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Pension fund is a $70B afterthought for state lawmakers

RALEIGH — One of the more remarkable changes that has occurred in the state capital over the past decade is how little thought and care state legislators give to the investing practices of the state pension fund.

That the fund is $70 billion — the size of 3 1/2 state budgets — and will require contributions of $400 million in future years to meet its obligations to pensioners doesn’t seem to matter.

A decade ago, newly elected state Treasurer Richard Moore faced pretty tough scrutiny when he asked, and eventually gained, the General Assembly’s permission to expand the rate of investing in venture capital and hedge funds.

Maybe the scrutiny came because Moore’s predecessor, Harlan Boyles, wasn’t much of a fan of that kind of thing, preferring to put pension money in bonds and publicly held companies, or maybe enough legislators shared Boyles’ conservative investing streak.

Fast forward a decade, and current state Treasurer Janet Cowell has run into little legislative opposition as she has continued the trend toward more aggressive, diversified investing.

In 2009, the legislature agreed to loosen the pension fund investing rules to allow money to be put directly into commodities, mortgage-backed securities, corporate bonds and exchange-traded funds. At the time, a handful of House Republicans, including retired stock broker Bill McGee, raised a bit of a ruckus about getting into the commodities game.

Otherwise, most legislators passively listened to supporters talk about how diversification is the way to avoid billion-dollar contributions to the system in future years.

Amazingly enough, this occurred less than a year after the largest insurance company in America had been bailed out by taxpayers after “diversifying” into mortgage-back securities. AIG was brought down on two ends of the housing bubble collapse, both offering up insurance for the mortgage securities and investing premiums in those lousy securities.

Just recently, the state Senate — with no debate on the chamber floor — unanimously approved a measure that would allow more pension fund money to be put into venture capital and hedge funds. The bill would also allow pension fund managers to engage in more shorting strategies, meaning betting on stocks to drop.

Assuming the bill is approved in the House, the changes would mean that, in just a decade, the state has moved from allowing no more than 17 percent of pension fund investments to go into nontraditional investments, like private equity and real estate, to 35 percent going into even more types of nontraditional investments.

Maybe that’s a good thing. The vast majority of legislators don’t know that to be the case.

They’ve never asked for an extensive review of the performance of the pension fund’s private equity holdings versus the fees paid to the fund managers and how those results compare with old-fashioned stocks and bonds.

They just believe that Wall Street is the avenue to avoiding those pesky $400 million pension fund contributions.

After all, no sharks roam Wall Street. And no one has ever lost their shirt there.

Scott Mooneyham writes about North Carolina politics for the Capitol Press Association.

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