Human Behavior

There is definitely no logic to human behavior.

This form of gambling is always popular with lawmakers

There is no way of knowing if Rep. Harry Geisinger R-Roswell) will be able to round up enough votes in the next legislative session to pass a constitutional amendment to legalize pari-mutuel wagering or casino gambling.

But even if neither of those issues makes it out of the General Assembly, there’s another form of gambling that’s sure to be popular with legislators:  taking money out of the state pension funds and betting it on the casino known as Wall Street.

Every few years the idea circulates at the Capitol that it sure would be a good idea to start using the state’s pension money to invest in alternative debt instruments and other exotic business ventures.

During the Roy Barnes administration, there was a proposal to amend state law so that the money in public pension plans could be steered to such private equity investments as leveraged buyout funds, venture capital funds, and timberland.

A few years later, during the Sonny Perdue administration, several bills were introduced that would have authorized the retirement systems to put billions of dollars into similar investment alternatives.

None of those proposals made it into law, but the urge to gamble with the state’s pension money never goes away.  Our governor and legislators cannot long resist the temptation to play around with those funds.

This year, one of the smaller state pension systems — the Georgia Firefighters’ Pension Fund -– was given the go-ahead by the Legislature to put some of its money into alternative funds that invest in startup business ventures and the debts of financially ailing companies.

Gov. Nathan Deal recently told the Georgia Research Alliance he supports ending the ban on alternative investments for the other pension systems, which is a good indication that such legislation might well be adopted next year.

Supporters of these types of investments contend they will earn higher returns for the pension plans than the more conservative stocks and bond funds that typically draw these systems’ investments.  The billions socked away in state pension funds can also boost economic development by providing venture capital for startup businesses, supporters say.

They rarely mention that these alternative investments carry much higher risks as well -– upping the odds that the pension plans could lose the money they invest in these business schemes.

The two largest plans are the Employees’ Retirement System (ERS) and the Teachers Retirement System (TRS).  They use their nearly $60 billion in total assets to pay monthly benefits to more than 150,000 retired state employees and teachers.  I don’t think these retirees would feel very good about knowing their future pension checks are being gambled on startup business ventures.

When the diversification of pension funds was first discussed more than a decade ago, the chairman of the ERS board of trustees identified another troublesome possibility.

“The main problem is people who start to apply pressure to the governor or other politicians because they’re starting a venture capital fund and they want to get $10 million or $20 million in state money,” said Michael Kennedy.  “We want to take as much politics off the table as possible.”

That’s really the nut of the issue.  As we’ve seen in the past few sessions, developers and other business types are mad with the desire to get into the state treasury – and some of their friends in the General Assembly are more than willing to let them in.  With all those billions in pension funds suddenly available for riskier investments, you would see a gold rush among business types wanting to get their piece of that pie.  Political wheeling and dealing with pension dollars would be rampant.

Let’s think about this as well:  we have a governor whose track record as an investor is not one that would normally inspire confidence.  Deal lost more than $2 million in a failed business started by one of his daughters and is still trying to pay off the debts associated with that venture.

The governor now thinks it’s a good idea to invest state pension funds in startup business ventures and other such alternatives.  If I were a retired teacher or state employee, I might have some questions about that.

Keep in mind that our retirement systems traveled this high-risk, high-reward path before and lost quite a lot of money.

From October 1998 to November 2001, the state’s two largest pension systems spent $166 million to purchase more than 2.5 million shares of stock in the high-flying Texas energy company Enron, thinking they would get better returns on their money than they would from more conservative investments.

Unfortunately for our pension plans, Enron’s management ranks included a fair number of con artists and hustlers who ran the company into one of the largest bankruptcy filings in American history in December 2001.

Enron’s stock price quickly plummeted from more than $90 a share to 25 cents a share. Georgia’s retirement plans ended up with net losses of $127 million from that attempt at diversification.

That’s essentially what Deal and the other proponents of raiding the pension funds want to do now – allow the systems to make similar kinds of high-risk investments in hopes that they might earn larger returns on their money.

Perhaps it will work this time.  If it doesn’t work out, however, then a lot of retired teachers and government employees could be facing a very uncertain financial future.

How would this move to get pension money be accomplished?  It would really be quite easy. There were two bills introduced in the last session dealing with public pension funds that could be very easily amended to allow TRS and ERS to open up their funds to alternative investments.

Much of the legislation that is passed in the General Assembly these days is done in the form of an amendment that is attached to another bill that deals with the same general subject matter.  If a bill is introduced and for some reason has trouble getting out of the House or Senate, then the author merely hides the bill as an amendment to another measure and gets it adopted that way – often without lawmakers being aware of what they’re voting on.  That’s how the bill to give lucrative tax rebates to the developers of tourist attractions – such as Rep. Earl Ehrhart (R-Powder Springs) — passed during this year’s regular session.  That could be what happens in this case.

There are two bills that would be perfect Trojan horses for a raid on the pension funds:

HB 308 clarifies language in state law regarding the duties of the boards of trustees for the state’s public pension plans.  It was passed by the House and is awaiting a vote in the Senate.  It could be amended on the Senate floor or in committee to add language authorizing the use of public pension funds to make alternative investments.

HB 295 authorizes a method of calculating accrued benefits for persons who transfer between the Employees’ Retirement System and the Teachers Retirement System.  This bill is still pending in the House, but there would be plenty of time in the 2012 legislative session for both the House and Senate to vote on it.  This is another measure that could easily be amended, either in committee or during the floor debate, to add language authorizing the use of public pension funds for alternative investments.

If the General Assembly votes to open up the state pension funds to alternative investments, I would not be surprised to see it done by adding the pertinent language to one of those two bills.

Tags: alternative investments , Earl Ehrhart , Enron , ERS , Harry Geisinger , Nathan Deal , pension funds , TRS , venture capital

One Comment

  1. Rebecca
    Posted March 6, 2012 at 5:18 pm | Permalink

    Why were we retirees never told about the Enron loss?

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