Sunday, February 2, 2014

Critique of my Column on the State Pension

Critique of my Column on the State Pension

I haven’t found an electronic version of Ron Elmer’s letter to the News & Observer on February 2, 2014, so I’ve attached a scanned version and also transcribed it below.  My response appeared below his letter and I’ll post it separately.  

I’d like to thank Mr. Elmer because in doing research for my response I unearthed a dozen more business notebooks and a sketchpad of drawings done in 2001.

Mr. Elmer and I agree on most of the facts.  We draw different conclusions and have a different style.

“Politics At Play In the Pension Plan”

Mr. Silton’s Jan. 26th column, “Keep politics out of pensions” was sparse on facts.  I’d like to add some. 

The last annual report issued by Treasurer Cowell shows the state pension funding status to have fallen from 112.8% in 2000 to just 94% now.  That is to say, it is 6% under-funded.  That’s roughly a $4 billion shortfall.  But, Treasurer Cowell knows the government pension accounting standards are flawed and about to change.  A Buck Consultants report says the pension will be just 86% funded under the new rules.  That’s 14% under-funded, or roughly $8 billion.  However, the nation’s leading expert on public pension funding, Stanford Professor Joshua Rauh, argues that public pensions should calculate funding status in the manner corporate pensions are required. Professor Rauh estimates North Carolina is $38 billion under-funded.  That is roughly the equivalent of two years of North Carolina tax receipts. Professor Rauh will lecture at NC State University on April 16.  I suggest Mr. Silton and Treasurer Cowell both attend.

As of 6/30/13, the annualized 10-year investment performance of the state pension of 6.6% lagged the median public pension return of 7.4%.  The underperformance of 0.8% per year for 10 years for the $83 billion pension fund translates into lost returns of $6 billion.  And, that is the cost of not being merely average.  Plus, the average pension fund underperformed a simple portfolio of index mutual funds.

The primary cause of the state pension’s poor investment performance is evident in the latest investment report for 9/30/13.  The “Alternative Investments” portfolio had a 15-year annualized return of just 5.2% while the simpler, lower fee portfolios of stocks and bonds each returned 6.3%.

Many of these high-fee, poor-performing, investments were introduced to the pension by Mr. Silton himself.  Only Treasurer Cowell knows why she has not learned from Mr. Silton’s failed experiment, and pushed Senate Bill 558 which allows her to throw good money after bad.  But, it is worth noting that reports Treasurer Cowell raised more campaign money from New York City than Charlotte and raised almost as much money from outside our state is inside.  Mr. Silton, clearly politics are already at play within the state pension.

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