Monday, February 3, 2014

The Real Political Problem in Public Pensions

The Real Political Problem in Public Pensions: Corrected*

In the world of political influence and public pensions, the simplistic argument goes something like this.  Campaign contributions by money managers lead to changes in legislation or asset allocation, which leads to the money managers receiving mandates.   That’s the argument Ron Elmer makes in a letter to the editor in the News & Observer in attacking the State Treasurer’s continued foray into alternative investments.[1]  There’s no question that politics plays a role in public pension plans just as it does in corporate pension plans and endowments.  However, Mr. Elmer and many others are worrying about the wrong political influences.
Sketchbook #1 (2001
According to Mr. Elmer’s logic, Treasurer Cowell raised more campaign money in New York than Charlotte, implying that the New York hedge fund and private equity managers pushed the State Treasurer to pursue an increase in her authority to invest in alternatives.[2] While I haven’t done a definitive study, I’ve spent hours looking the campaign reports filed with the North Carolina State Board of Elections. 

It’s hard to find a discernible pattern in the contributions.  For example, tends to miss a great number of financial industry contributions in North Carolina because they don’t always connect spouses to their money management partners.  In addition, the contributions from the financial community seem to cancel one another out.  While many alternative managers were contributors to the State Treasurer’s campaign, plenty of conventional equity managers and class action securities attorneys, who stood to lose business as the pension shifted to alternatives, contributed as well.  In addition, most money managers who contributed to the State Treasurer never received a mandate from the pension plan, and most money managers who received mandates never contributed.  In other words, there’s no pattern. 

Mr. Elmer is right that campaign contributions cast a cloud over the investment process.  Fortunately, the SEC’s rules have limited money management contributions to $350 and $150 respectively for in-state and out-of-state contributors, helping to dissipate the cloud.

However, it isn’t campaign money where politics is really at work, and Mr. Elmer's former employer First Citizens is a typical good example.  Just before I arrived to become CIO for the state pension plan in late 2001, Treasurer Moore converted a portion of an active mandate managed by Mr. Elmer and his investment team at First Citizens into an S&P 500 index.  The active mandate had underperformed the benchmark for a considerable period of time and under normal circumstances, First Citizens should have been terminated.  First Citizens had no previous experience managing an index investment.  Nonetheless, we funded them.  Why? 

A more important form of politics than campaign contributions was at work as the management team at First Citizens pressured us.  They warned that firing them would harm the bank and its trust department.  The pension was a huge client.  In my earliest days as CIO, I heard from a few lobbyists and legislators as we prepared to remove the remainder of their active mandate.  As a result, we came up with a political solution that eliminated the harm of First Citizen’s poor investment performance, but maintained the relationship.  However, the pension paid a price because First Citizens didn’t have the economy of scale to manage the index at the market rate.  Moreover, I also had to worry because First Citizens didn’t have the portfolio and trading systems used by most index managers.  Fortunately, nothing went wrong.  This form of political influence was played out over and over by the North Carolina banks as we sought to remove them as active managers because of their sorry performance.  In the end, most of them became index managers and ceased harming the pension’s performance.

In fairness to Mr. Elmer and the North Carolina banks, all sorts of folks tried to get their foot in the door or defend their existing mandates.  Ex-Presidents, former Treasurers, Wall Street executives, legislators, and high-powered academics would try to get their viewpoint and product in front of us.  They didn’t need to contribute any money to any campaign, because they already had influence.  My fellow CIOs at trustee-led plans had the same stories.  In other words, it didn’t matter if a sole fiduciary or board of trustees ran the pension plan. Those with influence used any combination of charm or threats to make their point and gain an edge.  Our job was to resist.

So Mr. Elmer is right.  Politics plays a role in pension plans.  However, it’s influence and not money that is most worrisome.  I highly doubt we’re going to drive these realities away through more policies, procedures, audits, or investigations.

[1] See, Critique of my Column on the State Pension for a copy of the letter

[2] Mr. Elmer campaign data is off a bit because he relied on  I took  a look at the website’s data and compared it to the actual records on the North Carolina at State Board of E  Unfortunately, there are numerous coding and comparison problems with FollowTheMoney’s data.  Unfortunately, the raw data on the Board of Elections site is tough to use because it comes in multiple overlapping spreadsheets.

* Mr. Elmer maintains that he did not pressure the Department or me.  I agree with him.  The pressure was applied by others and this blog post has been edited accordingly.


  1. Andy, I like your blog. We agree on almost everything now when it comes to investments. I am sorry if my letter to the editor upset you. It was not intended to be an attack on you or even a critique of your column. I just wanted to share a few pieces of data to the conversation. You and I are two of just a handful of people who pay attention to what goes on in the Treasurer's office and I think we agree on nearly everything.

    Andy, to my recollection, I believe we met only once while I ran the equity team at First Citizens. My boss, the CIO was in the room and you and he ran the meeting. That was AFTER we began running the index portfolio for the state. I met once with Treasurer Moore with my boss, and my bosses boss at the treasurer's office and you may have been there that time, too. To say I "pressured" you is a complete fiction. We've barely ever even spoken to each other.

  2. I recall the meeting you refer to. You are right that the First Citizens was already managing some index money, when I arrived. The second, tranche was much larger, and there was a lot of internal discussion about whether to fund it. I remember coming over to your offices to discuss it. As a general rule, those types of official meetings never involved pressure or influence. I can only remember a few instances where those type of meetings evolved into attempts to exert pressure and influence. Our meeting back in 2001 was certainly not one of them and was entirely investment-related. The pressure I recall came in the form of phone calls (not from you) and was discussed in internal meetings within the Department.

    In any event, among the North Carolina banks from biggest to smallest, the pressure was always evident, and frankly I expected it. At one point, a Bank of America lobbyist tried to make a case for retaining one of their active mandates. The phone call was pretty pointed, until I offered to call the bank's chairman and ask him if he was satisfied with the investment performance of the mandate, which was also available in BofA's 401(K) plan. A big part of a CIOs job is to diffuse these situations.

    I have to agree that you did not personally apply pressure, and I will amend the blog post accordingly.