News: CJ Exclusives

Iffy Investments, Excessive Spending Drain Escheat Fund

Lawmakers seem disinclined to cut financial aid, placing fund in peril

In 2005, then-state Treasurer Richard Moore persuaded the General Assembly to let him invest up to 20 percent of a $600-million fund that underwrites need-based college scholarships into riskier-than-usual investments, including stock, real estate, and alternative funds.

The investments by the Escheat Fund have gone sour, and as legislators continue to raid the principal of the fund for scholarships, current Treasurer Janet Cowell has warned that the fund could go broke by 2012 unless the General Assembly turns down the spigot.

The Escheat Fund collects unclaimed property from residents such as bank accounts, utility deposits, and stocks and bonds that have been turned over to the state. The state gets about $100.5 million in unclaimed property a year and pays out about $39 million to people reclaiming the money that’s due to them. North Carolina has no limit on how long people have to reclaim their property. The fund increased to $686 million in 2007, but is projected to drop to about $405 million this fiscal year as legislators have drained the principal of the fund to offset rising college costs.

Moreover, the selection of investments Moore made with Escheat Fund money has drawn scrutiny. The former treasurer, who had full authority to invest the money, said was trying to spur economic development and create jobs.

Yet he invested it largely in funds connected to people who had donated about $160,000 to his campaign from 2004 to 2008.

Those firms included Franklin Street Partners, which got $30 million, and whose employees and other people connected to the firm had contributed at least $65,500 to Moore’s campaigns.

NC Idea, an organization devoted to fostering economic development in North Carolina and is run by the son of Franklin Street Partners Chairman Emeritus Paul Rizzo, got more than $2.4 million. The chairman of NC Idea, David Rizzo, donated $750 to Moore’s campaigns.

Moore won a second term as treasurer in 2004. In 2008, he ran for the Democratic nomination for governor and was defeated in the primary by then-Lt. Gov. Bev Perdue.
When the 2005 legislation passed, the General Assembly’s fiscal research division estimated that the change in investments could boost annual investment income by about 10 percent.

But most of Moore’s investments in this fund have not done well. Franklin Street’s investment is down about 1.8 percent since it was started. The investment in NC Idea has dropped by about 22 percent. In comparison, the Escheat Fund’s long-term investments, which were in bonds, have gone up by about 5.8 percent over the past five years.
In all, about $93.5 million was invested in real estate, equity, and alternative investments as of June 30, 2009 — and at that time, those investments were valued at $67.9 million.

Political calculation?

“Richard was only interested in making friends for his campaign for governor,” said Charles Heatherly, a former deputy state treasurer. “What happened after that, he didn’t care.”

Moore has not returned repeated phone calls from Carolina Journal.

Bill Thompson, the president of Franklin Street Partners, referred questions about the Escheat Fund to the state treasurer’s office. David Rizzo did not return calls from CJ.

State Sen. David Hoyle, who co-chairs the Senate Finance Committee, said the Escheat Fund has been an important source of money for financial aid.

“There’s no reason in tough financial times to leave a half a billion dollars sitting around unused,” he said.

Cowell, however, has warned that the fund may soon go broke. In 2009, she told legislators that, to be sustainable, there should be at least $200 million in the Escheat Fund. Legislators could maintain that level by cutting annual need-based financial aid for the University of North Carolina system in half — from about $125 million to $60 million. Even with those reductions, the Escheat Fund would still decline to a projected $203 million in 2015.

Lawmakers and Perdue seem disinclined to heed Cowell’s warning.

Shirley Ort, UNC’s associate provost and director of the Office for Scholarships and Student Aid, said the governor’s proposed budget would increase need-based financial aid.

“I don’t have anything that projects a reduction because we don’t know what they’re going to do yet,” Ort said. “There is a very high level of support in this state for need-based aid, so we remain optimistic.”

Loan to Global TransPark

The Escheat Fund also loaned more than $20 million to the troubled Global TransPark project. The principal and interest on the loan now exceed $37 million — and the TransPark has no realistic chance of repaying any of the money anytime soon.

The General Assembly passed legislation last year extending the due date to Oct. 1, 2011. The bill also required the GTP Authority to prepare a proposed schedule of repayment to the House and Senate appropriations subcommittees on transportation by May 15.

The budget passed by the state House in early June included an amendment restating a demand for the GTP to outline a debt repayment schedule.

Rep. Mickey Michaux, the senior chairman of the House Appropriations Committee, said the state will not rely as much on the Escheat Fund in the future.

“We’re not going to go through it (the Escheat Fund) as much as we have in the past,” Michaux said.

The state is looking for new sources of money for
scholarships. About $26 million in excess lottery revenue would go toward college scholarships under the proposed Senate budget plan. Over the last three years, lottery revenue has provided more than $107 million in scholarships for students.

Undergraduate and graduate students at public and private colleges in North Carolina received $464 million in grants and scholarships from the state for the 2008-09 school year. When final numbers for the 2009-10 school year are available, grants and scholarships are expected to be $493 million.

“[The Escheat Fund] is a finite fund, and I think legislators are very aware that at the rate they’ve used it the last few years, they can’t sustain that,” said Steven Brooks, the executive director of the State Education Assistance Authority.

Sarah Okeson is a contributor to Carolina Journal.