News: CJ Exclusives

Treasurer Could Make Invest More in ‘Alternatives’ Under Senate Bill

Up to 40 percent of state retirees' portfolio could move to nontraditional vehicles

A bill allowing the treasurer more leeway to invest the state pension plan in riskier portfolios is set tonight for its first Senate floor vote. The measure, Senate Bill 558, advanced through committee Thursday with little discussion and no opposition.

The bill would allow the treasurer’s office to invest up to 40 percent of the value of the state retirement system in “alternative” investment vehicles such as private equity and hedge funds. Currently, the treasurer can invest up to 36 percent in such portfolios. The law, however, limits the investments in five categories of alternatives, ranging, depending on the category, from 5 percent of the fund to 10 percent.

The bill got a favorable report from the Senate Pensions, Retirement, and Aging Committee. It is on tonight’s Senate calendar.

The sponsor of the bill, Sen. Ralph Hise, R-Mitchell, said the bill was requested by Democratic State Treasurer Janet Cowell. Hise said it’s an effort to not micromanage the investments and give the treasurer’s office more flexibility in managing the retirement system.

The state’s pension fund totaled $78.1 billion at the end of the 2012 calendar year.

“The proposed legislation will grant some additional limited management flexibility that will prevent the state [from] having to sell off well-performing assets due to market fluctuations that push these assets over their current statutory limits,” according to a memo issued by the treasurer’s office.

A treasurer’s office memo said that under the current investment limits, it is difficult to maintain a 7.25 percent rate of return.

The proposal troubles Bob Williams, president of State Budget Solutions, a national, nonprofit think tank advocating state budget reform. “If it works, it’s great,” Williams said. “If not, the taxpayers are on the hook for a lot more.”

Williams said that the states with pension systems that are in the deepest trouble are the ones most often widening their investment portfolios into areas where they typically have not ventured.

Julia Vail, a spokeswoman for Cowell, disagreed with Williams’ take on what the change would accomplish. “The idea behind it is really mitigating risk,” Vail said.

“The ability to allocate broadly across different asset classes allows the department to navigate markets more successfully and take advantage of available opportunities,” she said. “This greater flexibility would also help mitigate risk by reducing exposure to public equity [stocks] and therefore lessening the impact of large equity market declines.”

Williams recommended that the state move to a defined contribution retirement system, such as commonly known 401(k) or IRA plans, rather than continuing with the current defined-benefit pension plan.

More than 875,000 public employees in North Carolina are covered under various retirement systems administered by the treasurer’s office, according the state treasurer’s website.

The bill affects five categories that currently have strict limits on the percentage of money in the state’s retirement plans that can be included in those types of investments.

They are credit strategies, real estate, hedge funds, alternatives, and inflation-protected portfolios. Current law limits the overall percentage that can be invested in each portfolio to between 5 percent and 10 percent. The bill backed by Cowell would raise the cap to 15 percent in a single category, with the aggregate cap for the total portfolio of 40 percent.

Vail said those types of investments include privately negotiated investments not readily bought and sold on exchanges, commercial real estate property, stocks in closely-held companies not listed on exchanges, loans and other private debt of companies and governments (including unrated and below investment-grade entities), and private energy infrastructure.

Barry Smith (@Barry_Smith) is an associate editor of Carolina Journal.