Case Studies of Putting Public Funds in Stocks States from Texas to Connecticut Show How Clinton's Plan to Fix SocialSecurity Could Work

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For all the controversy surrounding President Clinton's plan to invest Social Security money in the stock market, you'd think the notion was radically new and dangerous to the republic.

New it isn't. States have been investing public pension and school funds in the equity and bond markets for years. As for dangerous, that seems to be a matter of opinion.

Some economists - including Federal Reserve Board Chairman Alan Greenspan - are wary of such programs. They say politics would inevitably creep into the decisions of government-run stock funds, bringing a heavy-handed influence to Wall Street and often poorer results for pensioners. Yet several states have continued to operate such programs - often with good results. State officials acknowledge that politics can enter into the decisionmaking - for example, controversy erupted over Texas' investment in Disney stock. But, for the most part, they maintain that stock-market programs consistently yield more than those that stick to traditional bonds. With Mr. Clinton staking a significant part of his legacy on his attempt to save Social Security, the issue of putting public money in the stock market has received unprecedented scrutiny. And with hundreds of billions of federal dollars at stake, comparisons with smaller state funds aren't perfect. Still, many experts are looking to the states to see what lessons can be learned. So far, the results have been somewhat mixed. Generally, states are getting a good return on investment, but experts say they could be doing better. One key reason, they say, is that most states maintain some control over the investing, and this can lead to decisions that are made for social or political reasons. "Anytime you get a big chunk of money in front of politicians, you run the risk of investments made not in the best interests of the beneficiaries," says Rick Dahl, chief investment officer for the Missouri's State Employee Retirement System. And political or social decisions can affect how a pension plan will perform, often in negative ways. Examples are numerous: *In 1990, the State of Connecticut Trust Fund for pensioners lost $25 million investing in a Colt firearms factory in a losing bid to save local jobs. Three years later, Colt filed for bankruptcy. *In 1991, the Kansas Public Employees Retirement System (KaPERS) was accused of conflict of interest when it invested $65 million in a failing local savings and loan. The head of KaPERS had once been director of the thrift, which eventually failed, leaving KaPERS with a complete loss on its investment. *In 1987, a new state law required Missouri's State Employee Retirement System to invest up to 5 percent of its fund in local start-up companies. After three years and a $5 million loss, the law was rescinded. The list goes on. But experts in the pension industry also say that every investment house - public or private - has its own horror stories. And besides, not all political decisions turn out badly. "Some of them {investments} have turned out well, some of them have not," says Olivia Mitchell, a professor at the University of Pennsylvania's Wharton School of Business in Philadelphia. …


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