And, sometimes, in-house investment does lead to the very patronage retirees like Edith Christy hope to avoid. Recently elected Connecticut Treasurer Christopher Burnham fired ten employees of the $11.2 billion Connecticut Trust Fund (the state pension funds) and eliminated the in-house securities trading desk after he discovered that local brokers were overcharging the pension funds.
In Arizona, the so-called Little Funds, three smaller public pension funds totaling $2.3 billion--the Public Safety Retirement System, the Elected Officials Retirement System and the Corrections Officers Retirement System--are managed internally and run by the same board. MDNMNew Times recently reported that in the past few years, the board has entered into real estate transactions that raise ethical questions, including funneling $688,000 to school chums and friends of state insiders as fees in real estate transactions; giving a close business associate of a board member a $1.8 million real estate loan; and investing more than $13 million in a UDC Homes business deal that is stalled in bankruptcy, with $6 million due.
Pensioners of the Arizona State Retirement System fear such practices could occur with their system in the future. Moving money in-house may make it more accessible to state politicos.
The state Legislature can control the fund's investments by changing the law that governs the fund. And the retirees suspect it was the Legislature, which has long pushed for investing pension-fund money in risky, "economically targeted investments"--such as the Little Funds' real estate ventures--that wanted the money moved in-house in the first place.
Currently, state law says 20 percent of the pension fund can be invested in-house. It also says that only 1 percent of the fund can be invested in economically targeted investments.
The Legislature also dictates precisely what cost-of-living adjustment, or COLA, the retirees get with their pension checks. Up until this year, the Legislature passed out COLAs irregularly--depending on the budget and the amount of lobbying done by the retirees. Then, in 1994, the Legislature passed a law that automatically gives the retirees a COLA each year the fund earns more than 9 percent on its investments. The COLA does not go up if the fund earns more money.
So there is a degree of self-interest here. If internal investing reduces the overall return below 9 percent, the pensioners will not get their COLAs.MDNM However, if the fund earns more than 9 percent, the retirees will not get more than their regular COLAs.
The fund has averaged about a 13 percent return over the past ten years, officials say, but performance is starting to slip compared to other public pension funds nationally.
A July 1995 retirement system memo obtained by New Times compares the Arizona fund's rate of return on its investments to that of 54 other funds of similar size. Arizona ranked in the top 40th percentile of all the funds this year, slipping down from the 4th percentile for the past five years.
Currently, the retirement system divvies up its multibillion-dollar purse among about a dozen different out-of-state managers that handle domestic and foreign portfolios. About $250,000 is currently invested in real estate mortgages in Arizona through an in-state bank.
The Boston Company, which managed the $1.06 billion domestic portfolio for the retirees, has performed well in its stock portfolio, but offered a mediocre performance with fixed-income bonds, documents show.
At an emergency meeting of both boards in April, the Boston Company was fired because several staffers who'd managed the Boston Company's share of the Arizona fund had suddenly quit the firm. "The core, heart and brain of their organization has [sic] departed," minutes of the meeting say.
The solution pushed by Gilbertson and others was to hire a trainer--in this case a reputable money-managing company named Axe-Houghton, which currently manages some foreign stocks for the fund. Axe-Houghton would train state staffers in investment strategies, help set up the sophisticated computer systems and within a year turn the money formerly managed by the Boston Company over to the state. The fees proposed by Axe-Houghton were competitive--less than 1 percent of the portfolio's net worth.
According to the minutes of that meeting, only one board member, Grace Lau, suggested putting the money with another large investment management company. She wasn't convinced Axe-Houghton had been adequately checked out, and she was concerned about giving the inexperienced state staffers such a large sum of money to invest. Lau said she preferred the staff "build up" to the $1 billion, "perhaps in $100,000 increments," the minutes say. Lau could not be reached for comment.
Pensioner Edith Christy and others think the entire move was "too hasty." Furthermore, they worry that because the retirement system has no "errors and omissions insurance," a mere technical mistake by a staffer--say, erroneously pushing the wrong key on the computer keyboard--could result in a multimillion-dollar, unrecoverable loss to the pension fund.