TexPool's Experiences in the 1990s: Policy Implications for Other State Investment Pools

The State of Texas's local government investment pool, TexPool, has faced major challenges in the 1990s. This article provides an overview of two major events involving TexPool: (1) a $2.2 billion "run" on the pool in 1994 and (2) the out-sourcing of TexPool's functions in 1997. The article describes these events and analyzes potential implications for other state-administered investment pools. The article addresses issues such as: (1) the need to develop investment policies and practices that are suitable for a particular pool's objectives and purpose, (2) whether a state government has a responsibility to ensure that participants in a state investment pool do not incur losses, (3) the possible implications of having an elected official as the person with primary responsibility for overseeing the pool, and (4) concerns related to the outsourcing of state investment pools. This article is intended to encourage debate on the policies and practices of state investment pools, which currently are serving more than 15,000 local governments in the United States.     

Socioeconomic Investment Practices of State Pension Funds: The Results of a National Survey

State pension fund managers appear to be under increasing pressure to promote social, ethical, or economic development goals with at least some of their investments. This article offers a conceptual framework for considering socioeconomic investing by these funds, and uses it in a national survey of state pension fund investment practices. True "social" investing, involving the expected sacrifice of market average rates of return for social or ethical goals, appears to be much less widespread than expected. However, the survey also suggests that policies and procedures designed to insure the prudence and accountability of fund managers with regard to socioeconomic investing may not be in place in many states.     

Accounting for failure in the nationalised enterprises — coal,steel and cars since 1970

This paper analyses the nature of the strategic miscalculations in nationalised British coal, steel and cars since the early 1970s. Specifically, it examines the extent to which the initial strategic miscalculations were caused by an uncritical use of return on investment (ROI) techniques and the extent to which subsequent operational retreat was determined by profit and loss considerations. The general conclusion is that financial (mis)calculation was a secondary problem in enterprises which did not identify their productive problems and could not solve their market difficulties. In our three cases, large-scale investment was futile when the state did not safeguard the market for the final product.     

Government Risk-Financing Pools: An Assessment of Current Practices

Since 1970, state and local governments have experienced two “insurance crises;” the first occurred in the mid- to late-1970s and the second in the mid-80s. The result has been a twenty-year period of time in which state and local governments have been able to afford insurance only intermittently-if insurance has been available at all. In response to this problem, local governments, government associations, and state governments created alternative risk-finartcing mechanisms to provide coverage for themselves. These mechanisms, commonly referred to as self-insurance pools, enable local governments within a state to pool together risks and resources to finance the costs of fortuitous losses. In 1988, the first comprehensive examination of pooling practices was undertaken through a nationwide survey. This article reports the findings from the first follow-up study since the 1988 survey and further extends knowledge of pooling and pooling practices.     

Understanding political risk in investment planning

In 1982, the Congress authorized $11 billion to modernize the nation's air traffic control system—one of the largest infrastructure investments since the building of the interstate highway system. Although this investment appears to offer a large and robust return, the economic results depend strongly on productivity gains through system consolidation. It is uncertain what balance the Congress will strike between the long-term, widely shared benefits of greater productivity and the immediate job losses from system consolidation. This risk can be included in the calculus of expected return through Monte Carlo analysis. When this is done, the expected return drops very close to the 10% hurdle rate that the government often uses for such projects. This method of integrating political risk can be applied to any investment, public or private, for which political action joins the customary economic and technical uncertainties in affecting the outcome.     

Globalization,government spending and taxation in the OECD

Abstract. This article assesses the impact of globalization on welfare state effort in the OECD countries. Globalization is defined in terms of total trade, imports from low wage economies, foreign direct investment, and financial market integration. Welfare effort is analyzed in terms both of public spending (and separately on social service provision and income transfer programs) and taxation (effective rates of capital taxation and the ratio of capital to labor and consumption taxes). Year–to–year increases in total trade and international financial openness in the past three decades have been associated with less government spending. In contrast, integration into global markets has not been associated either with reductions in capital tax rates, or with shifts in the burden of taxation from capital to consumption and labor income. Moreover, countries with greater inflows and outflows of foreign direct investment tend to tax capital more heavily.     

