States Seeking Stock Options

But that’s the task facing some officials in Louisiana, Montana and South Carolina, who are hoping voters will look past the market’s recent struggles to see the long-term benefits of playing the market with public funds.

“Under the current market conditions, I know people aren’t real pleased with this thinking,” said Montana Sen. Bea McCarthy, a Democrat who represents a rural district in the southwestern part of the state.

McCarthy backs a proposal on the November 5 ballot that would amend the state constitution to allow public funds, including public school and university funds, to be invested in stocks. Currently, the constitution allows only pension fund and state compensation insurance fund stock investments.

The genesis of the proposal goes back almost four years, said McCarthy, to a time when the market was flying high. But given the current state of the market, the proposal faces long odds of passing.

“I think we’re going to be very fortunate if it passes,” she said. “People will have to look beyond the current situation and look to the future.”

Another proposal on Montana’s ballot would allow up to a maximum of 25 percent of a local government’s self-insurance plan to be invested in stocks.

Lance Melton, executive director of the Montana School Boards Association, said his organization supports both proposals.

“In spite of the present downward turn in the market, historically, the stock market has substantially outpaced earnings in virtually any other category,” he said.

The Association’s members agree, voting at their annual meeting to support the stock proposals. But convincing the public of market’s benefits is another matter altogether.

“9-11 has thrown our economy into a bit of turmoil, and as a result, it’s making people far more wary and to a certain degree reactionary to some of the trends that we’re seeing in the stock market,” said Melton.

This wariness is translating into bad polling numbers for the proposal. A Lee Newspaper poll in late September found 39 percent of respondents opposing greater investment in stocks, 28 percent in favor and 33 percent undecided.

In Louisiana, two stock-related proposals are on the ballot. The first would allow investment in stocks of up to 35 percent of the state’s Medicaid Trust Fund for the Elderly. The second would permit state universities to invest up to 50 percent of their funds in stocks.

Both proposals were passed by the Legislature in 2001 and will go before voters November 5. Current law in the state prohibits most public funds from being used to finance private ventures.

During legislative debate last year, the House’s lone dissenting vote to the university-investing proposal was Rep. Shirley Bowler, a Republican.

“In a free market capitalistic society, government is not supposed to take equity positions in private companies,” she said. “There is no way that government can properly administer regulations or fairly or justly administer regulations if [it] holds equity positions in one entity among a field of competitors.”

Rep. William Daniel IV, a Democrat from South Baton Rouge and the author of the proposal, thinks it’s highly unlikely public officials could abuse their power by manipulating the market to their advantage.

“[The funds are] spread so far across the board and they’re so diversified that I don’t think you could have a major effect [on the stock market] by helping one industry with maybe more lax legislation or legislation to make it more profitable,” he said.

The Public Affairs Research Council of Louisiana, a nonprofit think tank in Baton Rouge, said that 16 of the 20 states it recently surveyed allowed public colleges and universities to invest public funds in stocks.

Despite the high rate of public university participation in the stock market, Bowler thinks public sentiment may turn against the proposal due to the market’s recent struggles.

“The timing of it is certainly going to make its defeat more likely,” she said.

South Carolina voters will also consider two proposals that would allow public funds to be invested in stocks.

The first would allow state retirement systems to invest in foreign corporations. The second would free local firefighter pension funds to move some of their assets from bonds and fixed-income investments to stocks.

Public funds in the market are quite common, especially retirement funds, according to the National Conference on Public Employee Retirement Systems. But judging their performance depends greatly on the timeline one chooses.

“A couple states, like Indiana and West Virginia, were not allowed to do stock investments until 1998-1999, and right now their funds are down because they got in when [the market] was high,” said Fred Nesbitt, the conference’s executive director.

“Reporters say, ‘Well aren’t you concerned about that?’ And I say, ‘Call me back in 40 years and I’ll tell you.'”