News: CJ Exclusives

Cowell Wants More Pension Investments in Real Estate

Outgoing treasurer would keep 'alternative' investments limited at 35 percent but increase share of real estate; some critics worry about risk to taxpayers

If the General Assembly approves State Treasurer Janet Cowell’s request for more flexibility in how it invests the state’s pension plan, North Carolina’s investment in real estate could be among the largest in the nation.

The department wants to increase the percentage of real estate investments the pension plan can hold from the current maximum of 10 percent maximum to 15 percent. If it is successful, North Carolina will rank with Alaska and Pennsylvania as the states with the greatest percentage of pension fund money allowed to be invested in real estate.

Real estate is one of what are called alternative investments, which also include private equity and hedge funds, and it is becoming increasingly popular among pension fund managers, according to The Financial Times. Real estate is the most popular of the alternative investment classes for state pension funds, according to The Wall Street Journal. Alternative asset investments are viewed as more risky and less liquid than stocks, bonds, or cash.

In a March 2016 column, Andrew Biggs, who studies pension and retirement issues at the American Enterprise Institute, noted, “The simple reality is that pensions are bigger than in the past and taking a lot more investment risk. Why? Because they can’t afford not to.” More and more public pension plans are expanding their alternative investments — and putting taxpayer-backed retirement funds at greater risks — because in recent years returns on government bonds and other “safe” investments have lagged.

According to a public fund survey conducted by the National Conference of State Legislatures, most states’ pension fund investments in real estate ventures fall well below 15 percent.

The Alaska Public Employees Retirement System and Alaska Teachers Retirement System have the highest percentage invested in real estate at 17.2 percent. The percentages are all 2013 numbers, the latest available, and don’t reflect changes made since then.

The only other state pension plan listed as having 15 percent or more invested in real estate is the Pennsylvania State Employees Retirement System at 15.6 percent.

The rate listed in the survey for the North Carolina Retirement Systems was 8.1 percent, which was higher than the average of 7.2 percent for the 84 systems shown in the report. That was as of June 30, 2013.

North Carolina currently is limited to investing 35 percent of its funds in alternative investments. The state treasurer wants to maintain that 35 percent limit, but increase the amount of real estate that can be part of the alternative investment portfolio, said Brad Young, Cowell’s press secretary.

“In the proposed bill, the real estate limit would increase from 10 percent to 15 percent, but real estate investments would continue to count toward the 35 percent limit,” Young said.

The state’s retirement portfolio is valued at about $84 billion.

The amount allowed to be invested in real estate in states surrounding North Carolina varied.

The Virginia Retirement System had 9.4 percent invested in real estate, the Tennessee Consolidated Retirement System had 4.9 percent, and the South Carolina Retirement Systems had 2.3 percent. Both the Georgia Employees Retirement System and the Georgia Teachers Retirement System had 0 percent invested in real estate.

Young said that since late 2015, the state treasurer’s office has been working with Buck Consulting and the state’s Investment Advisory Committee to analyze which combinations of investment types would work best under a wide variety of possible market conditions.

“The work conducted by Buck showed highly attractive risk-adjusted returns for real estate and private equity, two of the so-called ‘alternative’ asset classes,” Young said.

Reaction to the proposal has been muted, even among candidates to succeed Democrat Cowell as treasurer. Cowell did not seek re-election this year.

The Democratic nominee, Raleigh attorney Dan Blue III, did not offer a comment on the treasurer’s proposal, said Brad Kennedy, Blue’s campaign manager.

The Republican nominee, former state Rep. Dale Folwell of Forsyth County, who is a CPA and former head of the Division of Employment Security, said, “My priority as the next state treasurer will be to determine how well the alternative investment portfolios are performing and to make sure that the allocations are in compliance with state law.”

So far, no bill allowing for the change has been introduced in the General Assembly. However, the deadline to file bills dealing with state or local retirement systems isn’t until May 19.

Rep. Allen McNeill, R-Randolph, co-chairman of the House Pensions and Retirements Committee, said that House and Senate leaders are in the process of meeting to decide what legislation to put forward during the 2016 short session.

“They’ve sent us a whole host of things that they’re asking for,” McNeill said. “I have looked at what the treasurer’s office has put forward and I’ll make a determination based on what is best for the retirees.”

McNeill also noted that even if his proposals don’t include the investment changes the treasurer’s office is asking for, other legislators can offer amendments to his proposals until the session adjourns.