AUGUSTA — Debate may be subsiding over the state’s public employee pension system, following the Legislature’s approval of a two-year budget that contains measures to address the system’s $4.3 billion unfunded liability.

But with those reforms on the verge of implementation, the Legislature is poised to approve a bill that would make the pension system’s financial investments more private.

And riskier.

The Senate on Thursday gave unanimous preliminary approval to LD 1524, a bill designed to further shield some of the pension system’s financial investments from the state’s Freedom of Information Act.

Representatives from the Maine Public Employees Retirement System and State Treasurer Bruce Poliquin say the FOIA exemption is necessary so that MePERS investment managers can invest more of its $10.5 million in assets with top-tier, private equity firms.

“I’m huge on transparency and doing what is right,” Poliquin said. “Sheltering these private equity deals at some time during the negotiating process is the right thing to do. Otherwise, we wouldn’t be able to be involved in this business.”

The bill emerged from committee Thursday. Its inconspicuous route to passage has drawn little attention. However, some lawmakers on the Judiciary Committee and right-to-know advocates raised ethical concerns about exempting from FOIA private-market investments made with public money.

In a written response to the bill, Judy Meyer, vice president of the Maine Freedom of Information Coalition, wondered how the public would ever be assured that MePERS “is not investing in some board member’s personal company.”

Meyer, who is the daytime managing editor at the Sun Journal, added that securities laws mandate disclosure.

Rep. Charlie Priest, D-Brunswick, had similar concerns. However, he said, the bill includes provisions requiring MePERS to disclose the name of the funds it’s investing in, the amount of money diverted to them and the returns.

“My concern was, how do we know everything is on the up and up?” Priest said. “… But the due diligence that needs to be conducted (to join the private-equity managers) gave me some hope that the bill was striking the right balance between the public’s right to know and the need for confidentiality.”

Andrew Sawyer, chief investment officer with MePERS, said confidentiality is paramount to negotiating the deals with top-tier equity managers. Sawyer said the top funds were highly competitive and that managers had turned down MePERS’ attempts to invest because its FOIA law would expose “trade secrets” that could jeopardize deals negotiated by the private-equity partners.

Sawyer said MePERS needed access to that data to perform its due diligence in selecting which funds to invest in. However, he said, making the data public could be harmful.

“We’re not trying to keep our investment activity from the general public,” he said. “I don’t think the public should be concerned that this is going to make us do investments that are harmful to our beneficiaries, like investing in a trustee’s brother’s business or something. That’s going to be readily discovered by our internal and external auditor.”

Sawyer acknowledged that LD 1524 signaled MePERS’ intent to increase its private equity fund investment.

The increase mirrors a national trend by public pension plans. It’s also a trend that’s caught the attention of the Government Accountability Office, which last summer urged the U.S. Department of Labor to provide guidance to states investing in funds that can “magnify profits, but can also magnify risks.”

Private-equity firms invest in private-equity funds, high-yield, high-risk investments that can be significantly leveraged by debt. According to the 2010 report by the GAO, the debt leverage makes the funds risky because there is limited information about their real value until the underlying holdings are sold.

“The reason why investors invest in private-equity deals is that the returns are huge,” Poliquin said. “With that is a commensurate amount of risk. That’s why it’s such a small part of the (pension plan’s investment) portfolio.”

According to Sawyer, with MePERS, private-equity investment currently makes up less than 1 percent of the public pension plan’s investment portfolio.

About 90 percent of the portfolio is what’s known as passive investment, low-risk bonds and stocks that deliver low but consistent rates of return.

In other states, such as Washington, public pension plan investments in private equity funds can be as much as 25 percent higher.

Sawyer and Poliquin indicated that LD 1524 signaled a willingness by MePERS to increase its private equity investment, but not as high as some other states.

Sawyer said the target was about 5 percent.

“Will we go higher than that? I don’t know,” he said. “But I’m quite certain that, as long as I’m overseeing investments, there won’t be a board initiative to move to 20 percent.”

That’s because private equity fund investment can make pension funds extremely volatile.

And history has shown the consequences.

In “The Trillion Dollar Gap,” a 2010 study by the Pew Center for the States, private equity investments were highlighted as a factor in states’ public pension crises.

The study noted that by 2007, private equity investments accounted for 70 percent of all state pension plan assets, a marked increase that began in the 1990s.

During that period, the private investments were yielding huge returns. In some cases, pension plans were reducing employee contribution rates because the plans were over funded.

That changed in 2008 and 2009 when the returns collapsed with the recession.

“The market went down very hard and those funds also went down very hard,” Sawyer said.

Right now, Sawyer said, MePERS’ plan to invest in private equity funds is a modest one. He’s confident that hired investment managers would make prudent decisions.

smistler@sunjournal.com

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