An Investigation of the Characteristics of Local Governmental Units Disclosing High Deposit and Investment Credit Risk as Defined by Governmental Accounting Standards Board Statement No. 3

As a result of severe financial losses by local governments in the mid-1980s due to falling interest rates, the Governmental Accounting Standards Board Statement No. 3 was issued. The GASB No. 3 provides information for assessing a government's actual and future deposit, investment market, and credit risks. This article investigates the number of governments disclosing deposits and investments in the high risk category and determines if there are common characteristics among those reporting high risk deposits and investments.     

Risky business? Evaluating market risk of equity investment proposals to reform social security

A number of options have been proposed to address the expected financing shortfall of Social Security in the next century. Most basic aspects of the various reform proposals are captured by the three options offered by the Advisory Council on Social Security in 1996. Common to all three options is that they would permit either public or private equity investment. This article discusses the economic risks involved in public and private equity investments as a funding solution for Social Security. To quantify the risks involved in equity investment, stochastic simulations are based on the economic assumptions of the 1998 Trustees Report of Old Age and Survivors Insurance and Disability Insurance in combination with different assumptions about the rates of return on bonds and stocks. For public equity investment, financial market risk remains significant for at least 40 years. For individual accounts, I find that the chance of doing worse than with Social Security or of falling into poverty in retirement is generally high, yet varies with income level, gender, family status, and employment history. In general, women, married workers with dependent spouses, or workers with incomplete work histories fare worse than men, single workers, or workers with complete work histories when compared either to the current system or to the poverty line. © 2000 by the Association for Public Policy and Management.     

State Mandated Accounting, Auditing and Finance Practices and Municipal Bond Ratings

The accounting, auditing, and finance practices of municipal governments often are legally constrained by regulations imposed by state governments under whose jurisdiction cities are created. These practices may impact on municipal security risks and returns, either directly in the bond market or indirectly through such market intermediaries as bond rating agencies. The purpose of this article is to assess the impact of state mandates on municipal bond ratings.     

An institutional framework for the socio-economic reintegration of return migrants: A Kerala experience

This paper discusses the socio-economic conditions of the return emigrants to Kerala, the highest migration intensity state of India. On close perusal, it is learnt that although concrete steps are being taken by the State for the reabsorption of returnees in the labour market with the help of NORKA, an exclusive department to cater to the demands of return migrants, the State has miles to go in view of the remittances it receives and exodus of migrants on return with their accumulated capital and exceptional work experience for a permanent settlement in their home land.     

State and Corporate Cash Management: A Comparison

Public and private sector portfolio managers pursue similar goals even though they perform their portfolio management responsibilities in significantly different environments. This article compares and contrasts corporate cash management with state government practices. The comparison and analyses are based on data drawn from a survey of state government portfolio managers and an earlier study which reviewed corporate cash management practice.
The comparison and analyses consider investment objectives, permissible assets, assets held, and asset holding period, among other factors. The results suggest that portfolio management practices are quite similar even though the cash management environment is significantly different.     

Budgeting for Federal Capital

This article examines the issues involved in federal investment budgeting and planning for the acquisition of federally-owned assets. It describes the unique role of the federal government and examines the different issues and reforms prompted by differing types of capital and investment sponsored at the federal level. It suggests that meaningful changes can be instituted in our budgeting practices that can make a difference for our budgetary choices without adopting a full-scale capital budget. It also presents a framework for improving federal agency capital decision making based on a study of practices used by leading state and local and private sector organizations. The article is based on testimony delivered before the President's Commission to Study Capital Budgeting.     

The Impacts of State Capital Management Programs on State Economic Performance

Although the normative literature advocates systematic capital management practices, empirical studies investigating the tangible benefits of these practices are rare. Based on previous findings that public investment affects economic growth, this study extends the model of government spending and economic growth to investigate the effect of systematic capital management programs on state economic performance. Using panel data from 1997 to 2004 and the Government Performance Project's data on state capital management practices, the empirical results indicate that highly systematic capital management programs positively alter the relationship between the state's capital spending levels and the state's economic growth rate.     

