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BENEFITS BEAT
Pension Funds Think Outside the Box
Entrepreneurial sparks at CalPERS and Michigan MERS
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For many years, public pension funds suffered a bad rap as 20th century dinosaurs — huge, unwieldy creatures of the state that survived only by virtue of their massive size. In a nimble world, they were seen as slow to react because of their Jurassic process requirements and primitive political brains. They were thus unlikely to survive in a postmodern, competitive world.
My, how times have changed! We now have stirrings of downright creative energy coming from not just one, but two, noteworthy statewide public pension plans in California and Michigan — each doing very different things.
In California, the goliath CalPERS state pension plan now enjoys Gov. Arnold Schwarzenegger's support for legislation introduced by one assemblyman to permit it to offer a retirement program for state citizens. This could be a harbinger of other entrepreneurial efforts to come. The general concept is that CalPERS would offer a 401(k)-like plan to California residents who don't have a company retirement plan. The sponsors are not trying to put any existing retirement plan out of business, although CalPERS would clearly compete with private retirement-plan administrators and money managers. This could be a brilliant move to ward off "pension envy" by building a statewide constituency of stakeholder citizens and voters in the private sector.
In Michigan, the smaller but equally ambitious Michigan Municipal Employees Retirement System (MERS) has created a new subsidiary that will operate like a venture capital firm and a public-private partnership. They seek venture returns, employing a private sector venture capital adviser as a gatekeeper and partner to prevent "lemon socialism" that often afflicts public plans burdened by a social or political purpose. The new firm is called Tegrit Financial Group, a wordplay on "in-Tegrit-y." [Full disclosure: I am a member of the board of directors of Tegrit Financial, which sets policy and guides investment and strategic decisions. My opinions in this column are my own and not those of Tegrit Financial or Michigan MERS. I have no affiliation with CalPERS.]
Tegrit's business plan includes a multi-state initiative to offer retirement plan and OPEB trust services in the public sector and beyond. For example, the Michigan group will offer a bundled OPEB investment solution to municipalities in states that don't have workable solutions. They already have almost $100 million of such money invested voluntarily by client municipalities in-state, so this is a logical product marketing extension for them.
The Michigan MERS teams have immense potential to achieve impressive public purposes and earn a healthy investment return for the beneficiaries of their own pension plan. They already are looking at pension recordkeeping and technology partners or subsidiaries that could better serve their sister pension plans nationwide. Unlike CalPERS, they no longer have to run back to the state legislature for permission every time they want to try something new, as they were successfully spun off into a separate public-private entity several years ago Their capital structure for the venture operation is completely businesslike and meets fiduciary standards, and they have now hired a new CEO for the Tegrit subsidiary who's already familiar with their culture and mission.
These new public enterprises will provide genuine competition to the private sector, plus solutions to individuals, public agencies and retirement plan administrators, while preserving and visibly demonstrating the core values inherent in public service. If they are successful in these new ventures, their new markets can benefit their core constituencies — as long as they remember their founders' values. While the rest of the world is focused on sovereign wealth funds, let's see what America's public pension funds can do if they apply some Yankee ingenuity. Let's welcome them to this brave new world of public-private partnerships and public-sector entrepreneurialism.
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. His general market observations and institutional investment strategies are his own and should not be construed as investment advice or recommendations concerning specific securities. More biographical information.