Alabama Lawsuit Raises Questions Over In-State Public Pension Money

(June 27, 2011) — A class action lawsuit revolving around Alabama’s potentially haphazard investment process has been filed on behalf of employees in the state’s pension plan, CBS has reported.

The suit challenges the Retirement System of Alabama’s (RSA) right to invest in golf courses, condominiums, hotels, and resorts inside the state when there are more profitable investments out of state. Two Birmingham law firms filed the suit which names RSA CEO David Bronner along with its governing bodies and boards of control as defendants, the news agency reported.

Attorneys say that smaller returns on RSA investments pushed the state to contribute additional tax dollars into the fund. The result: Added financial strain on the employees who depend on the fund, as well as taxpayers.

“All of these public entities always get tremendous pressure to invest in-state. If it works out, you’re a hero. If it doesn’t, you’re a pariah,” said one industry source who declined to be named, describing the ‘politically charged’ decision of public pension plans investing in-state. “I can see why they funds choose to invest in-state, but it also carries tremendous risk,” the source said.

Other sources critique RSA’s choice to invest such a large chunk of money in real estate inside the state due to the risky nature of the asset class. Higher levels of underfunding among pensions may be fueling the drive to invest in riskier opportunities, investment consultants say, yet firms must adhere to lessons of portfolio diversification.