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.

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