Under the current treasurer's 3-year tenure, the $75 billion North Carolina state pension fund has significantly under-performed the median public pension fund return by -1.2% per year; falling solidly into the bottom 22% (see page 9 of the Investment Advisory Committee report from 2/29/2011 ). 78th percentile means 78% of the public pensions beat North Carolina's investment returns over the past 3 years.
While 1.2% per year for 3 years may not sound like much, it amounts to a shortfall of $2.7 Billion (yes, that's Billion, with a capital "B"). I'm sure North Carolina could have used that $2.7 Billion elsewhere. The $2.7 Billion in under-performance amounts to roughly $3,175 per pensioner and accounts for the majority of the $3.4 Billion that the pension is currently underfunded. Keep in mind, the $2.7 Billion we are missing from the state retirement system is an estimate if the fund had only performed in line with the "median" public pension. I believe if a professional investment manager were running the State Treasurer's office we could do better than median. For example, a rather simple portfolio of index funds would easily outpace the median pension fund returns (click here to see the evidence) and handily beat the returns produced by North Carolina's pension investment returns.
Unfortunately, it's only getting worse over time. Of the 31 state pension funds that have a fiscal years ending June 30th, North Carolina ranked second to last for 2011 investment returns.
| 1-year | ||
| Rank | State | Return |
| 1 | SD | 25.8% |
| 2 | MS | 25.4% |
| 3 | AZ | 24.6% |
| 4 | DE | 24.3% |
| 5 | LA | 24.3% |
| 6 | NH | 23.3% |
| 7 | KS | 22.6% |
| 8 | NM | 22.5% |
| 9 | ME | 22.4% |
| 10 | OR | 22.3% |
| 11 | FL | 22.1% |
| 12 | MT | 21.8% |
| 13 | CA | 21.7% |
| 14 | ND | 21.4% |
| 15 | GA | 21.3% |
| 16 | AK | 21.2% |
| 17 | OK | 21.2% |
| 18 | CT | 21.2% |
| 19 | WA | 21.1% |
| 20 | NV | 21.1% |
| 21 | MO | 21.0% |
| 22 | ID | 20.7% |
| 23 | MD | 20.0% |
| 24 | IA | 19.9% |
| 25 | IN | 19.9% |
| 26 | TN | 19.6% |
| 27 | VA | 19.1% |
| 28 | KY | 19.0% |
| 29 | SC | 18.6% |
| 30 | NC | 18.5% |
| 31 | PA | 18.0% |
The fund has even under-performed its own internal benchmark by 1% in 2011 and 0.6% annually for the current treasurer's 3-year reign (see the table here). What accounts for the 1% annual shortfall versus her own benchmark?
An estimated $337 Million went to line the pockets of Wall Street firms just in 2011. We can't be certain of the exact amount paid in fees to Wall Street investment mangers since the Treasurer quit the tradition of publishing the list of amounts paid to external investment managers soon after taking office. This reduced disclosure is at odds with the treasurer's stated initiatives that include "Ensure Transparency." However, we can estimate the huge and growing fees paid to Wall Street out of the pension fund by carefully analyzing the 2011 Annual Report (<--click there for the report).
On page 51 of the 2011 Annual Report the treasurer uses returns "Gross of Fees" when comparing the pension investment returns to its peers. "Gross of Fees" means not including fees paid. The Gross of Fees return for 2011 is listed as 18.93% while on page 53 the Net Return for 2011 is listed as 18.48%. The math is quite simple. The difference is 0.45%. And, 0.0045 x $74.9 Billion = $337 Million
The estimated $337 million going to Wall Street represents an increase of $117 Million over 2009 levels of $219 Million or an increase of 54% in just two years. The $219 Million figure comes from the original or "old" 2009 Annual Report that was originally published to the State Treasurer's website. However, the current form of the 2009 Annual Report listed on the State Treasurer's website is missing those pages.
| Fiscal 2011 GROSS Return | 18.93% | ||
| Fiscal 2011 NET Return | 18.48% | ||
| Difference | 0.45% | ||
| Pension Assets | $74,900,000,000 | ||
| Implied 2011 Manager Fees | $ 337,050,000 | ||
| Reported 2009 Manager Fees | $ 219,368,000 | ||
| Increase | $ 117,682,000 | ||
| % Inc. | 54% | ||
With a 54% increase in investment fees paid to Wall Street, one can see why the treasurer stopped disclosing these fees paid. By the end of her term, Treasurer Cowell will have dispensed over $1 Billion out of the North Carolina Retirement System to Wall Street investment managers in the form of management fees.
But, perhaps the most disturbing issue within the current State Treasurer's office is the obvious "pay-to-play" politics within the office. Treasurer Cowell openly admitted to a House Committee on campaign finance that campaigning for State Treasurer's office in 2008 did not entail traveling the state, but instead “Mostly, I just sat in a room and dialed for dollars for a year and a half of my life.”
WRAL did a story on the topic that you can see by clicking here. But, our own review of Cowell's 2008 campaign finance records shows that she actually held a campaign fund raising event in New York City on September 24, 2008. Treasurer Cowell must throw a pretty good party as she was able raise hundreds of thousands of dollars from donors in the New York City area in 2008 and ultimately raised more than $700,000 from out-of-state sources that purchased many, many TV commercials that eventually won her the election (click here to see Treasurer Cowell's campaign finance data courtesy FollowTheMoney.org).
So I asked myself, "Does North Carolina need a State Treasurer that has the audacity to hold campaign fund raisers in New York City? Shouldn't North Carolina's State Treasurer be a professional INVESTMENT MANAGER and NOT a professional politician?" I decided someone needed to step up and do something. And so I decided to run for State Treasurer myself.
I'm a professional investment manager and NOT a politician. I don't know how to run a political campaign but I know how to manage investments. We can manage the state and municipal employees, teachers, police, and firefighter's pension money without lining Wall Street's pockets to manage the investments for us. With professional investment guidance we can manage most of the money right here in North Carolina at a lower cost and with better results. I'm convinced we can save hundreds of millions of dollars per year for the State of North Carolina without raising taxes or cutting budgets.
www.ElmerForTreasurer.com
This is a damning article that merits a ton of attention. The $2.7 billion under-performance is not meagre change, and then not releasing the compensation for out-of-state investment managers is reprehensible.
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