Capital Goods - December 2009

Tension over pensions
By Scott Mooneyham

Things could be worse for Janet Cowell. Instead of entering office during the Great Recession, she could have been elected in the Great Depression. Lots of banks, not just a few, could be shutting their doors; local governments could be defaulting on debt. Still, her biggest task is managing the state’s public pension fund, responsible for benefits to nearly 800,000 retired and current state workers, and in the year before she took office, its value fell from $77 billion to $60 billion. For the first time in decades, the state treasurer cannot say that the pension fund is sufficient to meet its current and future obligations. (It has since rebounded to nearly $66 billion.)

Since markets crashed late last year, investment bankers have become even less popular than congressmen. As state treasurer, Cowell has a foot in the investment world and one in politics. But if she’s worried about how that shattered public confidence might affect her job-approval rating, she’s not showing it. “You run for public office,” the Raleigh Democrat says, “you know what to expect.” She calls some of what’s happened a “healthy wakening up,” with people becoming more wary of investment advisers and decisions. But there’s more scrutiny of public pension funds. New York Attorney General Andrew Cuomo has been conducting a nationwide investigation into their investments, political donations by investment firms and kickbacks.

The U.S. Securities and Exchange Commission has been focusing on public pension funds, too. It’s considering rules to ban managers of public pension funds from taking campaign contributions from those they do business with. Another SEC proposal would prohibit the use of placement agents, middlemen acting as marketers between pension-fund managers and investment firms. Some of those placement agents have proven to be cronies of those managing pension funds, the “marketing” a means of shaking down the investment firms looking for business.

North Carolina has avoided the kinds of scandals that sent pension-fund officials to prison in Connecticut, New Mexico and New York. Cowell, though, has been coping with her own little messes. In August, she fired Patricia Gerrick, the fund’s chief investment officer, from a $340,000-a-year job. Initially, Cowell offered no clues why. But newspaper accounts, based on public-record searches, reported that investment-firm executives had offered to help Gerrick’s children with job searches, internships and résumé tips. The pension fund also had hired a friend of hers as a placement agent to help arrange a $150 million investment. Before Gerrick’s firing, Cowell quietly let go Lisa Schneider, a top lawyer in the treasurer’s office. Schneider’s husband worked for a law firm doing business with the office. Cowell didn’t hire Gerrick or Schneider. They were problems she inherited from her politically ambitious predecessor, Richard Moore, who came under fire for his habit of taking hefty campaign contributions from investment-firm execs.

Cowell refuses to throw Moore, who failed to win the Democratic nomination for governor last year, under the bus. But Moore can’t seem to escape questions related to his tenure. In mid-November, The Insider, the state-government-news service of which I’m the editor, revealed that he took a job as a managing director of San Diego-based Relational Investors LLC nine months after overseeing an agreement that let it manage $500 million of pension-fund money. Moore says the investment and his hiring were unrelated, that the possibility of working there came up this spring, after he had left office.

That Moore supported Cowell’s candidacy and helped her raise money might explain her reluctance to criticize him. Like Moore, she took donations from investment managers, but she has been pushing for public financing of the treasurer’s race. She also has adopted reforms to prevent conflicts of interest and future scandal, the most significant intended to close the revolving door through which officials who leave the treasurer’s office go to work for companies that do business with it. Unlike Moore, they’re now barred from doing that for two years.

The larger problem for the pension fund isn’t scandal. It’s providing state retirees with benefits that keep pace with inflation. Cowell’s biggest challenge may be convincing state legislators that the days of relying solely on investment returns, minus substantial contributions of tax money, are over. North Carolina came to have one of the healthiest public pension funds in the country because of hefty state contributions over several decades. That began changing in the 1990s. Like so much else in the world of finance, the clock might be turning back.

Scott Mooneyham is the editor of The Insider,