Arkansas’ Teachers Retirement System was the only government retirement system in the United States to lose money by investing in the offshore limited partnerships at the center of the Enron bankruptcy.  The Cayman Islands-based partnerships “engaged in derivative transactions with Enron,” according to a November 2001 SEC filing, allegedly “to permit Enron to hedge market risks.”  ATRS might never have invested funds if a state audit of the system in 1998-99 had been taken seriously.  The audit reported that “Investment department management’s failure to establish effective controls over investments resulted in inadequate supporting documentation for market values on alternative, real estate and Arkansas related investments totaling $581,245,825.”  “Alternative investments” is a broad term that includes derivatives and the Enron offshore limited partnerships.  The audit also stated that “the accounting department did not maintain adequate accounting records and documentation to support differences between the general ledger and their published financial statements.  Due to the lack of administrative review, inadequate staff training and absence of written policies and procedures, the general ledger was understated $1,107,931,345.”  That is revealing, given that ATRS, Arkansas’ largest government retirement system, controls more than seven billion dollars in assets.

The issue is not whether government should ban or restrict the prudent use of derivatives to hedge risk.  Rather, the issue is one of transparency—how best to provide increased disclosure.  After Enron, government officials have been quick to legislate and enact regulations compelling private businesses to provide transparency to markets.  They have, however, dragged their feet and resisted requiring government systems such as ATRS to provide transparency to members and taxpayers.

The largest government systems have derivative policies that are published online (unlike ATRS), including the California Public Employees’ Retirement System (, which updated its policy in December 2000.  CALPERS’ policy prohibits the writing of uncovered (non-hedged) calls, leveraging (borrowing to increase rate of return), and the use of nonexchange-traded derivatives.  It permits CALPERS traders to use futures contracts, a type of derivative, but specifies that “Authorizing trade of S&P 500 stock index futures to 1000 long contracts and 1000 short contracts, without prior written authorization from management, is limited.”  The Arkansas statute on derivatives, on the other hand, is vague and does not address the issues raised by Enron.

ATRS’s lack of transparency carries over to such important areas as asset allocation, largest equity holdings, and investment returns.  This data is disclosed online in neighboring Mississippi by the state’s Public Employees Retirement System, which provides even greater detail in its annual reports.  The Mississippi system, for example, discloses online its equity position in Microsoft.  To obtain the same information in Arkansas, you must file a formal request under the state’s Freedom of Information Act.  ATRS’s Microsoft holding, as of December 31, 2000, had lost more than one third of its value, according to records obtained under FOIA.