May 12, 2014

NC treasurer wants to delay decision on pension investment board

State Treasurer Janet Cowell has sidestepped – for now – the politically charged issue of whether she and future treasurers should share high-level investment decisions on North Carolina's $86 billion pension fund.

State Treasurer Janet Cowell has sidestepped – for now – the politically charged issue of whether she and future treasurers should share high-level investment decisions on the state’s $86 billion pension fund.

Cowell has called on state lawmakers to adopt several reforms regarding the administration of the pension fund that were recommended last month by a bipartisan commission that she appointed. But she didn’t endorse the commission’s most far-reaching recommendation, which called for the appointment of a board of trustees that would help make investment decisions.

In a letter to the leaders of the state House and Senate that was released Monday, Cowell said she wasn’t staking out a position on investment decisions given that the 11-person commission was split on the issue – and based on what she was hearing from lawmakers.

“Based on initial feedback from legislators, legislation concerning a potential board will likely need to wait until the 2015 long session,” wrote Cowell, a Democrat. “On this issue, I hope the commission’s majority and minority reports can serve as a framework for discussion about whether the state should make this fundamental change.”

The State Employees Association of North Carolina, a frequent and vituperative critic of Cowell, has been pushing for an overhaul of the investment system. North Carolina is one of just four states where the treasurer is the final arbiter of investment decisions; the treasurer consults with an Investment Advisory Committee.

Ardis Watkins, SEANC’s legislative affairs director, ripped into Cowell’s specific recommendations as well as the lack of any action on the salient issue of who determines the state’s investments.

“The treasurer is trying to control the debate over the control she has,” Watkins said. “ ... She is now saying implement certain findings of my hand-picked commission and delay other findings of that hand-picked commission.”

“It is crazy-making to us,” Watkins added. “Our members’ futures are at stake, literally.” SEANC has 55,000 members who pay 6 percent of their paychecks into the state’s pension fund.

The N.C. Investment Fiduciary Governance Commission split by a vote of 7-4 on who should make investment decisions, with the majority favoring a board of trustees and the minority advocating keeping the current system with some alterations.

The commission included four legislators, with Democrats and Republicans on each side of the issue.

At a press conference on Thursday, Senate President Pro Tem Phil Berger said he was satisfied with the current system.

“People elect the treasurer to make these kinds of decisions,” said Berger, a Republican. “I think, ultimately, the buck has to stop somewhere.”

‘Open to all outcomes’

Cowell praised the work of the commission and said she convened it because she was willing to accept changes to the way investment decisions are handled.

“I am open to all outcomes,” she said.

But, she added, she couldn’t back switching to a board-of-trustees system without working out with legislators what other reforms they would be willing to support in conjunction with such a move.

“It really is all about the details,” she said.

She worries if lawmakers balk on working out issues such as whether the trustees could determine how much to invest in different asset classes or whether she would be able to hire a sufficient enough staff she would be hamstrung by “a double layer of bureaucracy and no flexibility.”

Michael Kennedy, who chaired the commission, said his reaction to Cowell’s position was “very positive.”

“I think the treasurer is approaching this in a very methodical way,” he said. Kennedy is a senior partner at Korn/Ferry International and chairman of the nation’s largest pension fund, the Federal Retirement Thrift Investment Board.

Four recommendations

Cowell did make four recommendations to legislative leaders that were unanimously endorsed by the commission.

“I think what we are announcing here is all significant and very important,” she said.

The recommendations:

• Give the treasurer greater flexibility on resources, including more authority to determine the size of her investment staff. Commission members believe that increasing investment staff would reduce reliance on outside money managers and lower overall investment fees.

“We are staffed at a quarter of the size of a typical (state pension) fund,” Cowell said.

The treasurer’s office has 25 investment professionals and can’t expand that number without the legislature’s approval. Cowell said she is asking for 14 additional positions and is optimistic that the legislature will permit at least some expansion.

Cowell said there is “a business case” for expanding her staff as it would bring some services in house.

• Expand reporting on investments and clarifying public records laws regarding pension fund investments.

“We’re open to disclosing anything that the legislature wants to see,” Cowell said. “So far, they seem fairly satisfied with the information they’re getting. We’ll see where they want to go.”

A report commissioned by SEANC that was released last month contended that Cowell has potentially violated numerous state and federal laws regarding investment disclosure. The treasurer’s office says that its disclosure policies are in line with the law and consistent with industry standards.

• Require the state’s financial statements for the retirement system to be audited by an independent firm. Cowell recommends that the auditing firm be hired by the state auditor, currently Beth Wood.

Although the auditor does inspect the pension fund’s financials, Cowell said: “I do think, given the limitations of her staff, that having her hire an additional expert auditing firm would supplement and complement the work that auditor Wood and her staff do.”

• Mandate an independent review of the state’s investments every four years.

“We are trying to codify what we have already instituted since I have been treasurer,” Cowell said. She said she hired Hewit EnnisKnupp to conduct a “full-blown review” in 2009, followed by reviews in subsequent years of specific issues, such as fees.

Cowell said she plans to make another round of recommendations to the legislature next year.

“Ultimately, you want this to work for the pension,” she said. “This is a very significant change for a system that is fortunately in very good shape, but it’s my responsibility as treasure to make sure that it remains in good shape.”

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