$22.3 billion public pension merger poised to fail again

Consolidation of Indiana’s largest pension funds—one of Gov. Mitch Daniels’ top legislative priorities—is hovering on the brink of failure for the second year in a row.

State Rep. David Niezgodski, D-South Bend, and chairman of the House Labor and Employment Committee, is recommending the merger proposal again be assigned to a Statehouse summer study committee, the same fate it suffered in 2009. According to Niezgodski, consolidation proponents haven’t proven their case.

With $14.2 billion in assets as of Nov. 30, the Indiana Public Employees Retirement Fund is Indiana’s biggest pension fund, responsible for paying benefits to 220,000 police, firefighters and government employees. The Indiana Teachers Retirement Fund, with $8.1 billion in assets, handles benefits for 160,000 Hoosier educators.

Daniels, a Republican, had proposed combining PERF and TRF into a single Indiana Public Retirement System. Indiana’s Senate, which has a 33-17 Republican majority, approved the merger. But Indiana’s House, controlled 52-48 by Democrats, has repeatedly balked at the idea.

“While there may be validity in the idea behind merging the administration of these two funds, there also are too many unanswered questions about the impact of such a move,” Niezgodski said in a press release. “Until we have more information, I cannot see this proposal moving ahead before the end of the session.”

In his State of the State address Jan. 19, Daniels very first request was for legislators to revive the merger of PERF and TRF, an idea they tabled last year. Daniels believes combined administration might save the pensions tens of millions of dollars in annual investment fees if their money-management decisions are made in unison.

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

“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.”

The recession’s initial economic downturn hit both pensions hard, but in the last year, they’ve each enjoyed strong recoveries. At their October 2007 peaks, PERF held $16.7 billion in assets, while TRF held $9.4 billion. Through January 2009, they suffered combined losses of $8 billion before rallying along with markets last year.

Indiana’s Legislative Services Agency has estimated combining PERF and TRF would reduce administrative overlap, yielding $8.9 million in one-time savings and another $1.4 million in annual savings. LSA also estimates their merger would boost the two pensions’ annual investment returns by 0.2 percent, or $44.6 million.

LSA hasn’t assessed how much the pensions might be able to trim their annual investment fees. In January, State Sen. Luke Kenley, R-Noblesville, who sponsored the pension merger bill in the Statehouse for Daniels, shared the administration’s estimate with IBJ:

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

The Senate approved Kenley’s pension merger bill, SB 298, 32-18. In the House, its language was rolled into a Niezgodski-sponsored bill, HB 1205. That bill originally pertained only to cost-of-living adjustments for pensioners.

Niezgodski said supporters of the pension merger must do a better job showing their math.

“The governor and others claim this merger would save the state somewhere in the area of $40 million. However, an independent study from the non-partisan Legislative Services Agency cannot find any savings greater than $8 to $10 million,” Niezgodski said in his press release. “That is quite a disparity, and I think we need to find out how they came to the $40 million figure.”

Niezgodski also said he’s worried the possibility the pensions’ merger will ultimately lead to their administration by a private entity, instead of state government. He said more information is needed to relieve those concerns.

“In short, PERF/TRF will offer yet another experiment for privatization, just a short time after the administration failed so miserably in having a private company oversee food stamps and Medicaid services,” Niezgodski said.

“We still have not spent the time needed to study this proposal in depth,” he continued. “This administration has not given us the details we need to make an informed decision. It is easy to be blinded by the announcement that we are going to save $40 million through this move, but there has been nothing offered to prove that these savings actually will take place.”

Senate Republicans will likely get one more chance to sway skeptical House Democrats in conference committee before the Legislature closes its doors for 2010. Both caucuses are currently selecting their conference committee choices.

Reached late this morning via cell phone, Kenley said he's still hopeful the Legislature will approve the pensions' merger this year. He said privatization is not the merger's intent, and that he's willing to add language to the bill explicitly clarifying governance issues. Kenley also said there appear to be clear savings, a resource the state should do its best to tap on behalf of pensioners and taxpayers.

"We'll have all week next week to resolve it," Kenley said. "We'll do our best to try to get there."

Also reached late this morning via cell phone, Niezgodski said he's willing to talk, but he still thinks there are too many open questions for the Democratic House caucus to move forward on the bill. Niezgodski said there are numerous pension stakeholders, such as teachers, who need the opportunity to weigh in on management issues such as a combined Indiana Public Retirement System's board structure.

Niezgodski said he holds "the upmost respect" for Kenley, and called him "a man of his word." But bottom line, Niezgodski said, there probably isn't enough time left in the Legislature's 2010 session to give the pension merger the thorough vetting he believes it deserves.

Niezgodski volunteered to lead the pension merger's summer study committe and promised a thorough analysis then.

"The biggest thing people are leery of is the unknown," he said. "To turn that thought pattern around in a week's time is the biggest thing we're up against."