Tuesday, January 7, 2014

Looking for Fire Where There’s No Smoke: SEANC Commissions a Pension Study

Looking for Fire Where There’s No Smoke: SEANC Commissions a Pension Study

I feel sorry for the public servants of North Carolina.  Too many politicians and much of the public treat them with little respect.  They’ve seen their take home pay decline over the past decade.  It turns out that many of them are represented by an organization, the State Employee’s Association of North Carolina (SEANC), that seems to enjoy playing politics with the State’s pension plan rather than protecting its members.  SEANC’s members are about to pay for a study of the pension plan that will be a waste of their dues.  The Association has hired Benchmark Financial to conduct a comprehensive review of the Teachers’ and State Employees’ Retirement System.
Final Disputes (1997)
SEANC in its press release[1] and Edward Seidel the President of Benchmark on his Forbes blog charge that something is terribly amiss in North Carolina’s pension plan.  The rhetoric is so over-the-top that it’s worthwhile laying out a couple of key passages from their announcements.  Dana Cope, the Executive Director of SEANC, says:

We believe the wolves of Wall Street are at our door and knocking. Given the treasurer’s expanded alternative investments authority that bleeds money in fees, we’re not going to wait until our retirement system is in near collapse like a Rhode Island or South Carolina to find out answers to pressing concerns about the state’s retirement system. SEANC will be proactive in our commitment to retirement security for the state’s public servants and the people of North Carolina.

Here’s Mr. Seidel’s take on his firm’s new mandate is as follows[2]:

Our North Carolina investigation will focus upon, but not necessarily be limited to, the following major issues:

·      conflicts of interest related to the pensions’ investments;
·      total fees paid by the pensions to its dozens of investment managers, such as Credit Suisse and Blackstone, and related expenses;
·      disclosure practices related to investments of the pensions, including disclosure of investment fees, expenses and risks;
·      heightened risks related to the pensions’ non-traditional investments, including valuation and liquidity concerns;
·      use of disclosed and undisclosed registered and unregistered placement agents in connection with the pension’s investments; and
·      other potential violations of the federal securities laws.

Upon conclusion of our review, we will provide a written report and may report to the SEC any potential violations of the federal securities laws we identify.

Whether plan sponsors like it or not, we have entered a new era in which public sector workers demand full transparency regarding all investments, including hedge, venture and private equity holdings, and oppose Wall Street pillaging of public pension honey pots.

While I am in favor of greater disclosure and backed Mr. Seidel’s initial attempts to draw attention to the increase in alternative investment exposure in Rhode Island (see, “Rhode Island is Following South Carolina into Alternative Investment Abyss [April 26, 2013]”), his study of Rhode Island provided little in the way of constructive analysis (see, “A Concurring Opinion on Rhode Island’s Hedge Fund Foray [October 21, 2013]”).  Mr. Seidel will do little more than provide Mr. Cope with ample ammunition for subsequent press releases.

Benchmark’s report will warn us of “red flags”.   It will talk about forensic accounting.   It will be filled with inflammatory rhetoric.  To get a preview simply read the report commissioned by Rhode Island Council 94 of AFSME, “Rhode Island Public Pension Reform: Wall Street’s License to Steal[3]” or check out Mr. Seidel’s blog post summarizing that report.[4]  While there are some real concerns about Rhode Island’s foray into alternatives and their State Treasurer’s links to a venture capital investment based on her previous employment, the Benchmark report doesn’t get very far in examining these issues.  And it won’t get very far in understanding the issues in North Carolina.

The real questions facing North Carolina’s pension plan are economic and investment-related.  The conflicts of interest and “other potential violations of federal securities law” cited in Mr. Seidel’s blog post are a huge distraction.  Moreover, Mr. Cope’s contention that something needs to be done before “our retirement system is in near collapse like a Rhode Island or South Carolina” is ridiculous.  First, Rhode Island’s pension issues aren’t investment related as much as liability and funding driven.  Second, South Carolina is not near collapse.  They’ve got an asset allocation and fee structure that isn’t, in my opinion, going to generate sufficient returns.  However, South Carolina’s decision to make large commitments to alternatives isn’t leading their plan to bankruptcy.

Third and most importantly, North Carolina’s pension plan is in good shape and will remain in good shape if the General Assembly and people of North Carolina continue to support it.  While I’d like to see greater transparency on the fees, performance, and management relationships in the North Carolina plan, these aren’t issues worthy of a forensic study.  There is a serious investment question about the efficacy and cost of using alternative investments to try to achieve the plan’s required returns.  While Mr. Seidel has a great deal of experience in the accounting and legal issues, his expertise does not extend to the investment question that is at the heart of North Carolina’s and most other pension plans’ decision to significantly increase their exposure to alternatives.

I’m in favor of strong representation for North Carolina’s public employees.  As best I can tell from observing the actions of our Governor and General Assembly, our civil servants are largely on their own.  It’s too bad that SEANC only seems capable of scaring its members.

[1] http://www.seanc.org/news/seanc-in-the-news/seanc-hires-national-sec-expert/
[2] http://www.forbes.com/sites/edwardsiedle/2014/01/06/north-carolina-state-employees-union-hires-sec-expert-for-83-billion-pension-forensic-investigation/
[3] http://www.ricouncil94.org/Portals/0/Uploads/Documents/Rhode%20Island%20X.pdf
[4] http://www.forbes.com/sites/edwardsiedle/2013/10/18/rhode-island-public-pension-reform-wall-streets-license-to-steal/6/

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