State pension funds eye ETIs.
But pension funds, government and private, with assets now risen to $4 trillion are a tempting source of funds, and state economies need shoring up. So some states are allowing their pension systems to put money into what are now being called "economically targeted investments" (ETIs), though typically the percentage of total assets that can be so used is severely limited. A new report from the Center for Policy Alternatives found that 27 state retirement systems are involved in ETIs, most of which are for local housing and venture capital projects.
Since 1982, the New York State Teachers Retirement System has invested nearly $2 billion (out of a total of $35.8 billion) in a portfolio of in-state investments that out-performed other securities over five years. Some $425.2 million went for Federal Housing Authority-guaranteed housing projects, underwriting 11,500 units for poor and elderly people and another $325 million for rehabilitation of dilapidated residences.
Colorado Public Employees' Retirement Association (PERA) has invested $42 million (with another $80 million committed) in several Denver-based venture partnerships, helping to create 4,603 state jobs in manufacturing, technology and communications. PERA's goal is to eventually invest 20 percent of its $12 billion assets in-state. A recent PERA project was a $33 million loan to build a gas-powered cogeneration plant. A steam by-product of the plant will be pumped into a nearby 10-acre public greenhouse, which employs 35 people.
Last spring CALPERS, the California Public Employees Retirement System, formally adopted a four-page ETI investment policy that encourages "investment intended to improve the economic well-being of California...localities and residents." Guidelines include such principles as no concession of risk and cost-adjusted return, and no distortion of overall asset allocation and geographic diversification.
New to the market are national partnerships and fund pools that target local economic needs of investors while providing the safety of geographic diversity. One example from the report is a real estate equity fund known as the Multi-Employer Property Trust (MEPT). It finances new construction of union-built commercial property in target markets where client pension plans are located. Nationally diverse with a mix of traditional office space, business park, flexible space, industrial, retail and lodgings, 40 percent of MEPT properties are located in the Midwest, 36 percent in the West, 22 percent in the East and 2 percent in the South. Net assets were valued at $665 million for 1992 when 96 pension plan investors participated, including some state retirement systems.
Advocates contend that ETIs are different from social investing because fund managers can't accept less than market rates of return. Investments are used to fill gaps in the capital market, especially for projects with the potential to create jobs, affordable housing or both. And the retirement system benefits from competitive yields in under-capitalized markets.
Critics believe ETIs complicate asset management and that the dual goals of return and economic growth create political pressures that may be hard to resist. The Center for Policy Alternatives recommends that states establish policies to ensure objective analysis of proposed investments and to avoid political interference in any investment decision. Benefits to the state should be secondary to consideration of the risk and return quality of the investment.
For more information or a copy of the full report, Economically Targeted Investments by Statewide Public Pension Funds, call or write The Center for Policy Alternatives, 1875 Connecticut Ave. NW, Suite 710, Washington D.C. 20009. Phone (202) 387-6030.