State Treasurer Janet Cowell plans to put up to $250 million of the state’s $60 billion pension fund in investments that would “support the well-being of the state of North Carolina.”

The investments, known as “economically targeted investments” (ETIs), are common in other states.

Twenty-one states use their pension money for ETIs to pursue goals like increasing affordable housing and creating jobs, according to a December 2008 report from Florida’s Office of Program Policy Analysis & Government Accountability.

“It’s a direct challenge to the idea that money floating up in the ether is in everybody’s best interest,” said Doug Hoffer, an analyst in Burlington, Vt., who has studied the issue. “Money invested in China or Europe may be getting a good rate of return, but it’s money invested elsewhere.”

Such investments also raise red flags from pension watchers. States that have used ETIs have had mixed success.

“The pension fund is not a do-gooder slush fund,” said Charles Heatherly, a former North Carolina deputy treasurer. “It was set up for a very specific purpose. The [investment] boundaries are written into the state constitution.”

Cowell plans to choose the funds that the state would invest in by Dec. 8. Proposals from companies that want state business are due Tuesday. 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.

“The Innovation Fund’s primary objective is competitive risk-adjusted rate of return consistent with the performance objective of the Private Equity Investment Program,” said Heather Franco, a spokesman for Cowell.

“The secondary objective would support the economic well-being of the state of North Carolina.”

Edward Siedle, a former attorney with the U.S. Securities and Exchange Commission, questioned what the state is looking for in an investment that supports “the well-being of the state of North Carolina.”

“It’s so broad that it’s highly susceptible to abuse,” said Siedle, who runs a company called Benchmark Financial Services in Ocean Ridge, Fla., which audits pension plans.

“What does that mean? Only in the mind of the reviewer would you know what that means.”

It is also unclear how many firms would meet the qualifications.

Chris Tobe, a trustee for Kentucky Retirement Systems, said the wording in the state’s request for proposals appeared rigged to favor a small number of firms.

“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.”

The request for proposals was put on the Web site of the state treasurer’s office and sent to private equity managers and publications that run lists of RFPs.

Guidelines issued last fall by the U.S. Department of Labor for pension plans putting money into ETIs say that “fiduciary consideration of non-economic factors should be rare.”

The Florida report said that New York City, California, and Vermont have had good experiences with ETIs. New York City rehabbed apartment buildings in low- and moderate-income neighborhoods, and the investments outperformed the Lehman U.S. Aggregate Bond Index.

California put $975 million in companies with little access to capital, and Vermont funded a real estate project. “The safest way for a state or municipality is to start with things that provide the most comfort,” Hoffer said. “Housing is a good example.”

But other states have lost money with ETIs. Kansas repealed a requirement that the state make ETIs after the pension fund lost money in a steel mill and a savings and loan. The Connecticut Retirement and Trust Funds lost $20 million after buying a large part of a firearms company that subsequently went bankrupt.

The North Carolina request for proposals require bidders to disclose any current or potential conflicts of interest, but Tobe said ETIs can have more problems with conflicts of interest.

“Local private equity is too good for legislators to resist,” Tobe said. “I think it can be done well, but it’s problematic because of the potential for conflicts. If you have all this money out there, people will find a way to find a great investment for it.”

Sarah Okeson is a contributor to Carolina Journal.