Facing a sharp decline in government pension funds because of the stock market plunge, Gov. Tim Pawlenty on Wednesday questioned whether the state's investment policy exposed the funds to excessive risk.

Pawlenty said the state requires the fund for future retirees to earn 8.5 percent a year and added, "I'm not sure that's realistic in the near-term."

He asked whether the requirement pressured fund managers to make too risky investments, noting that 80 percent of the money is invested in stocks, real estate and other assets that don't offer guaranteed returns.

State Board of Investment executive director Howard Bicker said he wouldn't change the allocation of investments. "We're kind of stodgy," he said. "We haven't done a lot of fancy-dancy stuff. We are not on the edge with this asset allocation."

Bicker also said a lower earnings target wouldn't justify more conservative investments because interest rates offered on fixed-income investments aren't high enough to meet pension obligations over the long run.

The comments at Wednesday's SBI meeting reflected concern about a 22 percent decline in assets managed by the board that occurred from mid-2007 through October of this year, mainly because of investment losses. The decline reduced pension assets by about $14 billion.

Board members learned that the losses included $55 million -- about one-tenth of 1 percent of total pension assets -- invested in bonds for the failed securities firm Lehman Brothers. The state attorney general filed a claim in behalf of SBI in bankruptcy court.

Funding from government, its employees and investment returns is expected to provide enough money to pay pensions for current and future retirees. If the state were to accept a lower earnings target for investments it would have to increase government and employee contributions, reduce benefits for future retirees, or both.

Asked afterward if he favored lowering the earnings target, Pawlenty said, "I don't anticipate it changing." Noting that he has questioned the target before, he said, "I think it's at least worth questioning at this point."

Pawlenty said he was reassured by the responses of Bicker and his staff.

Pat Doyle • 651-222-1210