Hartford Business Journal

10 HARTFORDBUSINESS.COM | JANUARY 13, 2025 "I mean, we went 70 years of not (funding the pension funds). And the frustrating part is, I look at myself and younger generations who are going to bear the burden of 70 years of mismanagement and digging us out of this hole." With state employee pensions funded 17 percentage points higher than they were 20 years ago, they are now at least on a better path toward easing that burden on future generations. That's the opinion of Jeffrey A. Sonnenfeld, senior associate dean for leadership studies and the Lester Crown Professor in the Practice of Management at the Yale School of Management. He co-authored a study published in May 2023 that was crit- ical of past state treasurers and the state's past investment performance. In fact, the study concluded that "previous treasurers provided this state, consistently, 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. Sonnenfeld has, however, expressed high praise for Russell's first two years in office, calling him "probably the best treasurer we've had in 30 years." "We are very fortunate to have Erick Russell in that role," Sonnen- feld said. "I'm hugely enthusiastic about the reforms he's made. … He's a godsend!" Hartford Business Journal recently sat down with Russell to discuss the reforms he instituted and his expec- tations for the future, including the anticipated impact of the incoming administration and Congress in Washington, D.C. Asset allocation While he was sworn in as state trea- surer on Jan. 4, 2023, Russell already had some experience with the office. After graduating from the University of Connecticut School of Law, he joined law firm Pullman & Comley, eventually rising to a partner in the firm's public and private finance group. In that role he represented municipalities and state agencies in financing infrastructure projects, managing debt and restructuring pension obligations, often working directly with the treasurer's office. Armed with that experience, and the knowledge that state investments had severely underperformed, Russell hit the ground running. "We've put in a lot of reforms since coming into office, the biggest one being changes in asset allocation," he said. That has included eliminating $394 million in transportation-related debt, which will save taxpayers $682.1 million over the next decade, Russell said. It also has included methodically moving more of the state's portfolio into private markets. He and the state's Investment Advisory Council developed a "five-year pacing plan" to increase allocations to "private equity, private credit, rail assets, infrastruc- ture (and) natural resources," he said. They are now a couple of years into that plan and review it regularly, he added. They also have allocated some investments into public markets, while reducing exposure in emerging markets, Russell said. "That certainly has benefited us over these last couple of years," he said. The treasurer's office also has improved its staff, which now includes 25 people on its pension fund management team and 136 employees overall. Meantime, the state has bolstered the Investment Advisory Council, which includes five appointed members of the public who assist the treasurer on investment policies. The council added Philip Zecher, a Stamford resident who is the chief investment officer for Michigan State University, as chairman, and Chris- topher Murphy, senior managing director for Hartford Investment Management Co. Fund managers Another change involved reducing the number of asset fund managers the state relies on, Russell said. "Managers that we have high conviction in, we're scaling up our investments," he said. "That allows us to get better economics on those transactions, and lower fees as we're investing on a bigger scale." The state has also moved more pension money into "passive" investments, he said, which also reduced fees. In the report on the state's investment performance written by Sonnenfeld and Steven Tian, director of research and chief executive of the Leadership Institute, they criti- cized the state's reliance on certain poor-performing asset managers. "There are cases where we are invested in funds where Connecticut is the single largest client — some- times substantively the only client, all while Connecticut pays high fees, with some obscure asset managers indi- vidually earning more than the entire state's cabinet combined," they wrote. In a recent interview with Hartford Business Journal, Sonnenfeld said "there are some long-standing under- performing asset managers that seem to still be on the Connecticut payroll," indicating there is still room for improvement. Russell declined to comment on the Yale report or Sonnenfeld's criticism, but did say the majority of the changes he instituted occurred before the report was published. "What I would say is, we are constantly evaluating all of our managers," Russell said. "We have regular check-ins and reviews. We have a watch list. So, if there are managers that are not meeting their benchmarks, or that are underperforming, we are constantly reviewing that." His office is "constantly engaging" with asset managers about fees to ensure the state is getting the best deal on its transactions, he said. "You pay fees because people perform," Russell said. "You don't mind paying fees when people are actually providing returns for pensioners, right? And so that's what our ultimate goal is." He added that the state is now managing a growing, $60 billion fund, and that even small changes in performance "are really signifi- cant when you multiply that over the portfolio." He also cautioned that the intent of the investments is to meet long-term goals. "We're not day traders," he said. "We're not trying to time the market. What we want to do is position our portfolio to perform over a long period of time in a way that is miti- gating risk for pensioners." New administration Russell is certainly aware of the potential changes coming in Wash- ington, D.C., and how that may affect the returns on the state's investments. He believes the best course of action is to wait and see what happens, but to prepare as best as possible. "I think my biggest concerns are, when you combine what has been talked about from a tariff perspective with the talks of mass deportation, I just think it has the ability to really cripple us economically in a big way," Russell said. "From a market perspective, I think we're going to see rates higher for longer," he added. Despite the uncertainty, Russell said he does not expect the state legislature to return to the days of kicking the can down the road. "To be very clear, there's been no conversation whatsoever around not making our required contributions to our pension fund," he said. "I don't think that there will ever be an appe- tite for that in Connecticut again." Jeffrey Sonnenfeld, of the Yale School of Management, said Connecticut's pension fund performance is improving, but more work still needs to be done. CONTRIBUTED PHOTO Eric Russell Continued from page 9

• Cover