GIVEN THE NATIONWIDE importance this year of corporate-governance, investment, and pension-fund matters, the biggest issue in the treasurer’s race is the state’s pension system and its relationship to corporate responsibility. Indeed, questions about the pension fund took up more than half of the NewsNight debate.

Under legislation passed in 1983, the treasurer does not run the day-to-day management of the Pension Reserves Investment Trust (PRIT). Instead, he or she must oversee the investment managers, such as Fidelity and Legg Mason, hired by the pension board. The nine-member Pension Reserves Investment Management (PRIM) board, of which the treasurer is a member, selects investment firms to manage portions of the pension. The idea behind the current set-up is that while the treasurer should oversee the pension, the day-to-day management of the fund is a job best left to these professionals. Too active an investment role by the treasurer means too great a risk of impropriety, or, at least, the appearance of impropriety.

To date, the system seems to have worked. In fact, one of the reasons why O’Brien hasn’t been blamed for the state’s investment in Enron — even though her husband, Emmet Hayes, was at one time a lobbyist for the company (though he had stopped working for Enron well before the state’s last few buys of the stock) — is because O’Brien is so obviously removed from the buying decisions. The multiple levels of insulation between the treasurer and the state’s pension-investment decisions make the charge that the state bought shares of Enron because O’Brien’s husband worked for the corporation difficult to believe.

Murphy, Segel, and Michael Cahill all think the current system works. Tim Cahill, however, would like to give it a radical overhaul. He’d like to see the treasurer play more of a hands-on role in the management of the fund, including making on-site visits to potential fund managers and possibly even to investment options. That’s what Cahill, as treasurer of Norfolk County, has done there. In 1997, he took Norfolk County out of the PRIT system. Since that time, Norfolk County’s pension system has ranked 84th in investment returns out of the 106 pension funds managed in the state. Its rate of return over the last five years is 8.1 percent, as compared with the PRIM board’s more successful 9.41 percent. (Cahill notes that in 2001 his fund eked out a .57 percent gain while PRIM lost 5.3 percent.)

"I don’t think there should be the separation that was talked about out there, that the treasurer shouldn’t have a say," says Cahill, referring to points raised by his fellow candidates during the NewsNight debate. "We should have these Harvard and Yale people telling us how to invest our money? The treasurer’s job is to have that responsibility and make those decisions."

Tim Cahill’s plan seems like a recipe for conflict of interest. His prodigious fundraising has already drawn scrutiny in the press. Boston Herald columnist Cosmo Macero pointed out on July 17 that Cahill’s hands-on role in managing the Norfolk County $400 million pension "has given Cahill entry into the big-bucks world of money managers, venture funds, and investment managers — which together have pumped thousands of dollars into his campaign." Macero made much of Cahill’s national network of donors, and noted that the candidate had even held an out-of-state fundraiser. That fundraiser, Cahill told the Phoenix, was organized by a long-time friend who now lives in Atlanta. He maintains that he’s never allowed a campaign contribution to influence an investment decision, adding that he won’t accept money from a contributor when there is an issue concerning that contributor before him. He also says that any donations from investment professionals don’t make him part of a "big-bucks world," claiming investment professionals make up no more important a bloc of donors to his campaign than plumbers, lawyers, or members of any other profession do. (A perusal of Cahill’s June 2002 fundraising forms showed donations from an accountant, an investment manager, a manager at the Massachusetts State Lottery, and the executive director of the Norfolk County Retirement System, over which Cahill provides. A list provided by the Cahill campaign showed donations by 36 attorneys and 11 investment professional, but no plumbers. However, 88 donors declined to designate their professions.)

That said, it’s clear that the Norfolk County treasurer’s more-activist proposal only helps reinforce the criticism implicit in Macero’s column — namely, that the possibility for the appearance of impropriety increases when a treasurer both solicits funds from investment managers and personally directs investment funds. Tim Cahill’s proposals go even further, however. He says he wants to see the state invest more in local companies and local real-estate ventures — a proposal that can’t help but raise red flags about potential cronyism. But the candidate brushes these concerns aside. "You don’t make that decision [based on locality] unless they’re equal," he says. "You won’t hire an inferior manager because they’re local. But if you have two good firms and one is on the West Coast and one is ... employing 1000 people here and they’re very good, then go with the Massachusetts firm."

Of the other Democratic candidates, only Segel offers a similar proposal, but his is much more cautious. He proposes local investment, but with state revenues, not monies from the pension system. For Segel, however, commitment to the pension system’s current set-up comes as something of an article of faith. He served as the executive director of the Massachusetts Municipal Association in the early 1980s — at the time when the legislature was devising a new system of pension management. Because Massachusetts cities all had their own pensions to invest, they would be major stakeholders in the new system. For this reason, Segel had an active role in setting it up.

"We professionalized it to get away from the cronyism and worse that that was going on," he recalls. "We don’t want to slide back. We want to make sure the pension investments are done well."

The other two candidates agree. "The treasurer himself is not going to be the top financial decision-maker," says Murphy. "He should get the best people he can get to sit on these committees to make these investment decisions. It gives the treasurer an opportunity to insulate yourself from any bad decisions." Murphy is pushing a code of conduct he calls the "Main Street Standards" — modeled on the settlement terms between Merrill Lynch and New York State — which would require any company with which the state invests to provide full disclosure about its own investments and dealings. "I look at when the state bought its shares [of Enron], and it looked like a good buy," he notes.

Michael Cahill agrees. He also rightly points out that Enron was only a small part of the overall investment holdings that the individual investment managers carried. "It needs to be remembered that these individual investment managers did a good job with their piece of the portfolio overall," he says. "They may have made a bad decision on Enron, but how many other people made that decision?"

There is broad agreement among the four candidates on some other ideas relating to the Treasury. Both Murphy and Segel believe the state’s investment power can be used to help make corporations accountable to government. All seem to believe that the legacy of Shannon O’Brien, who began initiating classes for the public on investment and money management, should be continued and expanded. All believe that Governor Jane Swift’s plan to reduce lottery payouts is foolhardy and counterproductive. Murphy is in the process of working with the state legislature to lower credit-card interest rates in the state. Mike Cahill suggests increasing the awards on games such as Mass Millions and Megabucks, which do not do as well as scratch cards, to generate excitement and more income. Tim Cahill proposes a special holiday gift card, which consumers could buy for friends and family, that recipients could use to purchase scratch cards.

POLICY IS ONE thing, but in Massachusetts it always comes back to politics. The current treasurer’s race bears an odd resemblance to the 2001 special election in which State Senators Stephen Lynch of South Boston, Cheryl Jacques of Needham, Brian Joyce of Milton, and Marc Pacheco of Taunton vied to replace the late congressman Joe Moakley. Murphy represents the Boston-Irish urban machine, and he has the same campaign team as Lynch did. A poll conducted by Murphy reportedly has the city councilor with a double-digit lead over his closest opponents, but more than 50 percent of the electorate remains undecided. Segel is a Needham liberal who, like Jacques, represents the suburbs. Tim Cahill is employing Doug Rubin, who worked for Joyce, another Norfolk County Democrat. And Mike Cahill is a state legislator who hails from an odd part of the state from which to launch a big campaign — much like Pacheco. In 2001, the urban/trade-union vote meant victory for Lynch. The only question is whether the same coalition can succeed in a statewide race.

Seth Gitell can be reached at sgitell[a]phx.com