Important Points to Know Regarding Pension Investment Bill

 

• What does the Pension Investment Bill do?  It amends 47-20 to add 47-20-87 so that the Employees’ Retirement System is authorized to invest no more than 5 percent in alternative investments in addition to all eligible investments currently authorized by the law.  Safeguards allow for prudent risk management.  The law provides certain information be disclosed under process of law or by officers otherwise entitled for official purposes.

 

• What is an “alternative investment” considered?  Currently, Georgia only invests in common stock, bonds, and short term investments according to the Annual Report of the ERS.  The Pension Investment Bill allows for further investment outside of these three areas.  Please refer to Section 1, Line 18 of SB 80 for a complete list of the types of alternative investments available.

 

• How does the lack of state support for alternative investment hurt Georgia?  PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report based on data from Thomson Financial in 2006 reports over 90% of the venture capital investments made in "later stage" Georgia companies were made by venture capitalists located outside the state. There is a strong likelihoodthat these investments are an interim step before merger with another company in the venture capitalist's portfolio -- located outside Georgia.   In most cases, the companies absorbed are moved out of state along with the jobs and resources too. 

 

• Will alternative investments benefit Georgia’s pension plan?  Public-sector fund managers have invested private equity for years in every state but Georgia.  Over the last 30 years, alternative investment returns exceed traditional annual equity returns by 5 to 7 percent according to the Metro Atlanta Chamber of Commerce. According to the Georgia Public Policy Foundation, California’s pension investment returns were 50 percent higher than Georgia in 2004.  A similar approach would have added $4 billion to Georgia’s pension.    

 

• How many other states invest pension funds in alternative investment plans?  Every state except Georgia has legislation allowing the investment of pension funds in alternative investments.  In 2005, approximately 66% of state pension funds had investments in the alternative assets class, which includes private equity and venture capital.  Among 125 state retirement systems examined by Wilshire Consulting in 2006, the average asset allocation to private equity by a state pension fund is 4.4% according to Southeast BIO.[1]

 

• How do VC programs help Georgia?  Private equity investment programs allow states to keep homegrown startups in place.  This is a crucial tool if states wish to retain businesses at home.  When Georgia loses businesses it does not only lose high returns in lost investments; the state loses intellectual capital, future job creation, and a segment of the tax base. 

 

• Is it “risky” to invest public funds in venture capital?  Earnings from private equity investments have by far outweighed losses suffered during market downturns.  However, putting a cap on the amount invested in private equity can protect pension holders from downside risks while offering a chance to reap rewards from the success of local businesses.  Georgia’s Senate Bill 80 mandates pension plan investment cannot exceed 5 percent of the plan at any time.

 

• Why does Georgia need the Pension Investment Bill?  Georgia is the only state that does not allow state pension funds to be invested in alternative investment plans.  The Employees’ Retirement System needs a fully diversified investment base to meet the earnings level required to pay benefits to all state employees.  The Pension Investment Bill aids this effort by allowing the state to invest in alternative assets.

 

 

SE BIO did a white paper on pension investment in alternative assets.  The results are in the table below:

 

SE BIO Statistics
States	Amount Invested in Alternative Assets	Returns
Florida	FRS invested 3.2% ($3.5 billion) in 2005	13.15%
Georgia	Not Permitted	0%
North Carolina	NC invested 2% ($1.5 billion) in 2006	21.35%
Virginia	VRS invested 5.1% ($2.7 billion) in 2006	28.60%