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Pension merger raises questions

March 9, 2009

We're generally supportive of a plan to merge the state's two largest public pensions in an effort to save money, but it's hard to know exactly what to think considering the lack of detailed information available about the performance of the funds.

The need to save money is apparent. The $11.2 billion Indiana Public Employees' Retirement Fund and the $6.9 billion Indiana State Teachers' Retirement Fund lost a combined $8 billion over the last 15 months as the stock market crashed.

Legislation that would merge the two funds passed the Indiana Senate unanimously last month. Its fate now rests with the Indiana House, where it's said to have a better-than-even chance of passing. The Legislative Services Agency estimates the onetime administrative savings of such a merger would be $8.9 million and the ongoing savings would be $1.2 million a year.

Merging the funds and eliminating duplicative costs seems like a good idea, in theory. It's the same kind of thinking behind proposals to merge units of local government, a common-sense effort thwarted by certain legislators in spite of broad bipartisan support. Local government reform's appeal isn't just about saving money, it's also about transparency.

In the case of the pension funds, more transparency is in order. Neither of the funds has made public enough information to calculate precise losses on a percentage basis, taking into account contributions to and disbursements from the funds.

And there's little information available about the performance of the funds' private equity investments, which are especially important in PERF's case. Almost 13 percent of its assets are tied up in such investments, and its goal is to raise that number to 30 percent. PERF says it's still calculating what those investments were worth last June 30, months before the widespread market meltdown.

PERF's investment strategy is much more aggressive than TRF's, which raises another question. With such different philosophies, how would the investment strategies of the two funds be reconciled if they were to merge? At some point, there needs to be a common vision about how assets are allocated.

We supported allowing state pensions to invest in the equity markets before the voter referendum in 1996 that made it legal. We stand by that position. It doesn't make sense to exclude public employees from the potential upside of such investments in good times. But in good times and bad there should be a clearer and more timely accounting of how pension assets are performing.

The call for accountability and transparency where public pensions are involved is only going to grow louder if assets continue to plummet and warnings of unfunded pension obligations become more dire.
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