"Investment" versus "speculation" is very much in the beholder's eye--and few beholders have a more conservative eye than the country's pension plan administrators.
And, while it's a long way from being a giant step forward, the mere presence on the Los Angeles city ballot June 4 of a proposition that would permit the city's three retirement systems to invest--for the first time--in real estate may be a significant, if long overdue, upgrading of its role as a safe haven for "sacred" money.
The move into real estate, local pension administrators say, has become particularly critical in light of Mayor Tom Bradley's recent call for a five-year divestment of as much as $1 billion of city-controlled assets--the lion's share of it in pension funds--from banks and businesses with ties to South Africa.
More than a mere request that such an investment redirection be considered, Bradley subsequently put teeth in it by threatening to remove fund commissioners and administrators defying it.
Caught between this and their legal responsibility to direct their investments to the maximum benefit of fund participants, local fund administrators fear that a South African ban would sharply restrict badly needed diversification in all three funds. Real estate, they feel, could prove a viable, nonpolitical, way out.
But, despite nudging by Congress as long ago as 1974--specifically in the Employee Retirement Security Act (ERISA), passed that year--which encouraged pension plans to diversify their investment portfolios to include real estate, the move to do so has been sluggish, at best.
-------------------------------------------------------------------------- Despite nudging by Congress as long ago as 1974, the move to include real estate in investment portfolios has been sluggish, at best.
Of the roughly $1 trillion now held by public and private pension plans nationally on behalf of workers, according to Dee Birschel, a researcher for the International Foundation for Employee Benefit Plans in Brookfield, Wis., only about 5.5% of these assets in 1984 were invested directly in real estate--down from 6.8% the year before--and far below the traditional involvement in real estate of European pension plans.
Even on this small base, according to Gary Mattingly, general manager of the local $1.7-billion fire and police pension system, corporate pension plans have been about twice as aggressive as public pension plans in plunging into direct real estate investments.
"About 70% of the corporate plans with $1 billion or more in assets," Mattingly said, "have some real estate holdings. But among public retirement systems of comparable size only about 30% have any real estate investments at all."
In Los Angeles, the proposal that will be put before the voters in June would permit the Department of Water and Power, the city employes retirement system and the fire and police pension system to invest as much as 20% of their assets--totaling about $4 billion in all--directly into real estate investments. (All three, in common with virtually all other pension plans, nationally, have had minimal investments in mortgage-backed securities for some time, but these fixed-interest, bond-like holdings have, at best, only a kissing-cousin relationship with real estate.)
The proposal to permit broader investment diversification in the city's pension plans was first made in November, 1983, Mattingly, a prime mover in the drive, continued, "and then an expert advisory committee was formed the following February to study it."
And Richard Rosenthal, a Venice realtor and a member of that blue-ribbon committee, said: "There was never any disagreement on the committee about the soundness of the idea--Mattingly and the others had researched the subject thoroughly--and our primary job was to draft the language of the charter proposal, lay down the ground rules and that sort of thing."
Among the ground rules, in addition to the 20% maximum investment in real estate, is a 5% maximum investment in any one project, and no investment in real estate unless it has first been recommended by one or more qualified independent real estate advisers--including the opinion of a qualified appraiser as to fair market value (except for investments in investment pools). The advisory board also turned thumbs down on investments in any project or program in which the adviser(s) has a direct or indirect interest as an owner, investor, principal, agent or employee.
The latter is particularly critical in the administration of public pension plans--far more so than in private, corporate, pension plans--to counter ever-present suspicions of City Hall cronyism. As one veteran pension administrator put it: "When you're investing what is largely the public's money, you've got to be like Caesar's wife--totally above suspicion."