State investment board is managing quite well

The Washington State Investment Board is second to one.

For fiscal 2006, which ended June 30, the state’s investment gurus notched a 16.7 percent gain for the trust fund that holds most Washington pension assets. That’s on top of a 13.3 percent increase the year before.

Total funds under management have grown from $62.9 billion at the end of fiscal 2005 to $70.3 billion at the end of fiscal 2006 to $76.3 billion as of Dec. 31, 2006.

Only Pennsylvania’s state employee retirement fund did better.

The returns are remarkable thanks to decisions made years ago to depart from the conventional portfolio of domestic stocks and bonds into real estate, private equity and, most recently, overseas markets. In the newly released annual report — seven months after the fact because of exhaustive auditing — the board set a goal of equalizing investment in foreign stocks with that in domestic stocks. No mystery why. International equities yielded a 27.2 percent return for the year compared with 9.9 percent for the U.S. portfolio.

But the real kick was generated by private equities, through leveraged buyouts, venture capital placements, or other means. The one-year return was almost 40 percent. Over the last decade, spanning the 2000-2001 downturn, the average annual return has been 16 percent.

The board had the foresight years ago to ally itself with, among others, Kohlberg Kravis Roberts & Co., one of the nation’s pre-eminent takeover firms. KKR this week led a group that announced a $32 billion buyout of TXU Corp., the largest utility in Texas. Washington participates in the KKR fund behind the deal.

The board has also succeeded because it has resisted efforts to let politics be its guide.

The board did not bend to labor pressure to divest itself of Wal-Mart stock, for example. And despite calls for more in-state investment, managers have kept their eye on a pension fund’s must priority; returns to the 443,000 former or current public employees who depend on the fund for pensions, or they will.

Of its total assets, $1.3 billion are invested in Washington, with technology stocks and commercial office space by far the biggest sectors.

That discipline has not carried over in the Legislature.

Despite the board’s canny money management, two of the state’s older pension funds have obligations that exceed resources by $5.7 billion over the next 25 years thanks to some ill-advised actions back in the 1970s. Although the state’s pension programs were restructured in the late 1970s to head off potential meltdowns, two decades later mischievous lawmakers instituted something called gain-sharing, which entitled some public sector retirees to half of any investment fund earnings in excess of 10 percent. They collected in 1998 and 2000, before the market bust, and are due for another boost in 2008.

Next year’s gain-sharing could take the unfunded liability to more than $7 billion over 25 years. State and local taxpayers will likely end up backfilling some portion of that amount. Lawmakers last year set aside $350 million to begin addressing the shortfall. Strapped counties, cities and school districts who contribute to the pension funds resisted more substantial commitment.

Although Gov. Chris Gregoire has introduced a bill that would cut off gain-sharing after 2008, and two other measures would reduce state obligations in other ways, they face an uphill battle with so much alleged “surplus” money up for grabs. So, too, does a bill introduced by Sen. Mark Schoesler, R-Ritzville, that would have lawmakers recognize the obvious; people are living longer, which means the pension funds will have to carry retirees deeper into old age.

Even the Pension Funding Council, the legislative group that should have a better grasp on the state’s vulnerability than members at large, lacks the political will to take this modest step towards better management.

All this while many workers in the private sector are experiencing benefit decreases. Last year’s much-needed changes in federal pension law increased the cost to employers of maintaining pension programs. Many have just bailed out.

Although Washington’s pension plans are sound, the Legislature will have to do some tinkering by the end of the session to keep them that way. Too often, actions come too late.