All over the country, the multibillion-dollar pension funds that so many state government retirees rely on to keep their checks coming are in trouble.
For years, most states have failed to fully fund their pension plans - to enforce the fiscal discipline that would make them actuarially sound. In the Great Recession, weak stock and bond market earnings have added greatly to the problem.
North Carolina has seen more of the latter difficulty than the former. The state's pension fund has long been one of the sounder plans - thanks to conservative management practices and a generally healthy economy. Lately, some of the shine has worn off that coin, but the bigger problem lies with lower returns.
State Treasurer Janet Cowell, a Democrat elected in 2008 to succeed former Treasurer Richard Moore, last year won the General Assembly's permission to let the pension fund invest 5 percent of its assets in riskier but potentially more lucrative instruments, such as lower-rated bonds, including "junk" bonds.
The plan had already been allowed to place another 5 percent share in commodities and real estate, etc. The idea is to use diversification to reduce overall risk and increase returns.
Yet a New York Times article, reprinted in The N&O, points out that just as states are moving in the diversification direction, big corporations are shifting their pension plans out of stocks and into bonds. The fear is that another stock market crash could decimate the companies' retirement plans.
Many states, in contrast, are "going to Las Vegas," in the words of a former chairman of the Texas Pension Review Board. "Vegas" and "pension fund" are words that should not be keeping company.
North Carolina's fund, judging by 2009's overall return of 15 percent, is doing fine - and it would be, if it hadn't tanked in the 2008 market collapse, losing 20 percent. It was stocks' recovery, starting just a year ago, that led to the gain.
So far, diversification - which does have its theoretical advantages - apparently hasn't kicked in as a growth factor. According to a report in Carolina Journal (put out by the John Locke Foundation), our fund's real estate investments lost about a third of their value last year. Indications are the loss was in the $1 billion range.
It's tempting to speculate about which developments the fund bought into, but unlike California's fund, ours declines to disclose details of its real estate portfolio - an issue being appealed to the N.C. Supreme Court by the State Employees Association, which seeks disclosure.
What we do know, however, is that candidates for treasurer continue to accept campaign funds from financial interests on Wall Street and elsewhere. That practice raises the specter of conflict of interest every time the treasurer selects private firms to manage chunks of the pension fund.
Now throw in real estate and lower-quality bond investments. Moore, the Democratic former treasurer, accepted at least $267,000 from "employees and people connected to firms where the pension funds had real estate investments," according to Carolina Journal. Cowell has also taken real estate-related contributions.
Considering that in North Carolina the treasurer is the pension fund's sole trustee, the possibility of favoritism, or the appearance of it, is simply too great. This time-bomb must be defused.
Cowell, to her credit, favors placing the treasurer's job with those other Council of State positions for which candidates can get public campaign financing. Legislators should make it so, well in advance of the 2012 election.
