A blistering report on the management of the state’s $87 billion pension fund commissioned by the State Employees Association of North Carolina reinforces and significantly expands the group’s long-standing criticisms of state Treasurer Janet Cowell.
The 147-page report takes a shotgun approach, leveling numerous accusations and complaints steeped in inflammatory language.
Among other things, the report, unveiled at a press conference at SEANC’s headquarters Tuesday morning, contends that Cowell has potentially violated numerous state and federal laws regarding investment disclosure; concealed $30 billion in investments from public view; and cost the pension fund $6.8 billion in returns over the past five years because “alternative” investments, such as hedge funds and real estate, have under-performed.
“The conclusion in the report, broadly, is that the pension fund is sick, it is suffering, it is failing to meet its objective,” said Edward “Ted” Siedle, the consultant SEANC hired to write the report. “There is compelling evidence of wrongdoing.”
Siedle and Dana Cope, SEANC’s executive director, said SEANC intends to file a complaint with the Securities and Exchange Commission’s Office of the Whisteblower and seek an Internal Revenue Service investigation. It also plans to call the report to the FBI’s attention.
SEANC’s Cope said his organization “will also be asking the General Assembly to stop the treasurer from entering into any agreements with Wall Street to conceal their fees. We will be the first in the nation, as I understand it, to request legislation seeking that.”
In an interview, Kevin SigRist, chief investment officer at the state treasurer’s office, defended the agency’s investment and disclosure policies and said no laws are being violated.
SigRist said any shortfall in investment returns can be traced to the state’s risk-averse policy of investing a greater portion of its money in the fixed-income sector, such as bonds, than the industry norm.
“Over time, the fund has had a lower risk than 80 percent of our public pension fund peers, and that has led to a lower return,” he said. “It’s not attributable to alternatives.”
Early Tuesday afternoon, the treasurer’s office issued a statement that said in its entirety: “Upon brief examination, there are a number of areas where the report is simply wrong. A full accounting of every dollar of the pension fund is provided in the annual report.”
But SEANC spokeswoman Toni Davis said the treasurer’s annual report contradicts the full-accounting claim on page 44, where it states: “Consistent with industry convention, cost figures do not include the fees and expenses of investment managers that are held within fund of fund vehicles.”
A “fund of fund” is an investment fund hired by the state to in turn hire other money managers that invest the state’s money.
SigRist countered that the state’s relationship is with the fund of funds.
“We hire the fund of fund manager,” he said. “They go out and hire ... these other investment managers. And out of the fees we give to the fund of fund provider, they are paying those underlying managers.”
Last month, Siedle wrote state Auditor Beth Wood asking her to conduct an investigation “and compel the treasurer to disclose all direct and indirect fees, as required by North Carolina law.” That request is still being evaluated by the auditor’s office, spokesman Bill Holmes said Tuesday.
Last year, Siedle issued a scathing report of the state employees pension fund in Rhode Island. That state’s treasurer labeled the report “a political attack paid for by opponents of pension reform.”
Siedle said that $30 billion of North Carolina’s state pension funds “has been heisted” in the sense that details of the state’s investments in alternative funds haven’t been disclosed and are therefore “off the radar screen.”
When pressed by a reporter, Siedle said: “I’m not saying anybody has stolen anything. I’m saying that money has been moved into the shadows.
“No one knows how it is being invested,” he said.
‘Wrapped in secrecy’
Siedle conceded other states that make alternative investments also don’t provide details on how hedge funds and other money managers invest that money.
“Generally speaking, across the nation, 25 percent of the public pension assets — perhaps $1 trillion — is in alternative investments,” he said. “And across the nation, they are wrapped in secrecy.”
Schorr Johnson, a spokesman for the treasurer’s office, said that the amount the state has invested in alternative investments is between $18 billion and $19 billion, not the $30 billion listed in the report.
The report also estimates that $400 million in annual fees for alternative investments are hidden from view because the treasurer hires “fund of funds.”
SigRist said the rates of return reported by the treasurer each quarter are calculated after deducting all investment fees and expenses.
“There is no hidden fees whatsoever,” he said.
The potential for “pay-for-play” is a major problem, the report contends.
“The unchecked ability to steer tens of billions in workers’ retirement savings into hundreds of the highest-cost hedge, private equity, venture and real estate funds ever devised by Wall Street, in exchange for political contributions to her campaign and to the campaigns of other influential politicians, makes the treasurer today arguably the state’s most powerful elected official,” the report states.
SEANC wants the state pension fund to be managed by an investment board rather than the state treasurer. State employees contribute 6 percent of their paychecks to the state pension fund.
In January, Cowell announced an independent, bipartisan commission would review the state’s structure for managing investments and look at whether an investment advisory committee should be created. North Carolina is one of just four states where the state treasurer makes investment decisions in consultation with staff.