Public Pension Plans

Evaluation of Economically Targeted Investment Programs Gao ID: PEMD-95-13 March 17, 1995

Governments at all levels are increasingly looking to the nearly $4 trillion held as of 1992 by the nation's private and public pension plans to fund public needs through economically targeted investments (ETI). In fact, several state and local government employee pension plans have implemented ETI programs. Critics have raised concerns that plan participants may lose their retirement savings through economically dubious but politically expedient investments, requiring increased taxation and reductions in other needed spending to pay the costs. They cite widely publicized cases in Alaska, Connecticut, and Kansas, where public employee pension plans have lost millions of dollars through ETIs that went bad. This report answers the following three questions: What has been the extent of ETIs by nonfederal public employee pension plans, in terms of amounts invested and the types of investments? Did ETI programs aimed at business development realize competitive returns? What were the economic effects of business development ETI programs, such as jobs created?

GAO found that: (1) public pension plans have invested billions of dollars nationwide in ETI; (2) in a survey of large public pension plans, 50 of the 119 respondents indicated that they had invested a total of $19.8 billion in ETI to promote housing, real estate, or small business development; (3) ETI that promote business development include private placements, venture capital investments, and bond, loan, and certificate of deposit purchases; (4) the performance of ETI by the public pension plans studied was generally similar to the returns of comparison investments; (5) the performance of ETI venture capital programs sometimes lagged behind the comparison investments; and (6) no definitive conclusions have been reached regarding the economic effects of ETI programs due to insufficient data.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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