CORP participants and employees hired on or after July 1, 2018, would be required to enroll in a DC plan. EORP participants would also see COLA capped at 2%, down from the current 4% cap, if the measure is approved.

This proposition comes after voters approved a similar measure in 2016 that replaced the permanent benefit increase for the $9.8 billion Arizona Public Safety Personnel Retirement System with a cost-of-living adjustment. The proposition allowed employees hired on or after July 1, 2017, to have a defined contribution retirement plan or a defined benefit hybrid plan, while increases in the COLA were capped at 2%.

In California, Democrat Fiona Ma is running against Republican Greg Conlon for state treasurer. Mr. Conlon has called for new employees of CalPERS and CalSTRS to be enrolled in a defined contribution plan instead of a defined benefit plan. The treasurer serves on both of the state pension plan boards — the $351 billion California Public Employees' Retirement System, Sacramento, and the $229.2 billion California State Teachers' Retirement System, West Sacramento. The candidates are running to replace John Chiang, who sought the Democratic nomination for governor but was defeated in the primary.

Mr. Chiang has been vocal as treasurer about CalPERS and CalSTRS strengthening policies on diversity, governance and divestment, and was instrumental in setting up the state's retirement program for private-sector employees without access to a plan.

Incumbent Thomas P. DiNapoli is running for re-election in a crowded field for New York state comptroller against challengers Jonathan Trichter, Mark Dunlea and Cruger Gallaudet. Mr. DiNapoli, who is widely expected to win, is the sole trustee of the $209.1 billion New York State Common Retirement Fund, Albany.

Mr. DiNapoli is a proponent of publicly traded companies disclosing environmental, social and governance information. He was one of several institutional investors who petitioned the Securities and Exchange Commission to order a uniform approach to how companies disclose and manage potential risks.

In the race for Colorado treasurer, Republican Brian Watson is in favor or raising the retirement age to at least to 67 — to match Social Security — as well as reducing or freezing cost-of-living adjustments and dropping Colorado PERA's assumed rate of return from 7.25% to something more "realistic," according to his campaign website.

The pension reform law the Colorado General Assembly passed in spring includes automatic adjustment provisions to ensure that PERA remains on the path to full funding in 30 years.

The current annual COLA for participants that started receiving benefits prior to Jan. 1, 2007, is 2%. For 2018 and 2019, the pension reform reduces the COLA to zero. For each year thereafter, the COLA is 1.5%. The legislation also raises the retirement age to 64 for new employees hired on or after Jan. 1, 2020.

On his campaign website, Mr. Watson said the law doesn't go far enough.

Democratic candidate Dave Young voted against the bill earlier this year as a state legislator and is against raising the retirement age and cutting COLA increases.

The Colorado treasurer has a seat on the PERA board.