Who’s Making Decisions About Your Pension Fund?

Some states are pushing to replace educator representatives on pension trustee boards with political appointees. They claim it’s to restore health to the funds, but research shows that boards with strong member representation deliver better pension fund earnings.

The Tennessee state senate approved a bill this month that would strip the Tennessee Education Association of its ability to designate members to serve on the board of the state’s pension system. At the same time, the bill gives expanded authority to politicians, including the speakers of the Senate and House.

“Bills like these don’t help a single child, they don’t raise a single test score and they don’t help move education forward in Tennessee,” said State Senator Eric Stewart (D-Belvidere). “When it comes to education reform, we should be inviting teachers to the table. These bills push teachers away.”

They also push money away from the pensions.

Research shows that pensions perform better when plan participants – like public school educators who have a direct stake in the health of the fund — sit on the board as trustees.

“You simply look at things through a different lens and have different motivations when it’s your own money,” says Nancy McKenzie, a senior pension specialist at NEA.

Retirement system boards can include three types of trustees: representatives of plan beneficiaries, ex officio members (government officials who become members of the board because of their office or position), and political appointees. The National Education Association (NEA) advocates that every board include trustees elected by active and retired plan members, and that this group should constitute a majority of the board.

But in the wake of the economic meltdown, proposals to reduce the numbers of plan members on state pension boards have cropped up. Proponents of such measures maintain that “member” trustees are novices who lack investment knowledge critical to the continued health of the systems – even though they receive ongoing financial management training, and have access to financial experts who help them make sound investing decisions.

Still, in New Hampshire Republicans proposed reducing the number of public employee seats from 8 to 4, claiming that because the public employees had no financial experience, the fund suffered as a result.

Similar measures were introduced and defeated in Alabama and Colorado, but some say new proposals could remerge there and elsewhere because of the current political environment.

While it’s true that many public pension funds had significant investment losses in states across the country, the problem isn’t lack of financial expertise among the plan participants on the pension boards, says Boston University Law School Associate Professor David H. Webber.

If lack of financial know-how is the cause of the collapse of public pension funds, then what caused the collapse on Wall Street? “Would it be better if state pension boards had the financial expertise of Lehman Brothers?” he says.

Governors and state legislatures would like to blame the public employee board members for the performance of the funds as a way to take back control, but the research doesn’t back them up.

What Does the Research Say?

 

Yale law professor Linda Romano conducted a statistical analysis of 50 public employee retirement plans and found that earnings were much better when the boards were independent, rather than political.

According to Romano, board members elected by plan participants are less susceptible to political pressure because their personal retirement funds are at stake and their positions don’t depend on the good graces of state officials. She also found that government official trustees on pension boards raised serious conflict of interest problems because the fund becomes an “inviting target” for state officials seeking money for other state projects, especially in times of fiscal difficulty.

“Research is clearly on our side on this issue,” says Carole Wright, who is speaking as an individual, but is also a retired educator and board chair of the Public Employee Retiree’s Association of Colorado. “Boards made up of members achieve better results because of our devotion to fiduciary duty.”

When there are too many political appointees and politician board members, there is too a high risk for “pay to play” issues.

“You’ve got people who want to hire the politically popular vendors, who might provide rewards with everything from a game of golf, to major contributions to your campaign or to the campaign of the politicians who appointed them,” Wright says.

In California, elected officials who serve on the state pension board have been accused of soliciting campaign contributions from service providers, and in New York, former New York State Comptroller Alan Hevesi who pleaded guilty in a pay-to-play scandal at the state pension fund he once ran, will go to prison for as many as four years.

Hevesi admitted giving preferential treatment to a service provider, approving $250 million in pension-fund investments in exchange for almost $1 million in gifts, including $75,000 in travel expenses, $380,000 in sham consulting fees for a lobbyist, and more than $500,000 in campaign contributions.

The case of Hevesi is extreme, but the politicization of public pension funds is a real risk when the composition of the board leans more toward political appointees and away from plan participants.

“That’s why you want a board where the public employees represent the majority,” says Webber. “The ideal composition of a pension board is one that is the most motivated.”

He says it all boils down to skin in the game, a term coined by Warren Buffet to describe the situation where corporate executives use their own money to buy stock in the company they’re running to gain the best stock performances.

“Nothing motivates more than skin in the game,” says Webber.