North Carolina Retirement System Pension Fund Should Index

Last week I blogged about how bad North Carolina's pension investment returns have been.  This week, I thought I'd point out a simple solution to the poor performance.  A simple portfolio of Vanguard Index Mutual Funds not only would beat the performance of North Carolina's pension, but has outperformed more than 75% of all public pensions over the past 3, 5, and 10 year periods. (Click here and see page 4 for investment returns of all public pensions). 

	North Carolina Pension Investment Returns as of 9/30/2013
		1-Year		3-Year		5-Year		10-Year
	North Carolina Pension	9.97%		8.82%		7.78%		6.89%
	Median Public Pension	12.25%		10.29%		8.23%		7.27%
	Passive Index Mutual Funds*	12.33%		12.00%		10.33%		8.42%
	NC Under-performance vs. Index Funds	-2.36%		-3.18%		-2.55%		-1.53%
	NC Tax-payer cost for under-performance	$2	Billion	$8	Billion	$11	Billion	$13	Billion

Why all pensions don't index is a mystery to me?  North Carolina’s pension at $83 billion, like many public pensions, are so large, it's inconceivable that their 240+ external managers could collectively outperform "the market."  It is ridiculous – and expensive – for them to even try. 

North Carolina Pension Investment Performance is Bad, Again

North Carolina Treasurer Janet Cowell recently released North Carolina’s pension investment returns.  As usual, the press release did not provide any relevant point of reference as to whether the returns were “good” or “bad” other than to compare them to an obscure, undefined, and obviously cherry picked benchmark.  On the surface, it would appear the returns are “good” since every return for every time period was higher than this mysterious, ever changing, self-managed and self-serving “benchmark.”

I thought I’d compare North Carolina pension investment returns to the average public pension returns as published by The Bank of New York Mellon Public Pension Universe (click here and see page 4).  Glancing at the table below, I believe the word “bad” adequately describes North Carolina’s pension investment performance.  Over any time period one wishes to compare, the North Carolina pension investment performance lags the median public pension returns.

North Carolina Pension Investment Returns as of 9/30/2013
	1-Year		3-Year		5-Year		10-Year
North Carolina	9.97%		8.82%		7.78%		6.89%
Median Public Pension	12.25%		10.29%		8.23%		7.27%
Under-performance	-2.28%		-1.47%		-0.45%		-0.38%

Just to put the last year’s investment performance in perspective, if the $83 billion North Carolina pension merely had average returns, the pension would have earned an extra $2 billion. This is roughly the equivalent of 10% of the entire North Carolina state annual budget!  Or, this $2 billion short fall is roughly the equivalent of 20% of the entire state's annual spending on education. 

If you are a state employee or teacher and you are upset about budget cuts and a lack of raises, just imagine what the state of North Carolina could do with an extra $2 billion. That could be a reality if only your pension investments could achieve “average” returns.

Same-Sex Marriage and Tax Return Filing Status in North Carolina

The Internal Revenue Service (IRS) now allows same-sex married couples to file a "married filing jointly" tax return.  However, many states do not allow these couples to file using the "married filing jointly" status.  My home state of North Carolina recently released a directive for these couples outlining how to file.  You can read the full directive by clicking here. 

These couples will file their federal tax return using the "married filing jointly" tax status, but will also need to recalculate a separate "pro forma" federal tax return under the single status for each individual (or head of household as the case may be).  Both will need to file separately with North Carolina and attach a "pro forma" federal tax return to their state tax return.  

Thus, these couples will need to fill out a total of 5 income tax returns:

1 - Federal income tax return submitted to the IRS (Married)
2 - Federal income tax returns submitted to the North Carolina Department of Revenue (Single)
2 - State income tax returns submitted to the North Carolina Department of Revenue (Single)

Please feel free to send me your questions on this or any other topic at:  InvestorCookbooks(at)gmail.com

The North Carolina Tax Deduction for 529 Plan Contributions Expires 12/31/2013

When the new Republican-controlled North Carolina State Legislature overhauled our state's income tax, they removed the deduction for 529 plan contributions after 2013. 

See page 5 of the updated NC 529 Plan Program Description.  However, you still have six weeks to save up to $387 for 2013 contributions ($5,000 contribution for married couple filing jointly in the top income tax bracket).  See how much you can reduce your 2013 North Carolina state income taxes by clicking here.     

See my 529 plan post from last year for more general info on 529 education savings plans.

