State Treasurer Dale Folwell should do better when investing NC pension funds

State Treasurer Dale Folwell addresses members of the NC Council of State on August 2, 2022. (Photo: screenshot from video stream)

PW investigation raises important questions about holding billions of dollars in cash

In a way, there’s something almost odd about the investment strategy that North Carolina’s conservative Republican Treasurer Dale Folwell is pursuing for the vast pension funds he oversees for the state’s public employees and retirees.

In a nation where conservatism was once associated with concepts of caution, self-denial, and modest expectations, rather than greed, instant gratification, and the trickledown ethic that have become hallmarks of the otherwise strikingly retro 21.

As Policy Watch journalist Lynn Bonner recently reported, since taking office in 2017, Folwell has kept a much larger portion of pension funds in cash than industry standards recommend. Indeed, as history explained:

North Carolina’s Pension Fund ranks among the top 10 largest public pensions in the country. According to their most recent financial reports, none of the other nine have anywhere near as large a percentage of their wealth in cash as North Carolina.”

And we’re talking about a boatload of cash that’s supposed to be kept practically under the mattress.

Bonner reported that as of May of this year, about 13% of North Carolina’s $119 billion combined pension fund was held in cash. That’s more than six times the 2.1% of assets those plans held in total cash in 2021, according to a national database reporting the pros and cons of about 130 public pension plans.

Folwell, who says he is motivated in part by witnessing previous stock market crashes, defends his fiercely conservative approach as one who is circumspect for someone whose agency is, as he puts it, “in the check delivery business.” And it’s true that North Carolina’s pension funds remain solvent and able to meet their obligations. And, of course, no one is in favor of putting billions of important public dollars at unnecessary risk

However, it’s also Folwell’s duty to invest those monies wisely in order to generate a healthy return to spare current employees and taxpayers having to make ever-larger contributions to the funds to keep them healthy. And, as several critics have noted, this is one area where Folwell fell significantly short.

According to Bonner’s report:

The state pension fund’s one-year return as of March 31 was in the 94th percentile compared to comparable public funds, meaning 93% of pension plans had better returns, according to information from the Folwell office. In comparison, the plan’s one-year return at the end of December was in the 88th percentile.”

As Andrew Stilton, a former chief investment officer in the Office of the Treasurer and Folwell critic, pointed out to Bonner, Folwell’s cash-heavy investment approach has almost certainly cost the fund huge amounts in lost revenue over the past several years:

Silton estimated that the opportunity cost of Folwell’s strategy, or actual returns compared to what investments would have earned if Folwell had followed asset allocation guidelines, was approximately $13 billion as of early December 2021. As the stock market declines this year, the opportunity cost is now approximately $7 billion, he said in an email.”

Now add that Folwell has also cut the pension fund’s assumed rate of return on more than one occasion — moves that have resulted in state and local governments in turn increasing their contributions to fund things adequately — and the true impact of the Treasurer’s approach more focused and challenged.

As Stilton points out, managing a huge pension fund in the modern American economy is not for nervous Nellies who see economic collapse looming around every corner.

“The pension is not an investment for a 65- or 70-year-old,” said Silton to Bonner. “Pension is an investment for people who will count on the money in years to come. If you are investing for the long term, cash is a bad idea.”

So is there any kind of cure for this condition? It is believed that Folwell, a feisty, experienced and ambitious politician who rarely shies away from debate, would say that if North Carolinians are unhappy with his unorthodox approach, they should support an alternative candidate for Treasurer, who promises another.

But realistically, investment strategy is a pretty pompous subject to turn the race for treasurer into an electoral referendum — especially when the office in question is buried at the end of a long vote in presidential election years.

A better solution would be to set up some sort of oversight group and task it with overseeing and regularly approving the treasurer’s investment plans. After all, $119 billion is a hell of a lot of money that should be left to the discretion of an individual official. Interestingly, in 2009, Folwell himself sponsored a bill creating an oversight commission while he was in the General Assembly.

Bottom Line: It’s hard to believe that pension fund performance over the past few years represents the best North Carolina can come up with. At the very least, state legislators should follow Folwell’s questionable approach and carefully consider whether such significant investment decisions require a higher level of regulatory oversight.

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