Since landing the job in 2022, State Treasurer Erik Russell has instituted a number of reforms to Connecticut’s investment strategy following a 2023 report issued by the Yale School of Management, which found Connecticut had the second-worst investment performance in the country, costing taxpayers $10 billion in unrealized gains over ten years.

Despite glowing testimony and lawmaker comments about Russell’s reforms during a public hearing before the Finance, Revenue and Bonding Committee last week, however, it appears the latest proposal to reform Connecticut’s pension investment practices may be a bridge too far for both Russell and Gov. Ned Lamont.

Senate Bill 1557 would replace Connecticut’s current Investment Advisory Council (IAC) with an Investment Board and require an annual independent review of Connecticut’s investment performance. The new investment board, notably, would become the fiduciary, bearing responsibility for the state’s investments. 

As it stands now, the Connecticut state treasurer is the sole fiduciary; the only other state that vests that responsibility in their treasurer is North Carolina, the only state with a worse investment performance than Connecticut, according to the Yale study. North Carolina, however, is moving toward an investment board as well, meaning Connecticut will be the only state with a sole fiduciary in the state treasurer.

The Yale Study was conducted by Jeffrey Sonnenfeld, founder and president of the Yale Chief Executive Leadership Institute, and research director Steven Tian, along with a team of Yale graduates. Their report found past treasurers Denise Nappier and Shawn Wooden had continued investing with management companies who were charging excessive fees while also under-performing. 

The study was a bombshell. A state known for its concentration of hedge funds had performed badly to the point of losing billions during a time when Connecticut’s underfunded pension funds required two major tax increases in 2011 and 2015 just to make the annual payments.

Sonnenfeld and Tian testified in person and in writing in support of SB 1557, saying that Russell has done a great job reforming Connecticut’s investment strategy, but he will not always be the state treasurer. They argued this move is not a reflection on the current IAC, but having a sole fiduciary is a “structural weakness.”

“While Treasurer Russell has vastly improved the state’s investment performance, we are not always guaranteed a leader of his dedication and character,” Sonnenfeld and Tian wrote in testimony. “A single individual holding sole fiduciary responsibility over $60 billion without checks and balances does not seem like a good idea, which is perhaps why 49 other states have gone down a different route with board governance.” 

Notably absent from the discussion were Treasurer Russell and anyone from the Governor’s office; current IAC member D. Ellen Shuman submitted written testimony in opposition days after the hearing. That’s because they don’t want it, believe it is unnecessary, and will add a layer of bureaucracy to how the treasurer’s office operates when it comes to investing.

“This bill clearly reflects a fundamental lack of understanding of the authority of the IAC, which has significant power under state law and is comprised of talented, experienced institutional investment professionals,” Russell said in a statement provided to Inside Investigator. “They approve the investment policies the Treasurer must follow, the hiring and promotion of investment personnel, and perhaps, most importantly, the CRPTF’s strategic asset allocation—something that has played a key role in the positive investment performance we’ve seen over the past few years.” 

“The Investment Advisory Council, which is made up of five experienced appointees as well as representatives from the state employees’ and teachers’ retirement systems, operates in full transparency and already functions as a check on the Treasurer’s authority,” Director of Communication for the Office of the Governor Rob Blanchard wrote in a statement. “While this legislation is directed at the office rather than the officeholder, replacing the IAC will not serve future treasurers in a more efficient manner. In fact, added bureaucracy could potentially hamper performance and interfere with the positive progress that has been made in recent years.”

Russell implemented some recommended reforms, including offering more competitive pay for IAC members, loosening restrictions on who can serve on the IAC, and changing their asset management strategy. Chairman of the IAC, Philip Zecher, was part of that reform effort, being appointed to the IAC last year by Gov. Lamont, and says the legislation isn’t necessary.

“While this proposed legislation may be well-intentioned, there’s no objective specified in this legislation that isn’t already being achieved,” Zecher said in a statement to Inside Investigator. “The [Connecticut Retirement Plans and Trust Fund] has made significant progress in recent years, and I’m excited to build on that progress in collaboration with the Treasurer and the members of the IAC.”

Connecticut’s pension investments experienced a good year in 2024, returning 11.5 percent in fiscal year 2024, well above the assumed rate of return of 6.9 percent, but less than passively managed index funds, which returned more than 20 percent in 2024. That means Connecticut is no longer at the bottom of the barrel when it comes to pension performance; the state is now solidly in the middle of the pack, according to Sonnenfeld.

Furthermore, the state has been paying down Connecticut’s pension debt through its “fiscal guardrails,” sending surplus income tax revenue derived largely from investment earnings into the pension system, reducing the state’s pension debt by $8 billion and saving $18 billion over the next fifteen years in lowered payments. 

This year, however, could prove to be a much different market ride, with wild swings in the market reacting to President Donald Trump’s tariff policies. Connecticut’s market performance matters a lot: failure to meet the 6.9 percent rate of return can cause the annual required payments toward the state’s massive pension debt to increase, eating up more of the state budget, and can also mean increased deductions out of state employee paychecks.

According to the legislation, the Office of Legislative Management would contract with an advisory firm that would analyze Connecticut’s investment performance on an annual basis, including benchmarking Connecticut’s performance against other states, and by asset class.

Russell says there is no need for independent review of Connecticut’s investments because it already happens through “multiple entities,” including the Auditors of Public Accounts. 

“The transparency of this office is one of my top priorities,” Russell said. “Investment performance and proposals are reviewed during public meetings, and regular performance reports are posted online.”

Reached for comment, Sonnenfeld reiterated that Connecticut’s pension funds are being better managed under “a great new treasurer” and “several reforms implemented which our research has recommended,” but believes the treasurer should be accountable to a board like private sector entities.

“We are no longer the second worst performing treasury in the nation as we were for the past quarter century,” Sonnenfeld wrote in an email. “The only state which performed worse than Connecticut over the past 25 years was North Carolina and they too are the only other state which has lacked standard checks and balances in governance. Every executive across sectors faces a board of directors, trustees, or a legislature.  An oversight group with actual power makes the position more attractive.”

“We know from the State’s history, we may not always have a treasurer as great as Erick Russell,” Sonnenfeld continued. “As North Carolina prepares to add such oversight. Why should Connecticut be the only state in the nation which violates such basic prudent governance?”