COEUR D'ALENE. Idaho - Two executives involved in managing large public pension funds said yesterday that economically targeted investments should continue to play an integral role in the funds' investment portfolios.
Speaking at the National Association of State Treasurers Conference, Steven J. Nesbitt, a senior vice president at Wilshire Associates, and Carol O'Claireacain, commissioner of the New York City Department of Finance, both said the tremendous assets of pension funds make them a logical financial tool for improving the housing industry and the employment picture.
"The aggregate value of pension fund assets sits at $3.4 trillion, and mutual funds have grown to $1.7 trillion," Nesbitt said. "That represents roughly half of all the available equity in the country and it should be used."
Nesbitt, who advises state pension funds in California, Massachusetts, Pennsylvania, Washington, and Oregon, said the top 20 pension funds in the United States own 10% of corporate America's assets and they should be encouraged to support economically targeted investments, or ETIs.
Over the years, investors have been critical of these investments because of perceptions that the backing is shaky. Those critics have cited both Connecticut and Kansas as examples of states that have made losing pension fund investments in targeted areas.
But Nesbitt said the backing of several federal and state guarantees and the general market performance of those investments have made them more palatable to investors.
"The use of ETIs allows state and local pension funds to do something other than simply provide for its beneficiaries' retirement," Nesbitt said. "Now they will both protect and advance the investments of their members."
O'Claireacain echoed the comments made by Nesbitt and said that the use of ETIs is part of the due diligence and fiduciary responsibility she is expected to display in her position.
O'Claireacain, who earned a doctorate in economics from the London School of Economics, manages almost $50 billion in New York City pension funds.
"Over the years, I have routinely listened to the arguments that ETIs were not a sound investment for pension funds," she said. "Now, though, there are thousands of successful programs that have created jobs and built affordable housing through these investments."
O'Claireacain said a program implemented by Pennsylvania Treasurer Catherine Baker Knoll to increase the affordability of a college education is one example of a successful and profitable use of ETIs.
"New York City's pension funds realized a 13% return on our ETIs and 10% on every other investment," she said.
Both O'Claireacain and Nesbitt said, though, that infrastructure programs have not received enough of a federal guarantee for pension funds to invest.
"I find that rather sad, really," O'Claireacain said. "The country has all of these massive infrastructure needs and one of the largest sources of investable money is not in that market." She said that over the last seven years, she has been investigating ways that pension funds could play more of a role in infrastructure improvements.
"We have to find a way to get that good market rate of return from the infrastructure projects," she said. "But we cannot allow our funds to have investments with a questionable rate of return."
She said there are 20% to 25% of infrastructure projects that generate tolls or other regular revenues. Those projects, because of the promised stream of revenues, are something the funds are able to consider.
But without backing from the federal government through either a guarantee or a dedicated tax, pension funds cannot participate in the other 75% to 80% of those projects.
"We have a huge pool of savings from the nation's workers and a huge amount of projects to invest in," she said. "If the Congress would implement a federal guarantee, then pension funds could bridge that investment gap."
The treasurer's conference will continue at the Coeur D'Alene Resort in Northern Idaho until tomorrow morning.
One source said the group may make a statement this morning about the future role that underwriting firms may contribute to political campaigns.
The question of campaign contributions is-also being considered by the Municipal Securities Rulemaking Board and the Securities and Exchange Commission.