Cowell's pension fund path

Apr 29, 2014

RALEIGH -- Sometime even reporters with experience covering state government have trouble getting their minds around the fact that there exists an $86 billion pot of money that is largely controlled by a single elected official.

I spoke to one of those reporters leaving a news conference last week. A state workers group, the State Employees Association of North Carolina, and a consultant that it had hired roundly condemned that control.

The consultant, a fellow named Ted Siedle, referred to State Treasurer Janet Cowell's decision to put more of the $86 billion state employees pension fund into less traditional investments, like hedge funds, as a "heist."

When much of the media ignores the pension fund and its operations, perhaps those who want the media's attention feel compelled to use that kind of hyperbole.

Fortunately for the state pensioners, Cowell has neither heisted nor secreted off with their money.

Unfortunately for those pensioners, it is unclear whether Siedle's 147-page report will further or damage a legitimate debate about whether an investment strategy that moves money from stocks and bonds into the non-traditional investments is a wise move.

The report raises some interesting questions that should be a part of that debate. They include whether investment management fees have been reported as they should be and why a public pension fund, with its many resources, needs to rely on middlemen known as placement agents who in other states have been the subject of kickback schemes.

But the larger issue that remains -- one that isn't so sensational - is whether Cowell's investment strategy is resulting in the fund getting the best bang for its buck.

The reason that question should be important to the larger public is because taxpayers could be on the hook for meeting a bigger part of pension obligations when investment returns don't meet predictions.

The issue of fees paid to outside investment managers, as the state's former Chief Investment Officer Andy Silton has indicated, may be a red herring in some respects. After all, if a private equity firm is given $250 million to manage, beats larger market returns by 10 percent after fees, and collects $10 million for its work, who cares?

But what if you pay those high fees and are not getting that kind of return?

It's whether the strategy is paying off that ought to be the focus of anyone -- state workers groups, pensioners, legislators -- with an interest or oversight role in the pension fund.

The complaints about that strategy, legitimate as they might be, may ignore the predicament that Cowell faces.

To keep the pension fund solvent, she needs the returns that those non-traditional money managers promise. The other option is to push legislators for bigger annual contributions, a move that might well lead to the kind of backlash seen in other states that have begun scaling back pension benefits for public employees.

The question then becomes, which path represents real risk?