By Benjamin Yount | Illinois Statehouse News

In 35 minutes, Quinn outlined his agenda for the spring legislative session, referring to investments in higher education and tax breaks designed to employ more veterans for his 2012 jobs agenda.

By Gene Meyer | Kansas Reporter

TOPEKA — A House pension committee is recommending allowing Kansas’ underfunded state pension plan to put as much as a quarter of its investment money into high-risk alternatives that may include hedge funds or commodities.

State statutes restrict the Kansas Public Employees Retirement System, or KPERS, to investing no more than 1 percent of its portfolio annually in the riskier alternatives and to holding its total exposure to no more than 6 percent of its portfolio, more than $13 billion. Previous Kansas Legislatures limited KPERS’ use of hedge funds and other risk-taking investment companies after some mid-1980s ventures cost the fund $268 million.

KPERS originally asked the Kansas House Pensions and Benefits Committee for permission to increase the 1 percent annual limit to 5 percent to reflect changed market conditions, since the lower limits were imposed in 2003.

“Yes, 25 percent is high,” state Rep. Mitch Holmes, R-St. John, the pension and benefits committee’s chairman, said Tuesday.

“We don’t expect to ever go that high, but we didn’t want to let KPERS say it wasn’t enough if more than 5 percent was needed,” Holmes said.

“The 1 percent limitation was becoming problematic,” said state Rep. Steven Johnson, R-Assyria, who proposed the 25 percent cap. Limits that low can prevent managers from making investments that are likely to be profitable.

“I personally don’t envision (alternative investments) going over 6 percent,” he said.

KPERS trustees have no plans to increase the fund’s stake in alternative investments, but sought the original higher 5 percent annual cap to achieve the flexibility needed to manage current investments, said Kristen Basso, the pension system’s chief spokeswoman.

With a 1 percent cap, big swings in alternative investment market values would push the fund over that limit and potentially thwart good investments, Basso said.

KPERS has 2.8 percent of its portfolio, or about $508 million, invested in a collection of partnerships, private equity investment funds and other investments it identifies as alternatives to traditional choices among stocks, bonds, cash or real estate.

KPERS, for example, has committed $429 million to one group of private equity funds — which it first invested in in 2007 — but hasn’t been able to actually invest $292 million of that total because of the limits and market conditions, she said.

In contrast, the pension fund’s alternative investments stake accounted for 12 percent of its then-$4.2-billion portfolio in 1992, when the system was still absorbing more than $268 million in losses on a failed Kansas City, Mo., savings and loan and a variety of smaller business ventures across Kansas.

“The fundamental problem is that everyone is chasing yields to get higher yields on their investment,” said Art Hall, director of the University of Kansas’ Center for Applied Economics.

“And by chasing yields, you are going to dramatically increase risk,” Hall said. “If you make money, it’s a good idea, but I’m afraid it’s going to end up being very risky.”

Pension funds nationally invest about 10 percent of their portfolios in alternative investments, and that percentage has been rising, said Tracy Gordon, an economic fellow at the Brookings Institution, a nonprofit, public policy group in Washington, D.C.

Alternative investments and even traditional stock and other equity securities “are attractive investments that pay more than U.S. Treasuries, which are pretty low right now,” Gordon said.

“Some people argue that equities are too risky for funding future (pension) obligations because you are asking the taxpayers of tomorrow to fund the investments if they (the investments) don’t come to fruition,” she said.

Two of Kansas’ larger money pools, the endowments that manage donors’ contributions to the University of Kansas and Kansas State University, also invest part of that money into some form of alternative investments, though both schools define those differently than KPERS.

Kansas State’s foundation’s latest annual report shows it puts about 9 percent of its $532 million endowment in pieces of some of the same kind of partnerships, venture deals and commodity investments the proposed KPERS investments would allow. The University of Kansas puts as much as 20 percent of its endowment money into investments that include many of the proposed KPERS choices, but other alternatives, too.

“We are not an apt comparison,” said Lisa Scheller, spokeswoman of the KU Endowment in Lawrence.

“We are not investing for people’s retirement. Our goals are more long-term and complex,” Scheller said.

It wasn’t known Tuesday when the pension committee’s KPERS recommendation will reach the House for debate.

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By Mark Lagerkvist

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The state Senate inched forward with a plan to impose an impact fee on natural gas drillers in the state, and state House Republicans held behind-closed-doors discussions on school vouchers and other education reforms, but broad deals between the two chambers and Gov. Tom Corbett were still unsettled by week’s end.