Pension Funds -- A gold mine of untapped capital?
Sacramento, Calif. — Everybody knows that money doesn't grow on trees. But in California, as well as in a handful of other states, government officials have found one place money does grow: in public pension funds -- from Federal Reserve Board.
Today these massive and constantly growing funds -- the retirement savings of millions of public employees -- are being eyed as a major source of investment capital for state economies battered by the nation's fiscal bout with high interest rates and shrinking sources of capital.
Governed by strict state and federal regulations, pension funds traditionally have been invested in low-risk, conservative stocks and long-term bonds. The primary responsibility of fund managers has been to invest prudently -- to ensure that ample money will be in the pot to cover the pensions of retiring employees.
But as double-digit inflation has taken its toll on the value of such long-term investments, many fund managers have begun pushing for greater flexibility in administering pension monies.
And some states, on the lookout for ways to retool their ailing economies, are ready to please -- loosening pension fund restrictions while trying to attract more investment of pension fund dollars within their own borders.
New York and Illinois currently are looking at ways to encourage local pension fund managers to invest their monies at home. Kansas, Ohio, and Alabama already have begun experimenting with such plans, which include investing in home mortgages or in companies with plants in those states.
But it is in California -- where some of the largest public pension funds in the country add up to $30 billion in assets --that officials are contemplating proposals that one finance industry publication says are "perhaps the most comprehensive in the country."
In an interim report released recently by a task force set up by Gov. Edmund G. Brown Jr., members of the business, government, and labor communities urged that fund managers invest in local residential mortgages, alternative energy efforts, affordable housing, and small but fast-growing, innovative firms -- investments the task force contends can be made without sacrificing prudence.
Bills have been introduced in the state legislature that would relax current state laws that effectively restrict public pension fund investment to larger, older companies.
"What we're saying is that the health of the pension systems are closely linked to the health of the state's economy," explains Nathan Gardels, staff director of the task force, which will make its final recommendations, all of which will serve only as guidelines and not mandates, this July.
"We are recognizing a modern fact, that pension funds are the major investors in the nation's economy. They are the major source of savings in the country," says Mr. Gardels.
He points out that according to a recent US Senate committee report on the structure of corporate concentration, the $14 billion California Public Employees' Retirement System is the second-largest stockholder in the Bank of America, the fifth-largest stockholder in Chase Manhattan Bank, and the sixth largest stockholder in Atlantic Richfield Company.
"That means," he says, "that most of that money goes outm of the state's economy."
The rechanneling of pension fund investments, both as a means of economic reindustrialization and as a vehicle for social reform, was an issue sounded frequently by Governor Brown during his campaign last year for the presidency.
But although the report contains a recommendation that public pension funds impose a "social responsibility" rule in selecting investment opportunities, the Brown administration is downplaying the social activism issue. This attitude appears aimed at reassuring fund managers who have welcomed task force proposals that allow for investment in some of the state's burgeoning microelectronics firms but who bristle at the suggestion that their priority shift from making the best returns on their money to one of social responsibility.
"The focus now is on the better channeling of pension funds to foster innovative and productive businesses in the state," Gov. B rown told the Monitor. "Certainly, environmental and social values ought to be taken into account.