Taking Risks out of the State Pension Plan | Eastern North Carolina Now

    North Carolina has been fortunate to have honest and trustworthy State Treasurers. Current Treasurer Janet Cowell is no exception. The present discussion over public pension plans focuses on three central issues, namely who is making investment decisions, what influences are affecting those decisions and how much risk is being taken?

    The numbers are staggering. North Carolina public retirement programs currently manage $86 billion in assets for some 900,000 current and retired state and local public employees. The Treasurer has sole responsibility for making investment decisions.

    There are two concerns with our current system. First is how much risk is being taken, with the second being how much influence is exerted on the decision-maker?

    Contributions by governments and by public employees won't fully fund pensions so investments must make up the difference. Playing it too safe, with money-market funds and municipal bonds, won't provide enough returns to fully fund pensions. Investments like derivatives, junk bonds and speculative real estate might provide higher returns but they are highly risky and might lose money. Risk-reward decisions for an individual are much different from those for 900,000.

    Big banks and investment houses desperately want the state's investments and history demonstrates they will offer campaign contributions, luxury vacations, cars, homes and under-the-table cash to influence those decisions, small prices easily recouped by big investment management fees. Michael Lewis' recent book, Flash Boys, reminds us of the lengths to which Wall Street will go to secure and place these investments.

    Having more than one person make investment decisions only spreads the risks to a larger number. And who would be appointed to such a board and how would they be selected? Laypersons would be required to spend large amounts of time learning and keeping up with markets, for which someone would have to compensate them, or else they would be dependent on the advice of the State Treasurer or her investment advisors. If professionals were on the board they would likely have built-in conflicts of interest. So just having more people doesn't eliminate much risk.

    The best solution is to convert from a defined benefit to a defined contribution plan that gives each employee the power to make his or her own investment decisions. Corporate America and many public and non-profit organizations made this switch years ago.

    Public employees currently receive a defined monthly benefit upon retirement, based on a complicated formula that includes how many years they worked and their highest salary for the last few years of work. Under a defined contribution plan each employee would have their own private investment account, with both the state and the employee making contributions. The employee could choose from a range of investment options and make investment decisions based on risks they were willing to assume. The amount each received at retirement would be based on how much was in the account. While it would not be equitable to convert to such a plan for retirees and current longer-term employees we can and should convert those not currently vested and all new hires to the defined contribution plan.

    This takes the Treasurer off the hot seat, removes risk to the legislature and taxpayers and puts the responsibility directly on the employee, where it belongs. It resolves all three current state pension plan concerns.

    Publisher's note: Tom Campbell is former assistant North Carolina State Treasurer and is creator/host of NC SPIN, a weekly statewide television discussion of NC issues airing Sundays at 11:00 am on WITN-TV. Contact Tom at NC Spin.