The partial funding that characterizes most public pension programs is not a deficiency of public finance. It merely reflects prevailing public policy concerning pension funding, which is a compromise between the wishes of public employees (who favor full funding) and taxpayers (who generally favor limited funding). The state sponsors public pension programs on behalf of the taxpayers, and pension trustees bear no obligation to close the gap between the state’s liability and its limited funding of the public pension system.
The proper context for determining investment policy for a public employee retirement system (PERS) is broader than the PERS itself, and this complicates investment policymaking. The investment function of the PERS is to manage a fraction of the unitary state pension fund on behalf of the taxpayers. One implication is that portfolio construction in the true sense cannot occur at the PERS level.
Although PERS trustees are not responsible for closing the funding gap, they are responsible for incurring an appropriate level of risk with PERS assets and for achieving a fair return for the risk they incur. Many PERS officials should re-examine the logical basis for their investment policies in general, their rising equity percentages in particular, and the wisdom of their efforts to beat the market.
