Penn. State Ponders Disclosure

In the wake of California Gov. Arnold Schwarzenegger signing a pension fund disclosure bill into law, the state of Pennsylvania is considering three bills that would regulate the way pension fund investment information is disclosed.

The bills would set disclosure guidelines for the state’s two large pensions, the Pennsylvania State Employees’ Retirement System (SERS) and the Pennsylvania Public School Employees’ Retirement System (PSERS).

One of the bills, which affects SERS, allows private equity funds that the pension invest in, to decide what information is disclosed. Another bill allows PSERS to decide what investment information it would disclose. The SERS bill specifies “sensitive information” related to private equity firms, whereas critics of the PSERS legislation say that the PSERS bill could apply to any public record held by the pension system.

But the pensions systems consider the bills important because without such regulation, the pension funds fear they would get booted from top-tier venture funds that would not want details of their fund’s investments disclosed to the general public. For example, a SERS spokesman says that the $27 billion pension has been turned away from five private equity funds with previously existing relationships over disclosure issues. The spokesman says that the pension system has lost out on the opportunity to invest as much as $135 million in these five funds, which includes venture funds from raised by Charles River Ventures and U.S. Venture Partners.

Similarly, state pension funds in California, Massachusetts and Michigan found themselves not welcome into funds raised by Charles River, Sequoia Capital and Woodside Fund.

Pennsylvania State Representative Robert Godshall, who sits on the SERS board and who introduced the bill related to SERS disclosure, says that this rejection from top-tier funds is what motivated him to propose the legislation.

“More and more of the top tier firms are demanding that confidentiality,” Godshall says. “So what we tried to put in the bill is what some of the top tier venture firms said they had to have to do business with us.”

PSERS has not found itself being turned away from any private equity funds, so far. But the pension is concerned that failure to achieve clarity on disclosure issues would make it less appealing to top-tier firms.

“We haven’t had the same experience as SERS, but we do have the same concerns,” says State Representative Steven Nickol, who is vice chairman of the PSERS board and who proposed the PSERS disclosure legislation.

Two bills have passed the House and await action by the State Senate Finance Committee. A Senate bill includes language for both pension systems and is also pending. The committee has not set a time for when it will consider the legislation.

Pennsylvania is the latest state to take the initiative of protecting return data from a pension fund’s investment in private equity.

In California, the governor late last month signed a public pension disclosure limit bill into law that codifies what California courts and legal agreements have already declared: that public pension funds should disclose the funds that they invest in, the rates of return of those funds and the management fees paid to investment firms, but not the values of underlying portfolio companies, capital call information or confidential internal private equity firm documents.

The California Public Employees’ Retirement System (CalPERS) voiced support for the legislation.

The California bill was introduced and championed by California State Sen. Joe Simitian, whose Silicon Valley-based district includes a sizeable segment of the venture capital industry.

“From the outset I was trying to balance two legit competing interests,” Simitian says. “I wanted to respect the public’s right to know but also the need to protect proprietary information. It’s a winner all around.”

Simitian says that the ability for California to get this passed bodes well for the pension disclosure issue nationwide.

“If we could bring interested parties together in California … it may well prove useful to others around the country,” he says.