Who should make state investment decisions?
Saturday, August 12, 2017
Many of us have a 401k plan, a pension or private investment portfolio. We often seek investment advice from stock brokers, money managers, newsletters, tips from friends or we do our own research, but none of us has a $93 billion investment portfolio like the Teachers and State Employees Retirement Fund, overseen by the state treasurer of North Carolina.
Andrew Silton, former chief investment officer for the state’s pension fund, recently wrote an op-ed piece in which he advocated removing the sole investment authority from the treasurer and vesting that responsibility with a board of trustees.
No one can argue that having one person with the ultimate decision-making authority for $93 billion is an awesome responsibility, but when you flesh out the concept of establishing a board of trustees to make investment decisions you can get into deep weeds quickly.
Would this board consist of full-time employees? If not, who would be chosen? Ideally you would desire that any trustee be someone with a great understanding about markets, investment categories, historical performance and persons who could assess risk potentials, rates of return and trends. Few laypersons would qualify and those with the requisite expertise would likely be private sector investment professionals. Conflict of interest risks, as well as the potential for undue political or other pressure could call into question decisions that were made.
If the board consisted of full-time professionals there would be further complications. Trustees, in good faith, should place their own investments in trust and sever any relationships with financial managers, so as to eliminate conflicts of interest or undue influence. Compensation would be problematic. Most willing to leave the private sector would demand high compensation packages. The recently departed chief investment officer for the state pension fund earned almost $400,000, one of the highest paid state employees. Perhaps each member of the board of trustees would not require such a large amount, but most anyone with the experience and expertise required would be making salaries greater than the governor, treasurer and all but a handful of state employees. Those salaries and the additional expenses incurred would be deducted from the investment returns earned. And what would happen when these trustees disagreed about investment decisions, as they no doubt would? Who would be the final decision maker?
Finally, there is the issue of accountability. When any committee makes decisions no one person can be held accountable. The state treasurer, elected statewide, is currently personally accountable and can be removed by voters if not making good decisions.
When I served as Harlan Boyles’ assistant treasurer we examined other public pension funds to determine if any had a superior approach to North Carolina’s. At the end of our study, we concluded that our investment approach, while not perfect, was better than any we could find. There were no conflicts of interest, no corruption and as little politics involved in decision-making as could be found in any other state.
North Carolina has been fortunate that our state treasurers have acted responsibly, avoided undue risks and have protected the retirements of current and retired state employees. Our current approach could possibly be improved, but changes must be carefully considered so as to avoid the traps many public pension plans have encountered.
Tom Campbell is a former assistant North Carolina State Treasurer and the creator of NC SPIN, a weekly statewide television discussion of NC issues airing Sundays at 8 a.m. on WFXI.