MONTGOMERY, Ala. -- Five money managers stand to lose lucrative mandates from the $1.3 billion Alabama Trust Fund if voters in November give the green light to a constitutional amendment that would eliminate certain restrictions on the fund.
The amendment would require that half of the fund be managed from the office of David Bronner, chief executive officer at the $28 billion Retirement System of Alabama.
The trust fund's board of trustees would then decide how to manage the remainder. Mr. Bronner's office already manages the $500 million Heritage Fund, another state trust fund.
Current managers for the trust fund were hired last September, and only received the assets in November. Previously, Wellington Management Co. LLP, Boston, had been the sole manager.
The managers, all handling core fixed-income accounts, are: Conseco Capital Management, Carmel, Ind., and Salomon Smith Barney, New York, each with around 27% of the pie, or $351 million; Southwest Bank and Sterne Asset Management Inc., both of Birmingham, Ala., each with 21%, or $273 million; and AmSouth Bank, also of Birmingham, which got 4%, or $52 million.
Tom Meyers, a spokesman at Conseco, said he understood that if the amendment passes, the phase-out could take as long as two years.
"Even though it's not good to lose assets, it is a sizable mandate, and if our performance is good we could be renewed for a pared-back mandate," he said.
Dick White, division president at Southwest, said the bank also was hired as the trust fund's master custodian in September, and he wasn't sure what the implications would be for that assignment, should the amendment pass.
"We don't know how they would realign the managers. They could eliminate some or cut them all back. But the change could also create opportunities."
Frank D. McPhillips, an Alabama attorney hired by state Finance Director Henry Mabry to draft the amendment, said if it passes, the state would be required to immediately move 50% of the assets to Mr. Bronner's office. It would be up to the board to determine whether to do new searches for the rest.
"But if there were a dollar cost to switch immediately, the situation could be revisited," he said.
As the trust fund is now structured, only some income can be used for the state's capital fund; principal and any capital gains achieved through investment cannot be used. So even though the fund is allowed to invest in equities, there has been no incentive to do so, Mr. McPhillips explained.
Jim Bryce, the state's assistant finance director, said he expected that under the new structure there would be searches for equity managers, after a new asset allocation strategy is developed.
Ken E. Scislaw, the consultant who did the search for the current managers, believes it's outrageous to change managers again. "I find it extraordinarily unprofessional for state officials to go through the costly and lengthy process of hiring these investment managers and then virtually overnight, during the middle of a legislative session, write a bill to undo all of this work. . . . it truly reflects a lack of long-term planning by state officials," he said.
The Alabama Trust Fund and the Heritage Fund are slated to merge at the end of 2001, according to existing law. The two funds were created in the 1980s from lease payments that oil companies paid for drilling sites on the coast.
The purpose of the amendment is to create the Alabama Capital Improvement Trust Fund from the two funds, which would receive a larger percentage of the royalties plus a share of capital gains from more aggressive investment options that, in turn, would allow the state to start financing bond issues totaling as much as $350 million.
Currently, all royalty payments go into the trust fund, but only 20% of the income is permitted to be used for capital improvements; 10% goes to an environmental fund, up to a maximum of $5 million.
Mr. McPhillips said if the amendment doesn't pass, the state's general fund would lose $20 million to $25 million annually. "The state is broke and needs to raise money to fix its bridges and modernize its ports, and investing in equities would help achieve those goals," he said.
The amendment also would allow a portion of the royalties to pay for capital improvements. Now, only the income from the trusts can be used for the general fund.
"Due to a poor tax structure, decades of bad management and a complete lack of long-term strategic planning, the state finds itself in financial difficulty during the longest economic boom in our country's history," argued Mr. Scislaw, the consultant. "The current administration is desperately trying to find sources of revenue without raising taxes."
