You asked whether other states geographically target their pension and other state fund investments to promote economic development and other state goals. Much of the information in this memo is based on a 2004 Oxford University study of investment practices of U. S. public sector pension funds that are designed to promote urban infrastructure and economic development. The study is available online at http: //www. geog. ox. ac. uk/~kstraus/urbanrenewal/meeting/pension_funds_final_0211. doc

SUMMARY

Several states use pension and other state funds to promote economic development, but it appears that the only state that geographically targets such investments is California. California’s two major state pension funds participate in a state initiative that targets investments in areas that are underserved by capital markets, primarily those in the state. These funds, and pension funds in several other states, also earmark part of their assets to promote state economic development goals, although these investments are not geographically targeted. In contrast, Kansas and Missouri have repealed laws that required that part of the state’s pension funds be invested in businesses in the state.

Under Connecticut law (CGS § 3-13d), the treasurer may consider the social, economic, and environmental implications of investing in particular securities or types of securities in making investment decisions. Her investment policies allow up to 3% of the private equity fund and up to 5% of the real estate fund to be invested in underserved markets. She is investigating the feasibility and desirability of making such investments in light of its fiduciary responsibilities and its past investment experiences in the state.

CALIFORNIA

The Oxford study finds that the California Public Employee Retirement System (CalPERS) is among the most active pension funds in terms of targeted investing. CalPERS is part of the California Initiative, which targets areas underserved by capital markets, primarily those located in the state. Under the initiative, the system invests in private equity and real estate in these areas. Part of the initiative is the California Urban Real Estate Program (CURE), which was established in 2003. The program aims to finance low-to-moderate income housing, urban infill projects, community redevelopment, and the rehabilitation of core properties in these markets, while achieving the highest total rate of return for the system.

Previously, the system adopted an economically targeted investment (ETI) policy. The system defines an ETI as one that improves the state’s economic wellbeing, as well as meeting the system’s fiduciary responsibilities. Such investments are designed to promote job creation and retention, business creation, increases or improvement in the stock of affordable housing, and the improvement of infrastructure. The program’s goal is to invest 2% of the system’s assets in these types of investments.

The state teacher retirement system (CalSTRS) is also a partner in the California Initiative. As of March 2004, CalPERs and CalSTRS had authorized investments of up to $ 475 million and $ 350 million, respectively, in private equity investment in businesses in underserved areas, and more than $ 1. 3 billion and $ 850 million, respectively, in urban infill ventures. We are seeking additional information on how much of this money has actually been invested in these ventures. In addition, CalSTRS provides, for a fee, credit enhancement for community development bonds and administers a home loan program for qualified teachers and other candidates.

INITIATIVES IN OTHER STATES

A number of states have pension fund initiatives that seek to promote economic development and related policies, although the investments are not necessarily geographically targeted. Iowa directs the state’s public employee retirement system to invest its assets “…in a manner that will enhance the economy of the state, and in particular, will result in increased employment of the residents of the state,” when such investments can be accomplished in a manner consistent with other investment guidelines and the Prudent Person rule (Iowa Code § 97B. 7). The system has invested over $ 1 billion in Iowa-related assets, overwhelmingly stocks. It does not appear that these investments are targeted within the state.

The New York State and Local Retirement System operates several programs that promote economic and housing development through targeted pension fund investments. The targeted investments must have return and risk characteristics at least as good as those of comparable investments. Initiatives include the:

In 2003 the Oregon legislature dedicated $ 100 million of state pension fund assets to make venture capital investments in start-up companies in Oregon and the Pacific Northwest. The board overseeing the fund has retained Credit Suisse First Boston to manage the fund, which has opened a dedicated office in Oregon for the purpose. Additional information about the fund is available online at http: //www. oregoninvestmentfund. com/.

In contrast, Kansas and Missouri have repealed laws that required that part of the state’s pension funds be invested in businesses in the state. In 1985 Kansas enacted a law that required its public employee retirement (KPERS) system to invest 10% of its fund in private loans to Kansas businesses. In 1988, the system entrusted two investment firms with $ 300 million to execute this strategy. One of the firms loaned $ 65 million of KPERS funds to a Savings & Loan that became insolvent just a few years later. KPERS invested in two other companies that also failed soon thereafter, and as a creditor KPERS was forced to shut them down. Over 700 Kansas residents lost their jobs due to these closings. In 1991, the state put a moratorium on the private investments program and repealed the in-state investment requirement. KPERS no longer considers geographic or economic development factors when evaluating investment alternatives, but seeks only to maximize risk-adjusted returns for pension beneficiaries.

In 1989, Missouri passed legislation requiring the Public Employees’ Retirement System (MPERS) to invest 3 to 5% of its assets in small businesses located in the state. MPERS organized Missouri Venture Partners (MVP) to perform this duty. All investment decisions were made by MVP without MPERS approval. In its first two years, MVP invested in five companies, two of which filed for bankruptcy soon thereafter. At that time, MPERS decided to cancel its MVP arrangement due to lack of investment control. In 1992, the legislature repealed the law requiring in-state investments.

KM: ts