Daniel K. Grimm of Washington State has a vision of better-educated pension fund trustees.
The state treasurer is spearheading the drive to form a national organization for the officials' fiduciary schooling. The group would be funded by its members instead of by private vendors with investment management services to sell.
While assets in pension funds have grown tremendously in the past few years, public pension fund trustees currently have no organized way to exchange information. Mr. Grimm asserted in an interview recently.
He further pointed out that Taft-Hartley, or labor union pension, funds tend to be more regulated and supervised by professional managers, while decisions regarding public funds are often made by people with little if any exposure to asset management.
The problem became painfully clear in Washington several years ago, when novice trustees, who received limited financial information from a former state investment board executive director, saw losses of more than $30 million pile up.
"That's when it became obvious that trustees were at a tremendous disadvantage by being lay people," Mr. Grimm said, adding that lack of knowledge kept trustees from effectively questioning investment decisions.
The treasurer voiced frustration that organizations of financial professionals do not spend more energy on trustee training. Their membership is restricted by occupation, he said, which presents another barrier to bringing trustees together.
"There is no organization solely devoted to trustees. Normally, it's an adjunct [activity] to another organization," Mr. Grimm said.
The proposed organization, to be open to state and local pension trustees, could possibly have several thousand members, Mr. Grimm estimated.
Training workshops would provide a primer on such topics as the history and purpose of public pension funds, portfolio theory, the determination of appropriate pension fund investments, the development of investment policies, liability identification, and commonly used financial terms.
Other sessions would be more specialized, discussing liabilities, risk tolerance, the development of asset allocation formulas, and whether real estate is venture capital that can be used for investment.
Education is an important issue for public pension funds because trustees tend to be laypersons, some who may have limited financial and economics experience, Mr. Grimm noted.
Such trustees have a greater need for education and for opportunities to exchange ideas, he asserted. There is a high turnover among the trustees, who are often appointed rather than elected, he added, making the need for continuing education essential.
Most pension funds are governed by a board of trustees responsible for developing an investment policy, hiring fund managers, and reviewing performance reports, said Cathie Eitelberg, director of the pensions and benefits center for the Government Finance Officers Association in Washington, D.C. A board of trustees, she said, may consist of the city or state treasurer, several appointees, employee representatives, concerned citizens, and people with financial expertise.
An investment committee, a subset of the entire trustee board. usually is responsible for developing investment policies and strategies, and reporting on the fund's financial performance to the overall board, Ms. Eitelberg added.
She also pointed out that few state investment programs mirror that of New York State. A single trustee, Comptroller Edward V. Regan, oversees the state's short-term investment pool, which invests bond proceeds.
The Western and Midwestern regional treasurers groups have already adopted resolutions supporting formation of a trustee organization following Mr. Grimm's outline.
Mr. Grimm also hopes to win over the National Association of State Treasurers at its annual meeting Sept. 13 to Sept. 16, in Lake Buena Vista, Fla.
Although not all state treasurers are trustees, a large number of them do have responsibility for state finances and investment policy. Many serve as members of their state's investment policy committees.
At least 39 treasurers from the 50 states and Puerto Rico controlled a portion of their state's funds in 1990, with 24 of the treasurers having sole responsibility, according to data from the National Association of State Treasurers headquarters in Lexington, Ky.
How it Shouldn't Be Done
While Mr. Grimm hopes to gain support for the new organization from the state treasurers group, he said the National Association of State Treasurers itself serves as an example of why an independent trustee group is needed.
The association focuses on cash management, which can include overseeing a state's general fund and expenditures, and not only managing investments and pension fund assets. But since the association's members do deal with asset management issues, Mr. Grimm asserted, they have a bond, with other trustees who may not be treasurers or association members. Membership in the new organization would be open to all public pension fund trustees. Mr. Grimm said, regardless of their primary occupation.
Other organizations, such as the Government Finance Officers Association, do provide educational services, for pension fund trustees.
The GFOA produces publications on pension investments that deal with legal obligations, accounting and reporting, information systems, and deferred compensation and portability, Ms. Eitelberg said.
"We've been writing in this area for years," Ms. Eitelberg commented, adding, "It's not the easiest one to break into, but there's always room for more education."
Another organization, the International Foundation of Employee Benefit Plans, in Brookfield, Wis., sponsors more than 50 seminars annually that are open to anyone interested in employee benefits.
The independently run foundation, which has 34,000 individual members and 7,000 organizations, sponsors an annual seminar targeted toward public pension fund trustees. Topics covered during the seminar include information on planning before retirement, creating joint employee- and management-run funds, setting investment policies and guidelines, underfunding of pension plans, and investing pension funds in such economically targeted areas as the local economy.
Other groups have agendas controlled by vendors according to Mr. Grimm. As a result, he asserted, workshops may not always be targeted to trustees' needs. For example, such an organization might discuss how to select a knowledgeable in international investing, but might not address the question of whether such a strategy makes sense, Mr. Grimm said.
The secondary role that pension fund asset management plays in each of these groups stands as a primary reason why Mr. Grimm wants to establish a separate trustee group.
