ASSET CLASS

As the shortfall in US infrastructure investment looms larger than ever, state legislators around the country are beginning to come up with increasingly creative – and controversial – solutions.

Last month, Texas governor Rick Perry sent a letter to the state's transportation commission chairman proposing that, as a possible solution to the state's transportation funding gap, the legislature will consider creating a “Texas Finance Corporation” or a “similar entity that will allow Texas-based investment funds to invest directly in Texas transportation projects that offer a potential solid long-term return”.

Much remains unclear about how legislators might structure such an entity once they gather for their next session in January 2009, but one thing is for certain: the governor had in mind two home-grown financing sources in the form of the state's $112 billion Teachers' Retirement System of Texas (TRS) and the $23 billion Employees Retirement System of Texas (ERS).

To be sure, other states have in the past sponsored statefocussed public infrastructure corporations. But the funding for such entities has typically come from general revenues allocated by state legislatures – never public pensioners.

Consequently, the Texas governor's plan represents unchartered territory for public pensions and may, depending on the outcome, set a precedent for other states seeking similar solutions to the same problem.

For their part, in accordance with their fiduciary responsibilities, pension fund managers aren't concerned so much with supporting local road projects as they are with maximising returns for their pensioners.

“We have to weigh any opportunity, whether it's in Texas or anywhere else, on a global basis. We have to look at it independently and whether or not it stands up to other investment alternatives that are out there,” said James Lee, chairman of the TRS board, at a recent joint hearing on the subject in the Texas state legislature.

But with the Texas Department of Transportation having announced a funding gap of up to $86 billion for improving traffic congestion in the state over the next 20 years, the state's leadership is hoping to find some way to make statefocussed transportation projects an attractive opportunity.

How to do so, though, without prioritising legislators' goals over pension fund managers' fiduciary duties is the multi-billion dollar question.

EXISTING MODELS
At one extreme, legislators could model the Texas Finance Corporation after California's Infrastructure and Economic Development Bank, which receives no pension monies but whose revenue bond issuances can be purchased by state pension funds like CalSTRS or CalPERS should they choose – for whatever reason – to devote a certain part of their funding to California-specific infrastructure projects. Under this scheme, political influence is minimised and pension managers' decision-making is preserved to the fullest extent.

On the other hand, they could simply force pension managers' hands by mandating that they devote an investment allocation to future state infrastructure projects.

This would, however, almost certainly meet with insurmountable opposition. And at this point, it doesn't appear likely, either: at the same hearing, Texas senate state affairs committee chairman Robert Duncan said that “the legislature has to be careful that we don't direct their [the pensions'] investments into interests that we have either politically or infrastructure-wise”.

Instead, the infrastructure investment vehicle is more likely to take the shape of a new state-sponsored limited partnership or investment trust that pension managers can choose, at their discretion, to invest in.

But no matter how the proposed Texas Finance Corporation eventually materialises, it is certain to be a long, drawn-out process before it comes to life – and not necessarily without some casualties along the way.

In June last year, former Texas Transportation Commissioner Ric Williamson, who had championed many of the governor's transportation policy proposals, told a local journalist he had suffered two heart attacks since he started advocating them. His doctor had warned him that his third one would be fatal. Six months later, he tragically suffered a third – and fatal – heart attack.