Alabama Inc.

By Tim Padgett/Montgomery

Waving a Cohiba cigar in his expansive office overlooking downtown Montgomery, Ala., David Bronner talks enthusiastically about his investments: in an airline just reorganized after bankruptcy, a chain of luxury golf resorts and a group of television stations. Is he a gunslinging Sunbelt entrepreneur in the mold of Ted Turner? A hedge-fund manager? A contrarian private-equity investor? Not even close. Bronner, 58, is, in his own words, "a government bureaucrat"--the chief executive of Retirement Systems of Alabama (RSA), the pension fund for 290,000 state workers and retirees. An unabashed cheerleader for Alabama who is comfortable in the spotlight, Bronner is overturning the image of the pension manager as passive investor--and not without controversy.

Bronner turned heads last fall when RSA spent $240 million for a 37% stake in the nation's seventh largest passenger carrier, US Airways, which this month emerged from Chapter 11 protection and named Bronner as its new chairman. Some of his ideas for reviving the airline involve RSA's other unorthodox ventures, including its $5 billion in media holdings and its string of acclaimed Alabama golf courses, the Robert Trent Jones Golf Trail. "I'll give US Airways free advertising," Bronner says. The pitch: "Fly US Airways to the Robert Trent Jones Golf Trail!"

Such big bets on synergy aren't the typical way to provide for the golden years of assistant principals and highway patrol officers. Most state pension funds are staid, blue-chip investors that focus on earning steady returns. But since taking over RSA in the early 1970s, when it was worth $500 million, Bronner, a finance Ph.D., has overseen its growth into a $22.4 billion concern. Under Bronner, RSA has ventured boldly into direct investments intended not only to fund state workers' pensions but also to boost Alabama's lagging economy and image. "I don't want to be a pension-fund manager who doesn't given a s___ about the state he lives in," Bronner says with characteristic bluntness.

But the US Airways acquisition, which included a $500 million loan to help the airline through bankruptcy reorganization, has pension-fund experts wondering about the risks of Bronner's approach. The deal makes RSA the carrier's largest equity investor (RSA already held $340 million in US Airways debt and owned nine of the airline's jets.) RSA's stake should create jobs in Alabama, where the carrier is expected to build new regional facilities. But whether that sort of spending will benefit the airline and its shareholders--including RSA--is another question.

To gain effective control of US Airways, RSA outbid by 20% the Texas Pacific Group, based in Fort Worth, a private-equity outfit with long experience investing in distressed airlines. RSA has plunged into a battered industry that has bedeviled even value-stock gurus like Warren Buffett, who once described his airline investments as "temporary insanity." Olivia Mitchell, executive director of the Pension Research Council at the University of Pennsylvania's Wharton School of Business, warns that for a pension fund, direct investment in such a risky business--especially when the fund manager becomes the airline chairman--"creates a slippery slope to conflict of interest. Running a pension fund and running an airline are two different skill sets."

Bronner, who insists he avoids conflicts of interest by not owning personal stock in any company, counters that the RSA--US Airways arrangement is hardly a conflict but rather a healthy symbiosis. "We at [RSA] are not some hedge fund out to make a short-term buck," he says. "We're into a long-term commitment that protects the investments we already had in this airline." And it's hard to find critics of Bronner in Alabama, which has embraced the Minnesota Yankee as one of its own. He arrived in 1969, earned a law degree and the finance Ph.D. at the University of Alabama at Tuscaloosa, and was appointed to head RSA in 1973 by Governor George Wallace. At that time, the pension fund's asset-to-liability ratio was a perilous 25%; today the system is almost fully funded at 96%. "His investments have been innovative and effective," says Warner Floyd, head of the Alabama Retired State Employees Association, "and they've had the added value of changing the state's skyline." Floyd argues that the 21 championship golf courses and resorts built by RSA since 1993 for $173 million (with three more set to open early next year) have helped boost Alabama's tourism revenue from $1.6 billion a decade ago to $6.5 billion today, and that billions more in RSA investments and loans have helped attract new industry to the state, including loan recipient DaimlerChrysler, which built a 1,900-employee Mercedes-Benz plant in Tuscaloosa in 1997.

"In Alabama you can still be a cowboy," Bronner observes. "If you're dumb enough to try something new down here, they'll say, 'Go ahead.'" Because the state is always a public pension fund's major contributor, he says, "if you don't help make the state economy strong, you're hurting yourself as a fund manager." Bronner has steered about 45% of RSA's assets into the public-equities market, compared with 56% for the average pension fund. The rest of RSA's capital has flowed into fixed-income and direct investments, such as $68 million worth of upscale retirement-home construction, six neoclassical office towers in downtown Montgomery and a mini media empire: Community Newspapers, a chain of more than 250 small-town papers around the U.S., and Raycom Media, 36 TV stations that reach 10% of U.S. households.

Bronner's in-state investments may serve the state's economic development, but they "risk violating a core principle of his job--diversification," says Randall Eberts, executive director of the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich. "His projects are impressive, but they risk reducing the rate of returns he could be achieving." For the past decade, RSA's flagship $14 billion teachers' fund gained a respectable (if middling) 7.2% a year on average, compared with a median of 7.9% for public pension plans as tracked by the investment consulting firm Callan Associates. The teachers' fund outperformed its peers in the past three years and five years, and overall, RSA's 19-fund portfolio has been less volatile than most pension portfolios. While Bronner didn't earn the overall market's lavish returns during the 1990s tech boom, he hasn't lost as much since then either. Alabamians--especially those who remember RSA's volatile, pre-Bronner returns--seem to value such middle-of-the-road dependability even if the means to achieving it are unorthodox.

Some critics, such as former state finance director James White, argue that Bronner enjoys unusual authority and that RSA's boards of directors (one for the teachers' fund and another for the general employee fund), which together constitute the only body that could remove him, have become "rubber stamps" for his maverick ways. Bronner, who earns $308,000 a year (compared with $96,361 for the Governor), calls that charge "nonsense," but can't cite an instance in which either board reined in any of his investment plans. He says that he intends to give his $40,000 board fee from US Airways to a relief fund for airline employees.

For all the controversy over RSA's investment in US Airways, Bronner is already looking beyond that deal. During a recent Alabama trade mission to Cuba (where he got his Cohibas), Bronner, a golf enthusiast, couldn't help but notice the investment potential, exclaiming: "They've only got 27 holes in the whole country!" --With reporting by Frank Sikora/Birmingham

With reporting by Frank Sikora/Birmingham