Getting creative with pension funds

Gov. Tim Pawlenty’s plan has the potential to jumpstart Minnesota’s biotechnology sector.

Gov. Tim Pawlenty is quickly learning that tinkering with the state pension fund can feel like entering a political minefield. Pawlenty has long been a proponent of the state’s burgeoning bioscience sector, and his biosciences advisory council has recommended investing some of the state pension funds in biotechnology startup companies. While the concerns of retirees and a handful of legislators highlight the need for caution, Pawlenty’s plan deserves Legislature approval.

The bill currently working its way through the Senate and House would divert as much as $200 million from the state’s $37 billion pension fund away from conventional investments and into more risky but high-growth biotechnology firms. The bill also promises that general taxpayer funding would compensate the state employee pension fund if the biotechnology investments fail to bring at least an 8.5 percent return over 15 years.

Bill opponents are right to point out that with interest compounding annually, such a security clause could cost the state much more than $200 million. But those fears should not be allowed to kill a plan that has the potential to jumpstart Minnesota’s biotechnology sector while also benefiting retirees.

In the long term, biotechnology investments have averaged a 24 percent return. They could be made less risky if the $200 million is reasonably diversified among bioscience firms and states within the region. Even if some of the money is not invested in Minnesota companies, investments in regional companies would likely benefit the state’s economy through spillover effects. The Minnesota State Board of Investment, which manages the state employee pension fund, can also reduce risk by ensuring financial analysts properly vet investment proposals.

The government certainly does not have a spotless record when it comes to picking the next high-growth economic sector. Biotechnology might be the exception to the rule. There is widespread agreement that the biotechnology sector will be a serious engine for economic growth in the future. Pawlenty should be applauded for crafting a policy that will harness the potential of government to jumpstart that engine.