WASHINGTON — Industry officials told state treasurers meeting in Asheville, N.C. earlier this week that they can benefit from investing pension funds in infrastructure, though some treasurers had concerns.
The discussion took place during a Tuesday panel during the National Association of State Treasurers annual conference.
States can invest pension money in infrastructure through public-private partnerships, the industry officials said. Money from pensions could be given to infrastructure managers, who in turn will find projects to put the funds towards.
Brian Clarke, executive director of business development in North America for Industry Funds Management, said the United States is relatively new to pension investments in infrastructure, but that such investments have been taking place globally for a long time.
Clarke said he thinks there are “two sides of the coin” as to why public pension funds should be invested in infrastructure. On one side are the financial considerations — investment in infrastructure helps to diversify a pension’s portfolio, provides high yields and provides a good hedge against inflation, he said. On the other side, these investments allow pension funds to invest society and the economy.
“These assets provide essential services that you can really touch and understand, and you can see how a community can truly benefit as a result,” he said.
Sonia Axter, managing director of infrastructure for Ullico Investment Advisors, said infrastructure is one of the best assets the country has, but is underfunded. Having a private partner can provide accountability for infrastructure projects, she said.
Washington Treasurer James McIntire, who attended the session, said he thinks the investments are risky, and his state is not as interested in the upsides of the high rate of return. His state’s pension fund would prefer to invest in other states than in Washington state, he said. It’s cheaper for Washington to finance infrastructure through tax increases, he added.
“Why should I ... tell my taxpayers, toll payers, rate payers, that they should pay more money just to support our public pension system?” McIntire asked. “That puts us in a very awkward [political] position as treasurers.”
Angela Rodell, Alaska’s acting commissioner of revenue also said that she would prefer to invest Alaska pension money in infrastructure outside her state.
Axter said that she’s heard from many officials that specifically want to invest in their own states. But P3s are not right in every case, she acknowledged.
Greg Carey, co-head of the national infrastructure practice and the municipal finance transportation department at Goldman Sachs, said financing infrastructure with tax-exempt bonds is a cheaper way to finance projects than using a public-private partnership, but added, The question is, can you back stop.’”
Rodell also said that states have to be concerned about liquidity, and she asked how easy it is to get money in and out of an infrastructure fund. Clarke noted that there are both closed-ended and open-ended funds and that “these things are cash cows.” However, states should not invest pension money in infrastructure with the expectation that they can trade on their investment, he said.
Another panel at the NAST conference discussed states moving away from defined benefit public pension plans, which specify the benefits employees will be provided after they retire.
Two decades ago, virtually all state and local governments had defined benefit plans. These plans provide generous benefits but high costs for municipalities, said Robert Clark, a professor at the Poole College of Management at North Carolina State University. Defined-benefit plans also incentivize early retirements and don’t treat short-term workers well.
Today, defined-benefit plans are still the most prevalent type of plan for states, but many states have made changes to these types of plans or give employees a choice of option. Plans that are a hybrid of defined benefits and defined contributions could become more popular in the future, Clark said.
Utah Treasurer and soon-to-be NAST president Richard Ellis described the pension reform his state undertook a few years ago. The state’s old system was primarily non-contributory, meaning the employer paid the full amount of the contributions to employees’ pensions. The state created a new program effective July 1, 2011 that gives new employees a choice of a hybrid plan or a defined-contribution plan.
Panelists noted that even when changes are made for new plans, states still have to pay the unfunded pension liabilities for the existing defined benefit plans. Richard Hiller, senior vice president at TIAA-CREF, said moving to a defined-contribution plan creates a system where a state won’t have new unfunded liabilities but will still have to address its current unfunded liabilities.
At a roundtable at the NAST conference, state treasurers discussed how they are working to educate local elected officials about the impact of the Governmental Accounting Standards Board pension accounting changes that go into effect for fiscal years beginning after June 15, 2014. The new standards could increase the total unfunded liabilities reported by many governments.
