State Pensions: Handle with care

Editorial by Jacksonville Daily News, August 15, 2013.

State Treasurer Janet Cowell plays an active role in safeguarding the state’s money, as well as that belonging to public employees whose retirement security depends on the health of the pension fund. So far she has done her job competently and generally with the taxpayers’ best interest in mind.

The most recent earnings statement is a testament to her office’s ability to manage money. It shows that North Carolina’s pension fund ended the 2012-13 fiscal year with returns of 9.52 percent, more than 2 percentage points above the state’s target and even bested the market benchmark.

While that’s an admirable accomplishment, Cowell is focusing on what could happen months and years into the future. And she says that without more flexibility it is likely — if not a sure bet — that the current investment strategy will lose ground, especially as more employees retire.

In an interview with the Star News of Wilmington late last month, Cowell made a good case that keeping the status quo could have a significant detrimental effect on the pension fund down the road. At the time, she was promoting a bill giving her the flexibility to shift more money to riskier ventures such as hedge funds and private equity. She pointed to the fixed-return investments, which actually lost money last fiscal year. That’s partly because the bullish performance of the stock market and “large-category” investments, such as private equity, real estate and hedge funds, has kept interest rates on bonds very low.

On the other hand, bonds tend to perform better when the bottom drops out of the stock market, as it did in 2008. But Cowell is concerned that returns across the board will suffer unless some changes are made.

The General Assembly passed the bill in the last hours of the legislative session. The new law raises the threshold on “large-category investments only slightly, from 34 percent to 35 percent — less than the 40 percent Cowell sought. In that sense, it represents a cautious nod to the treasurer’s concerns without risking too much at one time.

The association representing state employees and the conservative Civitas Institute both oppose the provision. They worry — with good reason — that relaxing restrictions that have served North Carolina well over the decades could lead to irresponsible investments and painful losses.

Our state has one of the best-managed pension funds in the nation, and that is largely due to its conservative investment strategy. Changing the mix might bring even higher returns in the short run, but investment is a long-haul activity.

Cowell made a strong argument for a bit more flexibility, but the Legislature must keep a close eye on the performance of state funds and be prepared to make corrections quickly if the financial picture changes. We can’t allow North Carolina to slip into the company of other states whose pension funds are in serious jeopardy.

A version of this editorial first appeared in the Wilmington Star News.