Hartford Business Journal

30 HARTFORDBUSINESS.COM | MAY 29, 2023 Editor's Take CT pension fund investments need greater oversight J effrey Sonnenfeld, the senior associate dean for leadership studies and a professor at Yale University's School of Management, is known for his provocative research. Last year, shortly after Ukraine was invaded in February, he published a list of U.S. companies doing business in Russia, putting pres- sure on them to exit the country or face potential public backlash. His work drew atten- tion from major U.S. media outlets, including the New York Times, Wall Street Journal and Washington Post, and likely forced some compa- nies to publicly declare they were at least temporarily severing business ties with or in Russia. His latest Connecticut-based research is just as compelling, and downright disturbing, and should provoke similar calls for action from local media, taxpayers, the business community, state policymakers and others. In a recent comparative analysis of state pension fund investment perfor- mances, he and fellow researcher Steven Tian concluded that "previous treasurers provided this state, consis- tently, with one of the single worst investment track records" in the country, costing Connecticut billions of dollars in returns that could have significantly improved the pension fund's funding status and/or led to tax cuts. "While the legislature battles over thousands of dollars or even millions of needed expenditures, billions of dollars were lost on terrible investments — investment errors that 49 other states somehow avoided," the two researchers wrote in an op-ed recently published by Hearst Connecticut newspapers. They added: "With $40 billion in assets — largely the pooled retirement savings of the state's hardworking teachers, firefighters and public employees — if Connecticut's invest- ments had yielded just the median returns of all 50 states, the past five years, we would have had $5 billion more and be able to cut taxes by 50 percent instead of 0.5 percent. Connecticut would have reaped a whopping $27 billion more over the last decade — practically enough to fully fund Connecticut's pension obliga- tions while simultaneously dramatically reducing taxes." As of June 30, 2022, Connecticut had the second-worst pension fund returns of any state in the nation on a three-year and five-year annualized basis, and the fifth-worst performance on a 10-year basis, according to Sonnenfeld and Tian. Only North Carolina performed worse — a startling realization for a wealthy and highly educated state that, ironically, prides itself on having a strong financial services sector. The researchers lay blame on two major factors: unusual asset allocation decisions and widespread external invest- ment manager underperformance. They point out that "Connecticut has made some highly costly and unusual asset allocation decisions over the past decade," including underinvesting in private strategies like real estate, and over investing in areas like low-grade emerging-market and high-yield bonds. If past treasurers had simply adopted "a generic 60/40 portfolio" (meaning 60% stocks and 40% bonds), it would have outperformed Connecticut's actual performance by over 1% annually, they concluded. They also identified numerous private investment managers hired by the state that charged exceedingly high fees but delivered subpar results. Some funds actually lost money, while many others produced returns below average bench- marks. Sonnenfeld and Tian recommend the state establish a more basic investment portfolio that focuses on getting into "top-tier blue-chip funds with strong, established track records of success." Just as important, better checks and balances must be built into the invest- ment decision-making process. Connecticut, Sonnenfeld told me in a recent interview, is one of only two U.S. states that makes its treasurer the sole fiduciary. The state's Investment Advi- sory Council — a seven-member board that includes five members of the public appointed by the governor and legislative leaders — is purely a consulting body without oversight powers. Forty-seven other states vest fiduciary duty in an elected or appointed board, Sonnenfeld said. The only other state with a similar model to Connecticut's is, you guessed it, North Carolina, which is currently considering moving toward a stronger board oversight structure. Connecticut must do the same. The status quo, based on Sonnenfeld and Tian's research, isn't working and is hurting Connecticut's economic compet- itiveness. "It's good to have a board of directors that has some teeth, that can challenge you, and can override you if need be, and right now we don't have that," Sonnenfeld said. Making that shift would require legisla- tive approval, and there could be some support around the idea. State Senate Minority Leader Kevin Kelly (R-Stratford) said he views Sonnenfeld's report as a call to action. "I believe you want the Investment Advisory Council to have more over- sight," Kelly told me, adding he hopes a bill is written up and considered before the end of the legislative session on June 7. Both Sonnenfeld and Kelly pointed out that current State Treasurer Erick Russell isn't to blame for past invest- ment strategy failures. He's only been in office since January, after winning Greg Bordonaro Through June 30, 2022: 5-Year State Pension Fund Investment Performances STATE WASHINGTON MICHIGAN MAINE OREGON ALASKA DELAWARE NEVADA HAWAII IOWA MASSACHUSETTS MINNESOTA TEXAS PENNSYLVANIA OHIO ARIZONA VIRGINIA WEST VIRGINIA RHODE ISLAND TENNESSEE ARKANSAS COLORADO MISSISSIPPI MARYLAND WISCONSIN FLORIDA MONTANA SOUTH CAROLINA KANSAS ILLINOIS INDIANA NEW HAMPSHIRE NORTH DAKOTA IDAHO GEORGIA NEBRASKA OKLAHOMA SOUTH DAKOTA NEW JERSEY CALIFORNIA LOUISIANA KENTUCKY NEW MEXICO VERMONT MISSOURI CONNECTICUT NORTH CAROLINA PENSION FUND NAME Washington State Investment Board Michigan Investment Board Maine Public Employees' Retirement System Oregon Public Employees Retirement Fund Alaska Permanent Fund Corporation Delaware Public Employees' Retirement System Nevada Public Employees Retirement System Hawaii Employees' Retirement System Iowa Public Employees' Retirement System Massachusetts Pension Reserves Investment Trust (PRIT) Minnesota State Board Of Investment Texas Employees Retirement System Pennsylvania SERS State Teachers Retirement System Of Ohio Arizona State Retirement System Virginia Retirement System West Virginia Investment Management Board Rhode Island State Investment Commission Tennessee Consolidated Retirement System Arkansas Teacher Retirement System Colorado Public Employees Retirement Mississippi Public Employees' Retirement System Maryland State Retirement & Pension System Wisconsin Retirement System Florida Retirement System Montana Board Of Investments South Carolina Retirement System Investment Commission Kansas Public Employees Retirement System Illinois State Board Of Invest1nent Indiana Public Retirement System New Hampshire Retirement System North Dakota Public Employees Retirement System Idaho Public Employee Retirement System Employees' Retirement System Of Georgia Nebraska Investment Council Oklahoma Teachers' Retirement System South Dakota Retirement System New Jersey Division Of Investment CalPERS Louisiana State Employees' Retirement System Kentucky Public Pensions Authority New Mexico Educational Retirement Board Vermont Pension Investment Commission Missouri State Employees Retirement System (Mosers) Connecticut Teacher's Retirement Fund North Carolina Retirement Systems % RETURN 10.93 10.3 9.5 9.36 9.03 8.8 8.8 8.73 8.55 8.5 8.5 8.5 8.47 8.44 8.3 8.3 8.2 8.13 8.12 8 8 7.97 7.9 7.9 7.69 7.63 7.43 7.4 7.3 7.2 7.2 7.18 7.1 7.05 7 6.9 6.9 6.8 6.7 6.7 6.53 6.44 6.44 6.27 5.79 5.7 Top 10.93% return is 5.1% higher than CT, represents $10.7 billion in lost investment revenue for CT 50-state median 7.9% return is 2.1% higher than CT, represents $4.2 billion in lost investment revenue for CT 50-state average 7.8% return represents $4 billion in lost investment revenue for CT Source: Yale School of Management Chief Executive Leadership Institute

• Cover