State Pension Funds Need to Venture Forth

July 31st, 2009 by Leave a Comment

By Daniel Groce 

Georgia prides itself in being set apart from other states for its diversity and innovation, but a sore thumb is its lack of diversification in investment through state employee pension funds.   

Georgia is the only state in this country that does not invest its pension funds in venture capital and other alternative investments, playing it “safe” with these funds and depriving citizens billions of dollars worth of returns and jobs each year. Some studies predict that had Georgia introduced a venture capital option to the pension plan 10 years ago, there would be $20 billion more worth of investment in Georgia, 400,000 more jobs and about $4.5 billion added to the state budget. 

Case in point: In 2005, all seven of Accuitive’s Georgia companies, a medical device venture capital firm, moved to California because of investment and regulation. Grossing $1 billion that year, losing these companies cost Georgia tax revenues and jobs it should have had.  

Such losses are unnecessary. With resources such as the Georgia Research Alliance, Georgia Tech, the University of Georgia and Emory University all located within miles of one another, there is no reason not to allow state investment through pension funds in startup medical research. Taking the first step, Governor Sonny Perdue has invested $7.5 million in Georgia’s budget in the Georgia Research Alliance Venture Fund, matched 3:1 by the private sector. This fund has already raised $18.5 million, an impressive feat in the current state of the economy. This must not be the final step:  Startup investments in medical research will multiply exponentially years down the road, benefiting the entire state.  

Teachers’ unions, unfortunately, oppose the very idea that would benefit them the most. They argue that the risks outweigh the returns, citing venture capital losses for this past year.  But they overlook the benefits of diversification. The Cambridge Associates U.S. Venture Capital Index indicates a 10 percent return in the past 10 years, while the S&P 500 indicates a negative return for the stock market. The minor loss (less than half of the S&P’s loss) in 2008 can hardly warrant opposition to policies allowing pension fund diversification.  

Legislation presented to the General Assembly has called for a 3-5 percent investment in venture capital, a small price for dividends that could solve many budget issues and help guarantee teachers and other state employees the retirement funds they deserve.  

In Florida, legislation passed in 2009 allows about $250 million of the $150 billion pension fund to be invested in venture capital. Florida uses a private investment manager, removing political cronyism from the process. High-skilled jobs are already being created and research is flocking to Florida universities.  

Opponents frequently cite failures in Connecticut, which used pension funds to essentially bail out a troubled gun company within the state. Florida’s program would not allow a bailout such as this one to occur. The program, currently capped at only 1.5 percent of total pension funds, will be expanded if successful, as most predict it will be. 

Maryland’s venture capital fund has brought back every dollar invested. Indiana’s pooling of about $20 million in seed money for seven local bio-life science companies has generated $73 million in out-of-state funding in the companies, creating new jobs and tax revenue. Similarly, Yale University, holding one of the largest endowments in the nation, has seen an average rate of return of about 15.9 percent through 2008. While recent reliance on hedge funds has caused a decline in Ivy-League returns, the point is clear: Alternative assets such as venture capital, if diversified, will yield competitive returns.               

Startup investment creates innovation and will allow Georgia to remain on the forefront of technological advances. The arguments against diversification in pension funds are growing old; the examples from around the nation show the practice is hardly new or risky. Instead of bailing out failing business models, let’s invest our state employee retirement funds in innovation and enjoy the benefits.  

Daniel Groce, a student at Mercer University, is a summer intern at the Georgia Public Policy Foundation. The Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (July 31, 2009). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.

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