Daniels revives push to merge PERF, TRF pension funds

Legislation consolidating the state’s largest pension funds into a single Indiana Public Retirement System failed
last year in the General Assembly.

Gov. Mitch Daniels’ response: Push even harder this time around.

In his State of the State address Jan. 19, Daniels’ first request was for legislators to revive a merger of
the Indiana Public Employees Retirement Fund and the Indiana State Teachers Retirement Fund.

“Absolutely nothing would change in the benefits, or the amount of funding, or in the totally separate, independent
status of these systems,” said Daniels, a Republican.

“All that would change is the amount paid
out in investment fees, when we bid the job as one large bundle. If someone’s Wall Street bonus is a little smaller
next year while we save Indiana taxpayers $40 [million] or $50 million, I think we can all live with that.”

A year ago, both pensions had been beaten up badly in the market downturn. At their October 2007 peaks, PERF held $16.7
billion in assets, while TRF held $9.4 billion. But by a year ago, their combined loss totaled $8 billion.

Each
has rebounded as markets improved, recovering more than half the losses. As of Nov. 30, PERF’s assets stood at $14.2
billion; TRF’s were $8.1 billion.

Kenley

At Daniels’ request, State Sen. Luke Kenley, R-Noblesville, introduced the merger legislation,
Senate Bill 298, to the General Assembly in early January. State Sen. Brandt Hershman, R-Wheatfield, later signed on as co-author.

Neither pension would answer questions from IBJ, saying they don’t comment on pending legislation.

A fiscal-impact statement prepared by the Indiana Legislative Services Agency said the measure would reduce administrative
overlap, yielding $8.9 million in one-time savings. It estimates another $1.4 million in annual savings.

The
merger also would boost the two pensions’ annual investment returns 0.2 percent, or $44.6 million, according to LSA.

But Kenley said the Daniels administration has high hopes the results would be far greater. If investment decisions
for both funds are made in unison, the reasoning goes, their investment fees can be negotiated down substantially.

“They think they can save as much as $50 [million] or $60 million [annually] by combining those contracts and bidding
them out,” Kenley said.

The Daniels administration is hoping the savings help alleviate pressure
on the tight state budget, Kenley said. In theory, the government agencies and school corporations that make pension payments
to PERF and TRF could reduce their contributions, thus scaling back their need for state revenue.

The same proposal
also is in Senate Bill 397, which was sponsored by Sen. Greg Walker, R-Columbus, and co-sponsored by his colleagues Dennis
Kruse, R-Auburn, and Phil Boots, R-Crawfordsville. Boots chairs the Senate’s Pensions and Labor Committee.

Kenley’s bill is moving quickest. It has emerged from the Senate’s Appropriations Committee, which Kenley chairs,
and had its second reading. The entire Senate is expected to vote on it in early February.

After that, the bill
would move to the Democrat-controlled Indiana House of Representatives, where its path is less certain. Kenley said he will
ask state Rep. Bill Crawford, D-Indianapolis, and Rep. Jeff Espich, R-Uniondale, to carry it.

Niezgodski

To get
through the House, it likely would have to make it through David Niezgodski’s Labor and Employment Committee. The South
Bend Democrat was a pension-merger skeptic last year. This year, he’s vowing again to ask hard questions.

“It won’t be just, ‘Hey, that’s great. Let’s save $44 million.’ I’m not ready
to accept that at this point,” Niezgodski said. “I’d like to see some clear documentation from the actuaries
and the fiscal people from PERF and TRF that show how these savings are reached.”

The funds’ past
investment performance, and how it stacks up to peers, may factor into the debate.

According to Santa Monica,
Calif.-based Wilshire Trust Universe Comparison Service, which tracks institutional investor performance, U.S. pension plans
lost a median 24.9 percent in 2008. Through Nov. 30, 2009, Wilshire reports, domestic public pensions with more than $1 billion
were up nearly 18 percent.

PERF’s 2008 losses appear to have been substantially worse than the national
norm, while its 2009 gains were far greater. On the other hand, TRF’s performance appears closer to the U.S. median.

Legislators also will have to consider whether the services provided pensioners could deteriorate in a combined
retirement system.

Keith Brainard, research director of the Baton Rouge, La.-based National Association of State
Retirement Administrators, pointed out that neither funds’ goal is to “shoot the lights out” in terms of
investment performance. Instead, their focus should be on reliably paying pensions while minimizing costs.

“The
role of the systems is to serve the participants in the plan. That ought to be the overarching consideration with respect
to its governance structure,” Brainard said.

“The issue is not solely saving money. The issue is,
what’s the best model for serving the plan participants? Cost is certainly a prime consideration, but there are others.”•