State board wary of Inslee's pension idea

When Democrat Jay Inslee rolled out his job-themed 2012 gubernatorial campaign this week, he offered one specific job-creation proposal that drew applause from supporters: investing a portion of state pension funds in local startup companies.

But is that a good idea? While it may sound tempting in the current economic downturn, the general concept Inslee proposed has been rejected as too risky by the board that oversees the state's pension investments.

Inslee, the seven-term congressman from Bainbridge Island, suggested startups in Washington are struggling, in part, because seed capital they need to grow is more readily available in places like Silicon Valley.

"That is why, when I am governor, I will propose using a small, defined portion of our state pension funds to create a pool of capital available for startup innovative companies that pledge to start here and pledge to stay here," Inslee said during his kickoff speech at a Seattle biofuels company.

Inslee's idea is not new. Large public pension funds across the country, and in Washington, frequently have been eyed as potential pools for local economic development.

But that's a gamble that has been rejected by the Washington State Investment Board (WSIB), which manages $61 billion in state pension funds.

"That's not our job. We're an investment organization," said Theresa Whitmarsh, the WSIB's executive director.

While emphasizing the board was not commenting on Inslee's specific plan, Whitmarsh said the WSIB is bound "by a very, very strict fiduciary duty" to maximize the return on investments that pay for benefits of state retirees. The Legislature has set a goal of an 8 percent return on its investments.

"Anything that would take us away from that would be in opposition to our fiduciary duty," Whitmarsh said.

Inslee did not give much detail of his plan during his kickoff speech, but added during interviews that he'd favor using only a small slice of the pension fund — perhaps tens of millions of dollars. The money would be dedicated to forward-thinking companies, he said, such as biofuel and high-tech firms. "You're not going to see this for a shopping center," he said.

Inslee said he would not be picking and choosing individual companies that should receive pension investments. The investment board relies on professional fund managers for that — and Inslee said that practice should continue.

But, Inslee said, the state should demand that Washington companies get their fair share of the pension system's investments in private equity funds. Right now, only about 1.4 percent of that investment goes to Washington companies, Inslee said. His idea, he said, is to push that up to about 2 percent, to better reflect the state's share of the national economy.

"I understand that when a person proposes a change with this much at stake that people are going to be uncomfortable," Inslee said. But, he said, "I don't think we should be afraid about asking questions about how we can grow jobs by increasing private equity investment in the state of Washington."

Inslee added that he didn't think the pension fund would suffer lower returns by investing more locally, pointing to the wealth of innovative companies in the state.

Joe Schocken, president of Broadmark Capital in Seattle, said, "It's a very good policy idea."

"There is a real shortage of capital" for high-tech startups and early-stage companies looking to grow, and "that has a real negative effect on the local economy."

State Attorney General Rob McKenna, the Republican who is Inslee's chief rival in the governor's race, said he opposes Inslee's idea. "Investing pension funds in risky startup companies puts taxpayer and state employee money at risk," McKenna said.

Greg Gottesman, managing director of Madrona Venture Group, said he didn't see a lack of startup capital as the state's biggest economic problem. The best thing the state can do, he said, is to build up its research universities to attract the most talented scientists and innovators from around the world.

"If we are attractive to the world's best people, capital follows them," Gottesman said.

Inslee isn't the only Washington politician to have thought about trying to increase state pension investments in local companies.

In 2005, 23 state legislators, including Democrats and Republicans, sponsored a bill that would have required the WSIB to set aside at least $500 million for local startups and expanding companies, especially woman- and minority-owned businesses. The bill got a hearing but did not advance further.

Last year, the investment board's research director, Steve Lerch, wrote a white paper that predicted the board would come under renewed pressure to favor in-state investments because of the recession.

But Lerch wrote that the record of pension funds in other states that have tried to favor local companies "is generally one of poor performance." In Kansas in the 1980s, for example, the state pension plan invested $400 million in various Kansas-based companies, savings and loans, and real-estate projects. The fund lost $236 million.

The investment board has made nods to local investment, hiring a specialist to connect local companies with the fund managers that choose where to invest the pension funds.

The WSIB also tracks its investments in Washington state companies — which totaled more than $1 billion as of 2009.

But, as Lerch's white paper noted, the board's official investment policy remains "to earn competitive, risk-adjusted returns regardless of where the investment opportunity resides."

Jim Brunner: 206-515-5628 or jbrunner@seattletimes.com