I’m going to an interesting dinner/discussion this evening. The Manhattan Institute, a public policy think tank in New York, recently released a report by James Copland and Steven Malanga on public pension fund governance. In “Safeguarding Public-Pension Systems: A Governance-Based Approach,” Copland and Malanga take note of the massive underfunding in state and local government pension plans, and make a case for developing stricter fiduciary obligations for pension fund board members. They also argue for greater ‘diversity’ in fund boards, citing how many boards are dominated by plan beneficiaries and government officials. The report argues for more representation for outside experts, and for boosting the level of financial expertise in these boards generally.
I’m looking forward to a closer read, and these look like good recommendations. But on the surface, there can be some tension among these goals, with two of them working potentially at cross purposes.
For some perspective, consider how Ed Kane, a finance professor at Boston College, has developed some very interesting recommendations for “too big to fail” banks. Kane notes that banks managed by officers owing fiduciary duties to shareholders can actually have an incentive to try to maximize the value of the equity by taking more risk and/or holding a slimmer capital position, if taxpayers stand behind public insurance mechanisms advertised to stabilize the banking system. Kane makes a case for explicitly recognizing taxpayer equity in bank capital accounts, as well as altering the law of fiduciary duties to include taxpayers along with shareholders as principals for whom managers/agents work.
As threatening as our government pension system underfunding problem may appear, things can actually get much worse if pension fund managers are pursuing risky investment strategies and those risks go the wrong way. It is possible that Copland and Malanga’s recommendations could be strengthened by incorporating some of Kane’s ideas.