Saturday, April 30, 2016

News & Observer on the NC Treasurer's appointment to two public boards

David Ranii of the News & Observer does a fine job of exploring the ethical challenges of Treasurer Janet Cowell's appointment to the boards of Channel Advisor and James River.  See, for my full analysis of the appointments.

Tuesday, April 26, 2016

Protecting North Carolina’s Public Pension Plan: SEANC’s Premature Endorsement

Protecting North Carolina’s Public Pension Plan: SEANC’s Premature Endorsement

The State Treasurer is perhaps the most powerful elected official in North Carolina.  Since North Carolina elects ten cabinet officials (known as the Council of State), the Governor does not have oversight of all the State’s agencies.  Meanwhile the State Treasurer is the sole fiduciary of the state’s $90 billion pension plan, steward of the state’s health plan, overseer of local government finance, chairman of the State Banking Commission, and defender of the state’s bond rating.  

This year’s Republican and Democratic candidates for North Carolina State Treasurer have strong resumes and seem reasonably well qualified for the job.  However, neither candidate has set forth in any detail how they would deal with the critical issues that will become their responsibility next January.  If you check out their websites or search for news items, you’ll come up with little or nothing.  Other than broad platitudes, the candidates have yet to define their positions, especially when it comes to the state pension plan.

Nonetheless, the State Employees Association of North Carolina (SEANC) has already endorsed one of the candidates – Dale Folwell.[1]  While Mr. Folwell and his opponent Dan Blue III have met with SEANC, it is apparent from SEANC’s endorsement that SEANC failed to ask and therefore get an answer to the most important question: will the next Treasurer promise to defend and protect the state’s defined benefit plan?  Instead SEANC focused on an important but secondary issue:  the rising level of fees incurred by the pension plan as it has been shifted toward alternative investments.[2]

In my view, the pension plan faces a potential existential threat in the next several years as the North Carolina General Assembly grapples with funding the pension.  Why?   Recently investment returns have been relatively low thanks to the mediocre returns generated by the capital markets.  As a result the pension’s deficit is growing, and thus the employer contribution is likely to have to increase over the term of the next treasurer.  While the problem is entirely manageable, I’m betting that the General Assembly will look to dramatically restructure the pension in order to avoid funding it.[3]

In the past four years the General Assembly has confronted every financial challenge by placing the lion’s share of the burden on the beneficiaries of state programs.  The rising costs of Medicaid, unemployment benefits[4], and school funding have all been addressed by placing a disproportionate burden on the poor, on the unemployed, and on educators.  So we can fully expect the General Assembly to dust off model legislation developed by the American Legislative Exchange Council (ALEC) and begin to disassemble the defined benefit plan for public employees in North Carolina.

Dismantling the State’s defined benefit plan would be extremely unfortunate because the liability is entirely manageable, and the retirement security of the state’s teachers, public servants, and first responders is a tremendous long-term benefit to North Carolina.  I think it is incumbent on the candidates for State Treasurer to unequivocally express their position on the sanctity of the pension plan.  In fact, it will be impossible for the next treasurer to make long-term investments on behalf of the pension while supporting or considering any proposal to eliminate or reduce the scope of the state’s defined benefit pension.  A candidate for treasurer is a potential sole fiduciary of the state’s pension plan, and therefore should be firmly on record in defense of the plans.   As best I can tell, neither of the candidates has addressed this vital issue.  Shockingly, SEANC has endorsed a candidate without getting an answer to the most important question facing our State’s public pension.