The new trustee group would be funded by the trustees themselves, with moneys coming from membership dues and workshop fees. The financing would differ from that of several existing groups, which receive significant financing from vendors, Mr. Grimm pointed out.
Vendors' role in the new trustee group would be limited so no preferential treatment would be given to a company based on its funding of the group, Mr. Grimm added. For example, he said, workshop agendas would be set by members, although vendors could attend.
And limited vendor participation might make trustees more comfortable asking questions, he suggested. "We tend to be sensitive about our lack of knowledge. When [trustees are] with vendors, sure, they know what strategic asset allocation he said.
Mr. Grimm's trustee proposal, is not expected to be the only one discussed during the National Association of State Treasurers meeting in Florida. Treasurer Francisco Borges of Connecticut is also developing a plan to establish a separate trustee organization.
"Over the last several years, it's become more and more evident to me and some other trustees that it is critical that an autonomous trustee organization dedicated to fiduciary education be established," Mr. Borges said. "It's important to avail ourselves of as much objective information as possible."
In pushing for such a group, Mr. Borges agrees with Mr. Grimm that a trustee-driven organization dedicated to education is needed. But the treasurers' ideas on membership vary.
While Mr. Grimm, advocates a group composed solely of public pension fund trustees, Mr. Borges envisions a group encompassing all trustees, including those for public funds, and private and Taft-Hartley funds. Because they are labor union pension funds, Taft-Hartley funds an generally governed by statutes that differ from public fund statutes. They also tend to be regulated more closely.
Mr. Borges is working with several other trustees and the National Association of Securities Professionals, an organization that represents minorities employed with institutional and retail brokers and dealers in the securities industry. A 12-member steering committee has been set up to develop a structure for the organization, he said.
The International Foundation of Employee Benefit Plans has already been in contact with Mr. Borges, with officials sending him information on the organization and its training programs, said Terri Bannon, a foundation spokeswoman. So far, Mr. Grimm has not been contacted, she added.
Officials at the foundation declined to comment on the plans for either trustee group's formation.
Despite the involvement of the National Association of Securities professionals in the development of Mr. Borges' trustee organization, the group would be autonomous once established, the Connecticut treasurer stressed.
"The pension fund business is a $3 trillion business. It really does require a focus unto itself and not to be the third wheel of some other organization. I think that Dan Grimm is right on point" with that idea, Mr. Borges said.
His group will seek an endorsement from the National Association of State Treasurers at the upcoming convention as well as support from Mr. Grimm.
"There's very little disagreement on the need. The real question is how to pull it together," but "I think we're all talking about the same thing," Mr. Borges said.
At this point, it remains unclear whether Mr. Grimm and Mr. Borges have met to discuss their separate plans or a possible merging of their proposals.
Not All Agree on Plan
Meanwhile, some treasurers question the need for a separate trustee education group.
"You better know the day you walk into that office" what you are supposed to be doing if you are a trustee, said Treasurer Catherine Baker Knoll of Pennsylvania. Mrs. Knoll is custodian for $35 million in pension funds for public school, state, and municipal employees, as well as a member of the board for each of those pension funds.
Several organizations and institutions periodically sponsor training programs for treasurers and trustees, said Mrs. Knoll, who has herself attended summer seminars for pension fund trustees held at the University of Pennsylvania. She named groups such as the National Association of State Auditors, Comptrollers and Treasurers and the Alfred P. Sloan School of Management at the Massachusetts Institute of Technology. "There are a lot of good groups that presently do that now." she commented.
Whatever group may offer learning opportunities. Treasurer Marjorie H. O'Laughlin of Indiana said she feels education is essential for treasurers and trustees.
"The more education we all have to help discharge our public duties is a good idea," Ms. O'Laughlin said.
As a custodian of the state's police and fire department pension funds, Ms. O'Laughlin likes to hear from other trustees and fund custodians, versus vendors selling products. "You want to listen to people who are involved in it themselves and not just those selling you services. People can share experiences," she said.
Treasurer Larrie Bailey of West Virginia, who may have more training than most of his counterparts in other states, also thinks hitting the books is important.
"I do believe the more financial backing you have, the more able you are to make financial decisions," Mr. Balley said, but added, "I think there is an adequate number of organizations to serve trustees.
A registered investment adviser, Mr. Bailey also has run his own investment management firm, Allegheny Financial Programs, and has worked for the retail broker Butcher & Singer. Also, he sits on the seven-member West Virginia Board of Investments, which oversees about $2.8 billion in assets.
Mr. Bailey was treasurer of the West Virginia from 1977 to 1984, and then re-elected to the post in 1990. He was not in office in 1987 and 1988, when the state's consolidated investment pool was hit with $279 million in losses.
The pool, run by the state treasurer's office rather than by professional managers, suffered because of speculative trading in when-issued Treasuries. A special prosecutor hired to look into the matter cited the lack of professional management as a key factor.
"Hopefully, West Virginia's problems and troubles are behind [us], and we won't see these kinds of problems again," Mr. Bailey said.
Mr. Grimm and Mr. Borges also have hopes: Namely, that a new trustee education group, in whatever form it eventually takes, will make the charge of poor public pen- [No text in original publication]