Indiana Public worker, teacher funds have lost $8B in 15 months

The state’s two biggest pension funds
are poised to combine into one Indiana Public Retirement System, with a single executive director and board.

And they’ll need only one tourniquet to stem their bleeding.

Over the last 15 months, the Public Employees’ Retirement Fund and Indiana State Teachers’ Retirement Fund have hemorrhaged
a combined $8 billion. That’s more than TRF alone is currently worth.

Driving the merger is a quest to boost efficiency — blunting the impact of the meltdown on the school districts that
to TRF and on the state agencies, city governments and other public employers that contribute to PERF. TRF hasn’t said whether
it will require districts to increase their pension contributions; PERF acknowledges that governments in its plan will have
to ante up.

By the close of January, PERF’s assets had fallen to $11.2 billion, off one-third from their peak. TRF has fared somewhat
better. It closed 2008 with assets of $6.9 billion, down one-quarter from their peak.

Legislation that would merge the funds is under consideration in the Indiana House of Representatives after clearing the Senate
Feb. 19 on a 50-0 vote. Observers say it likely will pass.

Combining the funds would yield $8.9 million in one-time administrative cuts, plus another $1.2 million in annual savings,
according to estimates from the Legislative Services Agency. In addition, the merger is expected to generate an ongoing 0.2-percent
increase in investment returns, or $60.5 million annually.

PERF and TRF officials declined to be interviewed for this story. But at a Feb. 20 PERF board meeting, trustee Ryan Kitchell,
director of the Indiana Office of Management and Budget, said: "A lot of the big savings that come out of this —
for TRF, since they’re smaller — is that you would have a bigger pool that you’d be managing."

Weak results

Business groups, including the Indiana Chamber of Commerce, support the merger. And they point out that the stock market crash
has lacerated almost everyone. Santa Monica, Calif.-based Wilshire Trust Universe Comparison Service, which benchmarks the
performance of institutional assets, reports a median 2008 loss of 24.91 percent among U.S. public pensions.

Neither PERF nor TRF has publicly released enough information to calculate their precise investment losses on a percentage
basis, after factoring out ongoing contributions into the fund and disbursements to retirees.

But some suggest PERF and TRF should be doing better. In 2008’s fourth quarter alone, PERF lost $2.1 billion and TRF lost
$887 million.

Economic consultant Bill Styring, president of locally based Styring and Associates, asked why the two pensions are paying
top dollar to money managers unless they beat the median by a wide margin. According to annual reports, PERF spends $67.4
million a year on investment expenses and TRF spends $32.4 million.

"Saving a little bit of money by combining the two is probably a good idea. But it’s like the Republicans talking about
the pork in the stimulus bill. You’re not looking at the big numbers," said Styring, a former senior fellow at the conservative
Hudson Institute. "I will work for $1, and I’ll manage to lose less."

Upping contributions

Across the state, more than 1,200 public employers such as state agencies and city governments participate in PERF, setting
aside a portion of their wages to fund retirement benefits. PERF collected $454.5 million in employer contributions last year.

The pension soon will ask them for more.

At PERF’s Dec. 19 board meeting, the pension’s actuarial consultant, locally based McCready and Keene Inc., recommended that
it immediately hike employer-contribution rates from 6.3 to 6.5 percent.

Doug Todd of McCready and Keene said at the meeting that PERF should warn employers that a larger hike — to 7.5 percent
of each
employee’s wages — will be necessary in 2010.

"We’re kind of nervous," Todd told the board. "We’ve got a big economic loss … to take care of."

And the loss is even bigger than PERF so far has admitted. For several years, both PERF and TRF have been moving hundreds
of millions into private-equity investments, such as venture capital and leveraged buyouts. Together, they’ve helped underwrite
BioCrossroads’ $73 million Indiana Future Fund and the $155 million Indiana Investment Fund.

PERF has been particularly aggressive in private equity. It holds 12.9 percent of its assets in such investments, and is aiming
eventually to have 30 percent in that class.

But the full extent of recent private-equity losses hasn’t yet shown up in PERF’s formal accounting. Like all state agencies,
the pension operates on a fiscal year that closes June 30. At its Feb. 20 board meeting, PERF Chief Investment Officer Shawn
Wischmeier said the pension still is valuing its private-equity portfolio at what those holdings were worth on June 30, 2008
— three
months before Lehman Brothers filed for bankruptcy, sending financial markets plunging.

Those investments are clearly worth less now. When the board asked Wischmeier for an estimate, he said private-equity valuations
for 2008’s third quarter nearly were complete, and he provided a ballpark estimate of an 8-percent decline through Sept. 30.
He wouldn’t speculate beyond that.

"We do expect some write-downs in the values from Q2 to Q3 and ultimately Q4," Wischmeier told the board.

Best stewards?

The author of the bill that would merge PERF and TRF is Sen. Dennis Kruse, R-Auburn. He said the idea was conceived last spring
by PERF Executive Director Terren Magid and his TRF counterpart, Steve Russo.

Under the bill, the combined fund would have a seven-person board, all appointed by Gov. Mitch Daniels, a Republican. Five
of the seats would go to public employees or educators covered by the fund. OMB Director Kitchell would retain his seat, and
the final slot would go to anyone the governor selects.

Because so much money is at stake, the bill requires that board members undergo 12 hours of annual training.

The Indiana State Teachers Association said it supports the merger because educators covered by the pension would have greater
board representation than they do on the current TRF board.

And they’re more likely to be conservative on questions of investment risk, said Dan Clark, ISTA’s deputy executive director.

"Quite frankly, I think they’re the best stewards in that regard," he said. "They’ll hold the fund to its mission
to create
returns for retirees, not to buy real estate or create [venture capital] funds."

Rep. David Niezgodski, D-South Bend, said he is sponsoring the measure in the House out of respect for Kruse but has not decided
whether he supports it. He promised a careful inspection.

"It’s going to be beginning the process over," he said. "I have not chosen to take this bill … to make sure
that I pass
it. It’s got to be vetted out thoroughly."

A good place to start might be PERF’s impending employer-contribution hike. Kruse said the pension hadn’t informed him about
it. When he learned of it from IBJ, Kruse was concerned about its impact. If public
employers must spend more of their budgets
on pension costs, they’ll have less available to pay for services.

"This is a tough time for the [state] budget," Kruse said. "This doesn’t seem to be a good time to increase
employers’ share
of paying into a pension plan. I’d say the Legislature would want to wait until things are better to increase that."

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