RALEIGH – For as long as there have been state treasurers managing state pension funds, there have been attempts by political insiders to scam some of the money with promises of “creating jobs.” They’ve always been, properly, rebuffed.
Until now.
State Treasurer Janet Cowell has just announced the creation of an Innovation Fund that will invest up to $250 million of pension funds in businesses with “significant operations in North Carolina.” According to reporting by Carolina Journal’s Sara Okeson, the fund has two goals: to achieve a competitive rate of return and to “support the economic well-being of the state of North Carolina.”
At first glance, however, it would seem to be impossible to pursue both goals at the same time. By definition, if the fund’s managers are required to favor North Carolina-based businesses in their investment decisions, then they are required to sacrifice rate of return for economic development. Any political constraint on their choice of business investment inherently reduces the manager’s ability to meet or exceed the performance of other managers who lack such a constraint.
That’s why former state treasurers have turned down every major attempt to use North Carolina pension funds for so-called economic targeted investment (ETI). They recognized that their sole responsibility was to maximize rate of return over time so as to guarantee the largest possible pensions to teachers and state employees at the lowest possible cost to taxpayers.
State treasurers, in other words, are not elected to serve as economic-development officers. As a fiduciary, they are required to focus like a laser beam on finding the best investments for the retirement savings entrusted to them – regardless of whether those investments occur in North Carolina, South Carolina, or South Korea.
But this first glance is mistaken, Cowell argues. Her case for the Innovation Fund centers on the fact that the health of North Carolina’s economy bears a strong relationship to the fiscal health of its government. Unless the state becomes a more attractive place to create or expand businesses, fewer people will have jobs and fewer tax dollars will flow to Raleigh to pay for, among other things, contributions to the pension fund.
This is more of a rationalization than an argument, however. If it’s okay for the state treasurer to make economic development a “secondary” objective to the primary one of maximizing investment return, how secondary does it have to be? How will the treasurer’s managers ever know if they’ve gotten the balance right? How many jobs must the Innovation Fund create in North Carolina in the short run to offset the hit that the pension fund takes on the long run by having an artificial limit on the breadth of its investments? And what happens if a firm in which the treasurer invests subsequently concludes that it should move its operations out of North Carolina in order to become more profitable? Does she buy, hold, or sell?
That these are unanswerable questions is the point. Clear rules exist precisely to clarify one’s responsibilities in an unpredictable world of limited knowledge. State treasurers are supposed to act as fiduciary agents, not economic policymakers. Whatever Cowell’s intentions may be, her Innovation Fund compromises her fiduciary responsibility, as I’m sure she’s going to hear loud and clear from irate teachers and state employees if she hasn’t already.
Rather than being truly innovative, the idea is closer to be enervative – that is, it weakens the professional and legal reputation of the treasurer’s office.
Now, one can be yet more cynical about all this and wonder who is about to get what. The state treasurer’s request for proposal was rather specific: she is looking for firms that have made at least three North Carolina or regional ETIs or have invested in at least 25 private companies with significant operations in North Carolina. Potential bidders must be managing at least $1 billion in assets.
Chris Tobe, a trustee for Kentucky Retirement Systems, told CJ’s Okeson that the wording in the state’s request for proposals appeared rigged. “There are not a lot of firms that can do North Carolina only,” Tobe said. “You have a very limited number of people who can do it.”
It will be interesting, to say the least, to find out who ends up with the dough.
Hood is president of the John Locke Foundation