 |
|
Posted August 16, 2007 The full Governing Management Letter | Subscribe to The Governing Management Letter Bonus columns: GIRARD MILLER’S BENEFITS BEAT Pensions & Potholes Self-dealing in infrastructure? Questions, success stories or anecdotes about benefit issues in government? After the Minneapolis bridge collapse earlier this month, states are really starting to look for ways to fund their mounting infrastructure needs. Even before that, many states had been desperately seeking funding for infrastructure maintenance, and some have turned to their pension funds as lead investors. This is a bad idea. It smacks of 'lemon socialism' — whereby the public treasury gets stuck with bad investment ideas that flunk professional scrutiny. Not to mention the potential for cronyism, political intrigue and patronage. 
Public pension funds are fiduciary funds. Their sole purpose is to provide benefits to retired employees. Their trustees are obligated to make investments with the sole interest of the beneficiaries. Although it's nice for them to think about the taxpayers every now and then, that really should be done through vigilance in the benefits department and not the investment division. Traditionally, public pension funds are uninterested in state and municipal projects because they are typically financed by tax-exempt municipal bonds. A pension fund has zero appetite for tax-exempt securities that pay reduced interest rates. However, the trend toward privatization and "public private partnerships" (P3s) has resulted in a number of deals that are financed with taxable debt since they yield explicit benefits to private parties.
This raises the potential for pension fund investments. In California, the state teachers' retirement plan is looking into this idea. The first test of any such arrangement should be whether the pension plan would buy an infrastructure investment from another state on the same terms as a proposed local project. If the answer is 'No' because the investment return is too meager or it lacks diversification, then it flunks the smell test. Buying in-state securities makes fiduciary sense only if purchased at arms-length by an accountable independent portfolio manager whose performance is measured relative to others in a free market. Now, there might be an arrangement that would pass fiduciary muster — and it could apply to both public infrastructure and to venture capital projects promising local economic development benefits. Nothing precludes an experienced professional fund manager from working with a group of public pension plans to put together a nationwide or regional fund that invests in public projects or startup companies on a broadly diversified basis. Their pooled investments could be selected with the objective but not the obligation to invest a proportional amount of that money within each sponsoring jurisdiction. That would provide diversification and professional management, and with appropriate controls and oversight, it could pass the smell test. These safeguards against blatant self-dealing and political crony-ism can be embedded in the partnership. Wall Street and the investment industry have a lot of creative minds. Their marketing mavens will figure out a way to make something work properly, especially if they have their own skin in the game. Meanwhile, public officials should raise a ruckus whenever they see politicians unilaterally pushing their pet infrastructure project into a pension fund. Last month: Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net. © 2007, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
