The California Public Employees' Retirement System (Calpers) and the California State Teachers' Retirement System might get approval from their boards in the next few months to provide a slither of their combined $337 billion portfolios into water supply and conservation, toll bridges and tunnels and energy transmission projects.

"If we can find the right opportunities and we conclude we would earn good returns, we would invest these projects," says Clark McKinley, spokesman for Calpers. Pensions would supplement the financing available from tax-exempt bonds and other traditional government financing mechanisms for public projects. Calpers may invest directly or may partner with private equity firms to find the most compelling infrastructure investments that it says could earn 8-10 percent.

An increasing number of private investment firms such as J.P. Morgan Chase, Goldman Sachs and Australia's Macquarie Bank have expressed an interest in financing infrastructure projects around the globe. While those professional managers charge fees, they do increase the odds of achieving higher returns.

With an estimated $11 trillion in assets, pensions could boost the long-term viability of the American economy. And with about $1 trillion of total infrastructure needs in the United States-an estimated $50 billion to $100 billion for transmission-the goal would be to get pension funds to give such assets a closer look.

In a survey conducted in the mid 1990s by the International Foundation of Employee Benefit Plans in Brookfield, Wis., 25 percent of 118 benefit managers and trustees said they would invest in infrastructure projects if they were structured specifically for pension funds and other institutional investors. Three-quarters of the respondents agreed that such investments would help the economy. Nevertheless, the respondents were nearly unanimous in their opposition to any types of mandates.

Potential Opportunities

Private investors are looking to best the bond market that is typically safe, but which earns minimal returns. Infrastructure investing holds appeal because the fees that such essential assets generate are steady and oftentimes pay more interests than bonds.

New Jersey is now having this debate. The state may place as much as $2 billion in private equity funds that would own parts of toll roads, airports and utility wires. Meantime, Pennsylvania might lease the state's toll road -- a proposition that Morgan Stanley says would be worth $3.6 billion over 30 years. Separately, Illinois' public pension fund has allocated $600 million, or about 5 percent, of its investment portfolio to similar projects.

"It's a huge potential opportunity set," says Peter Keliuotis, a consultant with Strategic Investment Solutions that suggested to New Jersey that it allot a small percentage of investors' money to infrastructure, at a public hearing on the matter. In that state's case, its returns have been less than 4 percent a year -- considerably less than the vast majority of private equity funds in the market. By diversifying, the consultant says that New Jersey would have access to a market that could reach $5 trillion over five years.

To be sure, pension plan trustees don't want to be pressured to make infrastructure investments. That would confuse fiduciary standards. Along those lines, investment pros are concerned that they would be forced to make political statements through their investment decisions. Capital will flow naturally to deserving projects, they add, if they are competitive.

Arm-twisting could potentially come in two ways: Municipalities could require the contractors who they hire to ante up with infrastructure investments from their pension funds. Or, Congress could eventually link the pension tax preference to participation in infrastructure financing. If that were to happen, the repercussions would be widespread. Critics of the idea note that the Kansas Public Employee Retirement System had at one time lost a third of its assets by making investments in intrastate businesses.

The concern is real. A study conducted in 1995 by Clemson University economist Wayne Marr and Washington State University economist John Nofsinger said pension funds that include such investments under-perform other pensions by 1.18 percent to 2.10 percent. Over several years, the compound interest makes the difference dramatic.

Pension fiduciaries are duty-bound to ensure the integrity of their funds. Government is therefore unlikely to add any undue pressures on where they invest participants' money. But that does not mean they won't ask. Regardless, some money managers like the idea, saying that they are considering investing directly or in partnering with private equity firms that have the appropriate expertise to diversify their portfolios.

"For us, there's a huge capital need to create new infrastructure for many uses -- bridges, toll roads, water treatment systems, energy products and distributions," says Russell Read, who sits on the board of Calpers, in an interview with Bloomberg Magazine. "We see a $20 trillion market over the next 25 years for projects, including distribution of liquid and gas fuel."

It's not the role of pension managers to bring about social change. But activists' money managers such as Calpers are using their clout. They are now eyeing vital infrastructure projects that they say will serve the twin purposes of satisfying investor demands and allowing whole communities to thrive.

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