[2] SEANC seems to be reading Treasurer Cowell’s endorsement of Dan Blue as a sign that he will continue to pursue alternative investments, which have resulted in a sharp rise in management fees paid to money management firms.  Since SEANC has been highly critical of Treasurer Cowell, I suspect her endorsement (and Mr. Blue’s tenure at Bear Stearns) preordained their endorsement.
[3] Recognizing the General Assembly’s reluctance to fully commit to the state pension, Treasurer Cowell has resisted lowering the pension’s assumed investment return.  A lower assumed return would increase the amount of money the General Assembly needs to appropriate.   As a result, the Treasurer is pursuing additional commitments to alternative investments in order to defend the 7.25% assumed return as part of a revised asset allocation plan.
[4] While not dispositive on Dale Folwell’s position on the State’s public pension plan, voters, state employees, retirees and most especially SEANC would be well advised to study Mr. Folwell’s deep involvement in cutting unemployment benefits when he served as Assistant Secretary of Commerce for signs of his intentions.

Friday, April 22, 2016

Spring Giclee Sale: 20% Off Until May 17th

Giclee Sale

Before I begin the summer printings, I am offering my Giclees at a 20% discount at Etsy

Saturday, April 16, 2016

CalPERS Failed Investment in a Private Equity Firm: Naked Capitalism Explains It All

CalPERS Failed Investment in a Private Equity Firm:  Naked Capitalism Explains It All

Yesterday, Naked Capitalism posted a detailed piece explaining just how CalPERS was outmaneuvered by Silver Lake, a PE firm, and then failed to accurately account for its loss when the investment went bad.[1]  I suspect that the average reader will get somewhat lost in the large number of technical components contained in Naked Capitalism’s post.  However, their work is must-reading for pension trustees, pension staff, legislators, and regulators because Yves Smith shows that even the largest public pension plan in the United States is ill-equipped to make sophisticated investments, ill-prepared to account for those investments, and unwilling to recognize its mistakes.

About four years ago, I tried to explain why Florida SBA should not acquire a stake in the private equity manager, Providence Equity Partners, a private equity firm.[2]  I don’t know what happened to that investment.  At the time, however, I pointed out that it was a very bad idea for public pensions to acquire ownership-stakes in their money managers.  Naked Capitalism has done the hard work of proving my case.


Monday, April 11, 2016

An Error, But an Even More Serious Concern: NC Treasurer Joining Public Boards

An Error, But an Even More Serious Concern:  NC Treasurer Joining Public Boards

My apologies to James River Capital, the Richmond-based fund-of-funds group, because Treasurer Cowell isn’t joining its board.  Instead she’s joining James River Group Holding, a Bermuda-based insurance company with its main office in Chapel Hill.  Thanks to an article by David Ranii of the News & Observer[1], I became aware of my error and the necessity of reading James River’s 2016 proxy statement filed the day before I wrote my post.

In the proxy I learned that Treasurer Cowell will receive $75,000 year for serving on the board plus $25,000 in restricted stock units.[2]  Her service on Channel Advisor, her other board seat, will net her $50,000 in compensation and $150,000 in restricted stock units.[3]  As our State’s Treasurer she makes just under $125,000 per year.

In blessing the Treasurer’s appointment to these companies, the North Carolina Ethics Commission noted that the state pension plan doesn’t own either security in its investment portfolio.  However, the Ethics Commission didn’t go far enough. 

For starters, Treasurer Cowell is chairwoman of the North Carolina Banking Commission, and James River has a direct relationship with a state chartered bank regulated by the Commission.   The chairman of James River, J. Adam Abram, is also chairman of Yadkin Financial Corp., a North Carolina chartered commercial bank.  Mr. Abram owns 522,809 shares or 1.03% of the bank according to the bank’s latest proxy.[4]  Mr. Abram founded Piedmont Community Bank Holdings, which was acquired by Yadkin.  According to the James River prospectus, the company has also made investments and loans to a Piedmont, and those investments and loans were assumed in the acquisition.[5]  It’s unclear from SEC filings if those relationships are still in place, although Mr. Abram owns the stock and chairs the Yadkin board.  I don’t how the bank’s principal regulator can sit on a board of a company whose chairman is also chair of a state regulated bank, even if James River no longer has other investments or loans in Yadkin.[6]

Turning the ownership, of James River, the latest proxy lists D.E. Shaw, Fidelity, and Wellington Management each as owners of over 5% of the shares.  According to the June 30, 2014 holdings report for the pension plan, Wellington manages some $3.7 billion across four equity mandates for the pension plan.[7]  And, according to the December 31, 2015 report for the state’s 401(K) and 457 (deferred compensation plan), they manage another $300 million for the state[8].