The dilemmas of incrementalism: logical and political constraints in the design of health insurance reforms.

Health care reform became a premier issue on the U.S. policy agenda in the 1990s. While the comprehensive proposal put forth by President Clinton failed, states and the federal government successfully pursued a variety of lesser initiatives. This article focuses on a set of reforms intended to make private health insurance more accessible and affordable to individuals and workers in small firms. It outlines the key arguments made by experts to justify stronger regulation of health insurance and the options and difficult tradeoffs that must be considered in policy design. It then examines the scope and strength of legislation adopted by 45 states and the federal government from 1990 to 1996. The substantial variation in state policies demonstrates that even though insurance market reform was the one issue that commanded nearly universal support in the health care debate, few design features were universally accepted by those who crafted the reforms. The article concludes by assessing the pattern of state and federal action. The reforms represent some progress on nominal access to insurance but little progress on the affordability of insurance for individuals and small groups. Few of the reforms present a serious challenge to existing practices and interests of the insurance industry. This pattern of policy design reflects the logical and political constraints of incrementalism. In a system where insurance coverage is voluntary, changes to increase access for one group tend to increase costs and thereby decrease access for another segment of the population. In addition, because incremental reforms will not attract sustained attention and support from the general public, it is politically difficult to impose substantial new regulation on a powerful industry.     

Political Embeddedness of Public Pension Governance: An Event History Analysis of Discount Rate Changes

State governments are frequently said to manipulate the discount rate assumption to make pension funding look better, reduce employers' and employees' pension contributions, or relieve fiscal stress. Building a model from the political embeddedness perspective and applying an event history analysis to the 81 largest state‐administered pension plans in the United States, the authors found that more politically embedded pension boards were actually more likely to reduce their plan's discount rate. Public union coverage and government political ideology, however, had no significant impact on discount rate changes. These findings reveal the effect of political embeddedness on pension planning decisions and provide useful insights into the intricate process of setting pension discount rates in a new era of more muted investment return expectations. This article points to both political and financial pressures facing pension boards and state governments for many years to come.     

Where Science Comes to Life: University Bioscience, Commercial Spin-offs, and Regional Economic Development

Biotechnology, rather than being defined as a distinct industry like steelmaking or shipbuilding, is instead a scientific knowledge base—a rapidly evolving technology—that has economically valuable applications in such diverse industries as pharmaceuticals, medical diagnostics, agriculture, bioenvironmental remediation, and chemical processing. Biotechnology has captured the imagination of ambitious scientific investigators and investors seeking high rates of return, as well as state economic development officials who hope to anchor the industry in their locality and reap the industry's economic and employment rewards. Biotech is still at an early stage of its development, and there are many competing hypotheses about its future development. Most importantly, biotechnology involves the commercialization of science resources in which the federal and state governments have made substantial investment. One key question is how to leverage this investment for future economic growth. This article explores the policy issue related to the commercialization of biotechnology, its role as an engine of economic development, and the appropriate public policy response.     

Economic discourse and the capitalist order

This paper uses the concepts of business model and financial ecosystem to analyse the relation between the US capital market and corporate business. Under a capital market double standard, from 1995 to 2000, new companies with digital prospects could recover their costs from the capital market; but, after the tech stock crash in 2000, all companies were required to generate profits from the product market. This encourages a blurring of old and new firm identities, because sectoral power is increasingly necessary to secure cost recovery. But this does not imply any return to business as usual when the financial ecosystem for new technology survives the crash and large-scale venture capital investment continues. From this point of view,the new economy illustrated, concretely, the determining role of finance in the broader processes of financialization.     

FHA: Recent History and Future Prospects

The Federal Housing Administration (FHA) deserves considerable credit for helping support the housing market during the recent financial crisis by increasing its own market share. However, as the recovery continues, the FHA can gradually return to its “traditional” role as an insurer of low-down-payment home mortgages for low-to-moderate-income and first-time homebuyers. A major concern going forward is susceptibility to increased adverse selection if it continues in nontraditional markets. Indeed, the modest market share of the FHA going into the housing collapse was important both in limiting its losses and in allowing it to maintain the market when other traditional secondary market makers failed.     

