Gamblers on a losing streak often resort to desperately making riskier bets to try to make up for their previous losses – a move that rarely pays off and which usually leaves them even poorer.
Senate Bill 558, Treasurer’s Investments, appears to mimic the risky behavior of the desperate gambler. Sponsored by Sen. Ralph Hise (R-McDowell) and strongly supported by State Treasurer Janet Cowell, this bill would allow the Treasurer to engage in more risky investments with the state’s $78 billion pension fund. The bill was just approved by the Senate Committee on Pensions and Retirement and Aging.
The legislation would, according to one news account, “allow Cowell to increase the state’s portion of pension fund investments in real estate and alternatives — including hedge funds, commodities, asset-back securities and other credit-related investments, and venture capital and private equity — to 40 percent. Combined, those categories can total 36 percent currently.”
According to a Pension & Investments magazine article, Cowell is seeking the added “flexibility” to make up lost ground by the fund’s poor performance in recent years in order to reach the fund’s long-term assumed annual rate of return of 7.25 percent. “We can’t hedge out 10 years of slow growth,” Cowell said.
Indeed, the state pension faces $2.8 billion in unfunded liabilities, and poor returns over the last several years dropped the fund from a funding ratio of 106.5 percent (the fund had more than enough money to cover projected future obligations) to 95.4 percent. In just five years, the fund went from having $3 billion in surplus assets to an unfunded liability of $2.8 billion.
The state’s pension fund is financed by a combination of state employee contributions and taxpayer dollars. The more underfunded the pension fund is, the more taxpayers are on the hook to pay the benefits promised to state government retirees. Taxpayer support for the pension obligations has grown to roughly $800 million this year.
This dilemma underscores a larger point: North Carolina’s pension system needs to be reformed. Rather than consolidating so much power in the hands of the State Treasurer and exposing taxpayers to billions of dollars worth of risk, state government workers should be shifted to a defined-contribution (or 401k-style) retirement system in which each worker controls his or her own retirement fund, and taxpayers are no longer exposed to any risk.
Because it resembles a risky move by a desperate gambler, exposes taxpayers to greater risk, and further empowers a politician rather than empowering individual state employees, SB 558 is this week’s Bad Bill of the Week.