Let’s leave aside the question as to why the latest ownership report for the pension is nearly two years old[9], and focus on the fact that Treasurer Cowell has a large investment and business relationship with Wellington.  Wellington earned $12.2 million in fees in 2014[10] and about $8 million in 2013[11] from the pension plan. In her job as pension fiduciary, the Treasurer is supposed to objectively evaluate Wellington’s performance and decide whether they should continue those mandates.   In her new role as a James River director, she now will also look after Wellington’s wellbeing.  Can she still be an objective fiduciary? 

Based on the Ethics Commissions report, none of North Carolina’s managers, including Wellington, owned any shares of James River in any account managed for the pension.  However, Wellington must think that James River is a good investment because they own 6.8% of the company.[12]  Are they now excluded from owning that stock in any portfolio they manage for North Carolina because Treasurer Cowell is a board member?  In other words, is the pension plan deprived of the opportunity to invest in James River because Treasurer Cowell will be a board member of the company?

Presumably Treasurer Cowell would also have to tread carefully when it comes to D.E. Shaw and Fidelity as well.[13]  While the pension doesn’t appear to have an investment relationship with either firm, Treasurer Cowell’s role a public director would make it difficult for the pension to engage either firm as a money manager.  So when the pension plan is searching for new money managers, will one of the largest investment managers in the world (Fidelity) and one of the largest hedge fund complexes (D.E. Shaw) have to be excluded from the searches?  I don’t see how that’s a benefit to the beneficiaries of the pension plan.[14]

Treasurer Cowell’s appointment to the boards of Channel Advisors and James River puts the pension in an unenviable position.  Presumably every long-only equity, credit and hedge fund manager has to be told to avoid the shares or debt of either company.  As I noted earlier, I don’t see why the pension should be deprived of that potential opportunity.  I don’t see how the Investment Division can monitor the situation since some of the pension’s investments are held in funds, rather than directly. 

The Treasurer’s appointment to the board of Channel Advisors is also a bit curious.  Rather than stand for election by the shareholders, the board expanded its membership by one and appointed her to fill the remaining term of that “vacant” seat, which ends after her tenure as Treasurers comes to an end.  Certainly a legal maneuver, but also a convenient way to avoid having the Treasurer subjected to a vote of the Channel Advisor’s shareholders, while she’s in office.[15]

In ethically challenged North Carolina, Treasurer Cowell will be allowed to serve as the sole fiduciary of the pension, Chairwoman of the Banking Commission, and a member of the board of directors of two public companies at the same time.  We don’t have a revolving door problem when it comes to public officials engaging in private sector activity.  The door is wide open.

Apologies also to Naked Capitalism, which picked up my original blog post with the mistake. 

[6] Moreover, James River regularly invests in bank loans according to its 10-K.  While it doesn’t provide any details of that portfolio, there’s certainly the possibility that James River is invested in other North Carolina chartered banking institutions.   See,, page 24.

[9] Not only is the manager performance and the fee reports stale, the information normally included for the Investment Advisory Committee has become very limited and untimely.  See, 
[12] Ibid, page 28.
[13] In addition to the conflict of interest between her current role as Treasurer, and a member of the board of James River, the Treasurer will have to navigate the myriad of corporate governance conflicts and affiliated relationships outlined in the prospectus when James River went public in December 2014.  See, pages 37-38,175-179.
[14] On the other hand, Treasurer Cowell will have a good opportunity to get to know D.E. Shaw because two of its senior executives sit on the James River board.  She’s going to discover that she’s working for them as they control James River with a 48.5% ownership stake.  See,, page 28.