The Penal Voluntary Sector in England and Wales: Adaptation to Unsettlement and Austerity

This article draws on some findings from research which investigated penal voluntary sector adaptation to the mixed market in criminal justice services. The article firstly reprises the main trends for aligning state relationships with the voluntary sector from the 1980s to the present. We then outline some findings about adaptive experiences, situations and practices of the voluntary sector in criminal justice resettlement in the light of considerable upheaval. The research found that service providing voluntary sector organisations (VSOs) either outwardly comply with, or, in a minority of cases, actively embrace, competitive marketised models of service delivery. Secondly, the sector has normalised commercial approaches to organisational efficiency as well as aligned with bureaucratic practices common to the statutory sector. Despite charges that they are effectively co‐opted by both state and market interests, many have reported conflicts between prioritising long‐term financial viability with their founding ‘ethos and values’. We conclude that while many VSOs have successfully adjusted to market and bureaucratic norms, aspects of that repositioning have been at a cost to their traditions of relative autonomy, localism and distinctiveness, to the possible detriment of a vigorous civil society.     

What stock market returns to expect for the future?

In evaluating proposals for reforming Social Security that involve stock investments, the Office of the Chief Actuary (OCACT) has generally used a 7.0 percent real return for stocks. The 1994-96 Advisory Council specified that OCACT should use that return in making its 75-year projections of investment-based reform proposals. The assumed ultimate real return on Treasury bonds of 3.0 percent implies a long-run equity premium of 4.0 percent. There are two equity-premium concepts: the realized equity premium, which is measured by the actual rates of return; and the required equity premium, which investors expect to receive for being willing to hold available stocks and bonds. Over the past two centuries, the realized premium was 3.5 percent on average, but 5.2 percent for 1926 to 1998. Some critics argue that the 7.0 percent projected stock returns are too high. They base their arguments on recent developments in the capital market, the current high value of the stock market, and the expectation of slower economic growth. Increased use of mutual funds and the decline in their costs suggest a lower required premium, as does the rising fraction of the American public investing in stocks. The size of the decrease is limited, however, because the largest cost savings do not apply to the very wealthy and to large institutional investors, who hold a much larger share of the stock market's total value than do new investors. These trends suggest a lower equity premium for projections than the 5.2 percent of the past 75 years. Also, a declining required premium is likely to imply a temporary increase in the realized premium because a rising willingness to hold stocks tends to increase their price. Therefore, it would be a mistake during a transition period to extrapolate what may be a temporarily high realized return. In the standard (Solow) economic growth model, an assumption of slower long-run growth lowers the marginal product of capital if the savings rate is constant. But lower savings as growth slows should partially or fully offset that effect. The present high stock prices, together with projected slow economic growth, are not consistent with a 7.0 percent return. With a plausible level of adjusted dividends (dividends plus net share repurchases), the ratio of stock value to gross domestic product (GDP) would rise more than 20-fold over 75 years. Similarly, the steady-state Gordon formula--that stock returns equal the adjusted dividend yield plus the growth rate of stock prices (equal to that of GDP)--suggests a return of roughly 4.0 percent to 4.5 percent. Moreover, when relative stock values have been high, returns over the following decade have tended to be low. To eliminate the inconsistency posed by the assumed 7.0 percent return, one could assume higher GDP growth, a lower long-run stock return, or a lower short-run stock return with a 7.0 percent return on a lower base thereafter. For example, with an adjusted dividend yield of 2.5 percent to 3.0 percent, the market would have to decline about 35 percent to 45 percent in real terms over the next decade to reach steady state. In short, either the stock market is overvalued and requires a correction to justify a 7.0 percent return thereafter, or it is correctly valued and the long-run return is substantially lower than 7.0 percent (or some combination). This article argues that the "overvalued" view is more convincing, since the "correctly valued" hypothesis implies an implausibly small equity premium. Although OCACT could adopt a lower rate for the entire 75-year period, a better approach would be to assume lower returns over the next decade and a 7.0 percent return thereafter.