State Pension Fund Investment Policy

Abstract

W ITH THE EMERGENCE of pension funds as a major financial intermediary with assets of $159 billion in 1965, economists and investment analysts have devoted much attention in recent years to the performance and impact on capital markets of these funds.' Some of this concern has focused on the investment policies and practices of the funds, and in particular, state and local government pension funds with portfolios approaching $34 billion have been a favorite target for criticism, since they generally have achieved a lower rate of return on investment than their closest counterparts, the private pension funds.2 This inferior performance, it is held, is due to the restraints imposed on portfolio management by law and tradition, thus it has been widely accepted that the asset mix of the public plans should more closely resembile the private funds in order to optimize yields on investment.' Inferentially, it follows that the rate of contributions can then be decreased, given some fixed schedule of pension benefits. More specifically, the major complaints leveled against the state and municipal funds have been that common stocks and mortgages have been far too small a proportion of total assets, and that the placement of taxexempt state and municipal bonds, with a lower yield than quality corporate bonds and other securities is indefensible, since the fund itself is tax free. Over the years, there seems to have been some response to these criticisms, for equities and mortgages have risen to modest proportions, although common stock ownership is still far below the levels found in private pension funds. The response to the stricture against tax-exempts, however, has been most vigorousstate pension funds alone have reduced their holdings from 17.5% to 4.3% of aggregate assets in the last decade.4 What are the possible consequences of sales of tax-exempts by State Pension Funds?