Friday, July 19, 2013

Inserting Themselves Where They Don’t Belong: The NC Legislature Acts On Investments

Inserting Themselves Where They Don’t Belong: The NC Legislature Acts On Investments

Thankfully the legislative session in Raleigh is coming to a close.  Months ago the General Assembly mandated that our students learn cursive.  Does anyone think our legislators should be telling education professionals how to teach writing?  When they weren’t tampering with curriculum, they were obsessed with Sharia law.  The Senate might have accomplished this critical task except that it appended an anti-abortion bill to the anti-sharia bill.  When the House balked at the language in the anti-abortion part of the proposal, they wrote their own anti-abortion bill by attaching it to a motorcycle liability bill (S353).  Have no fear; the anti-Sharia proposal is starting to move again in the Senate, and the Governor will sign the anti-abortion bill and further limit women’s reproductive rights.    In opposing the legislation, the American Congress of Obstetricians and Gynecologists makes a compelling objection: “As we’ve seen in several other states, legislators in North Carolina are getting between women and their doctors.[1]  This legislature has an uncanny knack for inserting itself where it doesn’t belong.

UK Fund (1999)

When it comes to pension investments, the Legislature has also wandered into a place where it doesn’t belong. You’ll be glad to know that the asset allocation for the state’s retirement plan is being micromanaged by the same bunch of intrusive legislators.   Apparently they’ve come to an agreement with the State Treasurer to increase the pension’s exposure to alternative investments.  I won’t rehash my concerns about alternative investments.[2]  Rather I want to point out the absurdity of letting legislators set investment policy.  For example, under the legislation that is likely to become law[3], the General Assembly has decreed that the pension plan’s private equity exposure can increase from 7.5% to 8.75%.    They also made small adjustments to the allocations for credit, hedge funds, and inflation-related strategies.  Credit investments can rise from 5% to 7.5%, hedge funds from 6.5% to 8.5%, and inflation strategies from 5% to 7.5%.   Real estate remains at 10%.[4]

In order to further control the pension plan’s investments, the General Assembly limits the overall amount of alternative exposure to 35%, instead of the 40% limit the Treasurer originally requested.[5]  As I read the existing law, the Treasurer already had the ability to invest up to 34%[6] of the portfolio in alternatives.  In short, the bill tinkers a bit with the alternative categories, but doesn’t give the Treasurer a whole lot of overall headroom.

What will have been accomplished if the bill becomes law?  Not much.  If the Treasurer is right about alternatives, the pension plan will have a slightly better, albeit small chance of generating the required return of 7.25% over the long run.  If I’m right, the pension won’t achieve that return, and the pension’s deficit will grow.  In either event, the legislature has, once again, inserted itself into a matter it does not understand and should not be managing.

[2] See, Expanding North Carolina’s Investment Authority, Again: Parts I and II, May 3-4, 2013
[4] I may not be reading the bill correctly, but it also appears that the current version of the bill has a meaningless 10% limit on any particular alternative category. See, Section 1 of the S558 v2 adding paragraph 10a to G.S. 147-69.2(b).
[6] Under current law G.S. 147-69.2(b) does not limit the overall allocation to alternatives.  The 34% limit is achieved by simply adding the current limits for credit (5%), real estate (10%), hedge funds (6.5%), private equity (7.5%), and inflation (5%).

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