The Wolf in the Closet

    There’s a wolf in the closet.  He’ll stay there until after the elections, but somebody will open the door for him once the votes are in.  Count on it.  Both candidates for Governor of the state of Georgia have expressed an interest in letting this wolf out, and once out he won’t go back in again.  The lure of $59 billion dollars, regardless of the source of those funds and especially in the ethically challenged Georgia system of politics, is just too much for politicians to ignore.  Both candidates might hem and haw and say they would only use the money “with the backing of teachers and the TRS board of directors,” but that’s Georgia politics at its finest.  Tell the voters what you think they want to hear before the election, and forget you ever said it once you’re in office.  If that doesn’t work, blame someone else for following through on what you really wanted in the first place.

    The Georgia Chamber of Commerce supports the idea.  They say the move to allow TRS to invest up to 5% of it’s total in alternative funds would secure the highest returns possible for public workers, and that Georgia is the only state that does not allow TRS funds to be invested in alternative investments.  One legislator even said he wanted Georgia to follow this plan because we were the “only state in the union” that didn’t allow this.  Remember what your mother said when you wanted to do whatever it was that “everyone else was doing?”  That should apply doubly to adults, but usually doesn’t.

    The NY Times reports that the $26.3 billion Pennsylvania State Employees’ Retirement System has invested about 46% of its assets in these riskier alternatives, and over the last 5 years has paid $1.35 billion in management fees and reported an annualized return over the same period of 3.6%.    The median return for public pension systems is 4.9% and the target return required to meet financing requirements is 8%.  In Georgia, prohibited from alternative investments, TRS has earned 5.3% per year over the same period and paid about $54 million in total fees.  TRS is recognized as one of the public pension funds that every other public pension fund wants to be, and provides  stability and peace of mind for teachers that have retired and those that expect to retire.  The Pennsylvania State Employees’ Retirement System has more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds.  A sampling of those pension funds with ⅓ to ½ of their money in hedge funds, real estate and private equity reported returns that were over one percentage point lower than those funds that avoided these riskier, more volatile investments.  Not only were the returns significantly lower, the fees charged for those investments were over 4 times what the others paid.  Lower returns and higher fees is not a good combination unless you are an investment banker.

    The dirty little secret about public pension fund investments is that they are required to be transparent in their investments, and their transactions are subject to the Freedom of Information Act.  Many of the best performing venture capital funds will not take money from public pensions because they do not want their portfolios made public knowledge, and, as a result of this need for obfuscation,  public pensions generally get to choose from lesser performing funds that don’t see transparency as an obstacle to performance.

    In 2012 Governor Deal supported Senate Resolution 782, but later withdrew his support after a backlash from teachers, both working and retired.  The resolution, still in committee at the end of the last legislative session, would allow a study committee of 17 members, all appointed by the Governor, to investigate doing away with the defined benefit system in place for TRS and moving to a contribution system.  Part of the resolution also calls for the committee, without the Governor really being involved, of course, to suggest removal of the restriction that currently prevents up to 5% of TRS funds from being used for investment in venture capital funds.

    Senator Carter also suggested a proposal to give state pension funds, including TRS, the freedom to invest in alternative investments and venture capital.  He later backed away from the idea and said he would never consider such a thing without the approval of the TRS board and teachers.

    The lure of that money just sitting around and not going to somebody that could help a campaign or a relative is anathema to politicians.  The real issue here, given the Georgia legislature’s lack of willingness to engage in meaningful ethics reform, is not really one of providing money for startups and venture capital but protecting it from the deleterious effects of rampant cronyism.  There is no way, as I see it, to keep politics out of investment decisions regardless of the positive or negative financial effects on pension funds.  Allowing politicians to reward donors through the allocation of access to venture capital from state pension funds without regard as to whether the investments made financial sense for contributors to that fund would be the epitome of folly for teachers that depend upon that fund for their current or future retirements.  Yes, I am one of those, and no, I do not trust any politician to ignore large pots of money whether it belongs to them or not.  Especially after the votes are in and they think nobody’s watching. I’m hoping that wolf stays in the closet, but I’m also watching the doorknob closely to see if anybody puts their hand on it later.  After the election.  When the votes are in.  When nobody’s watching. When the door swings open and the Governor - whoever he is - can stand back and say “I didn’t do it, they did!” - the wolf and I will both know better.  Be careful who you vote for.   A politician that needs your vote is one thing; an unscrupulous one that already has it is quite another.