Patrick targets pension systems

Governor Deval Patrick is proposing a tough new mandate for the state's cities and towns: If your pension system isn't performing, we're taking the money and investing it ourselves.

As part of a municipal relief package Patrick is to unveil today, approximately one-third of the state's 107 public pension funds would be forced to turn over nearly $5 billion in assets for investment by the state.

Those funds, which include the system overseen by the Massachusetts Turnpike Authority, have earned lower returns than the state's pension fund over the past five years and contain less than 80 percent of the money necessary to cover their pension obligations. Many of the funds invest pensions collectively for several cities and towns.

The proposal, which would encroach on an often jealously guarded function of local government, must be approved by the Legislature, which has cast doubt recently on another aspect of Patrick's municipal agenda, his proposal to allow cities and towns to impose a small local meals tax on restaurants. An effort to take control of the pension funds could spark criticism from local governments, who have put their hope in Patrick after years of depressed local aid and increasing property taxes.

Until now, Patrick's effort to fulfill his campaign promises to cities and towns has focused mainly on sending more money and granting municipalities new taxing powers. But Patrick is now making it clear that this may not be a painless process for local governments.

"The governor is talking about creating a new and modern relationship with cities and towns, and that relationship is a two-way street," said an administration source, who requested anonymity because the plan had not been made public. "There are things the state can do to help cities and towns, and there are things that cities and towns can do to help themselves."

Patrick, who has been under pressure to deliver on his promises in the light of a potential $1 billion budget deficit, is scheduled to announce his Municipal Partnership Package today at Watertown Town Hall. About two-dozen local leaders from across the state are scheduled to join him for the announcement.

The administration source said the package will be a multifaceted set of proposals to help cities and towns improve their financial and economic picture. The governor has previously said he is considering ways to give communities the authority to raise certain taxes, such as the meals tax, to help them cover costs and reduce dependence on property taxes.

Yesterday, in another effort to help bolster relations with cities and towns, Patrick appointed Robert G. Nunes, mayor of Taunton, to serve as his director of municipal affairs.

The state Public Reserves Investment Trust, overseen by Treasurer Timothy P. Cahill, manages $46.7 billion in retirement funds for teachers, state employee retirement funds, and about 28 county, municipal, and other retirement systems that have voluntarily chosen to invest with the state.

Several policy analysts and politicians, including Patrick's Republican opponent, Kerry Healey, have called for requiring all local pension funds to be folded into the state system to save money on administrative costs and to take advantage of the state's solid investment performance. Healey said cities and towns could save as much as $200 million in administrative costs immediately, though some doubted that estimate.

Questions have also been raised about the mishandling of public pension funds. In Brockton, controversy arose over a police lieutenant's $140,000 annual pension. And Middlesex County recently shifted nearly $700 million in assets to the state after the inspector general's office charged that one board member billed thousands of dollars in fraudulent expenses and that the bidding process for the system's new headquarters was rigged.

Cahill said that he supports Patrick's proposal. "In the long run, it will save local communities significant money," he said.

He said the state pension fund was among the top 2 percent of pension funds in the country over the last three years and that the size of the state's fund allows it to get high returns for lower fees.

Salem State College economist Ken Ardon estimated in a study last year that cities and towns could have earned an additional $1.6 billion over the last decade if they joined the state system.

"It would make sense to consolidate them into the state fund. You'd have lower costs and higher returns," Ardon told the Globe in December. "The state constantly outperforms these smaller funds. They just can't diversify to the extent the state can, and they aren't large enough to get in some of the investment vehicles the state can."

In a study authored by Ardon last year, the Pioneer Institute, a market-oriented think tank, found that in the prior 10 years, the total return for the state's Pension Reserves Investment Trust fund was about 200 percent, while local funds had a median return of less than 170 percent. In 2006, the state trust posted returns of 16.7 percent, outpacing most other public pension funds its size.

But some local officials raised concerns about the state's aggressive investment tactics. They said communities differ on how much risk is acceptable and should be allowed to invest as they see fit.

Patrick's proposal stops short of doing away with all local pension funds. Only pension systems that are less than 80 percent funded and that have underperformed the state fund by 2.25 percent over the last five years would be required to transfer assets to the state fund, administration sources said. The state fund's annualized returns were 7.04 percent between 2001 and 2005.

"This plan is calibrated toward performance," a Patrick administration source said.

(Correction: Because of a reporting error, a Page One story Thursday about Governor Deval Patrick's proposal to take over underperforming pension systems misstated the systems that would be targeted. The legislation targets systems that have underperformed the state pension fund by an average of 2.25 percentage points or more over the last five years and that are less than 80 percent funded.)