State Pension Fund Returns Ranked for 10-years Ending 6/30/13

As a follow up to my previous three posts on September 22, October 12, and October 18 I've ranked our US states by pension fund investment returns.  I found 10-year investment returns for 34 of 50 state pension funds and ranked them as of June 30, 2013.  

The Wilshire TUCS median return for public pensions for ten years is 7.4%.  

As is typical, my home state of North Carolina can be found near the bottom of the table with a 6.6% 10-year annualized return.  Using a basic time value financial calculator, I estimate North Carolina's under-performance versus the median public pension return has cost tax payers approximately $6 billion the past 10 years.

		10-yr
Rank	State	Return
1	WA	8.3%
2	LA	8.2%
3	MA	8.1%
4	KS	7.9%
5	ID	7.9%
6	IA	7.8%
7	PA	7.7%
8	IL	7.7%
9	VA	7.6%
10	NY	7.5%
11	WV	7.5%
12	FL	7.4%
13	RI	7.4%
14	AZ	7.4%
15	MI	7.4%
16	NJ	7.3%
17	TX	7.2%
18	CA	7.2%
19	NH	7.2%
20	NE	7.2%
21	MS	7.2%
22	VT	7.1%
23	ND	7.1%
24	ME	6.9%
25	NV	6.8%
26	MO	6.7%
27	KY	6.7%
28	MD	6.6%
29	MT	6.6%
30	NC	6.6%
31	NM	6.4%
32	TN	6.2%
33	IN	5.9%
34	SC	5.0%

State Pension Fund Returns Ranked for 3-years Ending 6/30/13

As a follow up to my previous two posts on September 22 and October 12, I've ranked our US states by pension fund investment returns.  I found 3-year investment returns for 39 of 50 state pension funds and ranked them as of June 30, 2013.  

The Wilshire TUCS median return for public pensions for three years is 11.5%.  

As is typical, my home state of North Carolina can be found 4th from last in the table.

Rank	State	3-yr Return
1	MN	13.0%
2	MS	12.7%
3	IL	12.6%
4	AZ	12.6%
5	NH	12.4%
6	KS	12.2%
7	MT	12.1%
8	DE	12.1%
9	NE	12.0%
10	GA	12.0%
11	NY	11.9%
12	LA	11.9%
13	MI	11.9%
14	OR	11.9%
15	MO	11.8%
16	NV	11.8%
17	CO	11.7%
18	TN	11.6%
19	FL	11.5%
20	TX	11.4%
21	NM	11.4%
22	WA	11.3%
23	ND	11.3%
24	MA	11.3%
25	CA	11.3%
26	IA	11.1%
27	ME	11.0%
28	RI	10.6%
29	NJ	10.6%
30	VA	10.5%
31	VT	10.5%
32	PA	10.4%
33	ID	10.2%
34	AK	10.2%
35	MD	10.0%
36	NC	9.9%
37	KY	9.8%
38	SC	9.3%
39	IN	8.4%

State Pension Fund Investment Rankings 2013

As a follow up to my previous post on September 22, I've ranked our US states by pension fund investment returns.  I found 1-year investment returns for 47 of 50 state pension funds and ranked them as of June 30, 2013.  

In the table below, you can click on the state abbreviation to link to the pension fund website. You can also click on the return figure to reach the source document for the reported returns. 

Rank	State	Return
1	SD	19.5%
2	AR	15.6%
3	NH	14.5%
4	MN	14.2%
5	KS	14.0%
6	OH	13.7%
7	ND	13.5%
8	MS	13.4%
9	GA	13.3%
10	NM	13.3%
11	IL	13.2%
12	FL	13.1%
13	AZ	13.1%
14	MT	13.0%
15	WV	12.8%
16	MA	12.7%
17	NE	12.7%
18	OR	12.7%
19	LA	12.6%
20	MO	12.6%
21	CA	12.5%
22	NV	12.4%
23	WA	12.4%
24	NY	12.3%
25	MI	12.2%
26	HI	12.0%
27	OK	12.0%
28	VA	11.8%
29	NJ	11.8%
30	CT	11.5%
31	WI	11.2%
32	DE	11.1%
33	ME	11.1%
34	RI	11.1%
35	KY	11.0%
36	AK	10.9%
37	CO	10.6%
38	MD	10.6%
39	TX	10.2%
40	IA	10.1%
41	SC	10.0%
42	TN	9.9%
43	NC	9.5%
44	ID	9.1%
45	VT	8.8%
46	PA	8.0%
47	IN	6.0%

Returns for Alabama, Utah, and Wyoming were no where to be found.