PW investigation raises important questions about holding billions of dollars in cash
In a way, there’s something almost quaint about the investment strategy that North Carolina’s conservative Republican treasurer, Dale Folwell, pursues for the massive pension funds he oversees for the state’s public employees and retirees.
In a nation in which conservatism once connoted concepts like caution, self-denial and modest expectations rather than the greed, instant gratification and trickledown ethic that have become its 21st century hallmarks, Folwell’s unusual decision to de-emphasize stock market holdings is, if nothing else, strikingly retro.
As Policy Watch journalist Lynn Bonner reported recently, since taking office in 2017, Folwell has kept a much larger portion of the pension funds sitting in cash than industry standards recommend. Indeed, as the story explained:
North Carolina’s pension fund is among the 10 largest public pensions in the country. None of the other nine holds close to as great a proportion of their assets in cash as North Carolina does, according to their most recent financial reports.”
And we’re talking about a boat load of cash to, in effect, keep under the mattress.
As of May of this year, Bonner reported, about 13% of North Carolina’s $119 billion combined pension fund was held in cash. According to a national database that reports on the ins and outs of 130 or so public pension plans, that’s more than six times the 2.1% of assets that those plans held, in aggregate, in cash in 2021.
Folwell, who says he’s motivated in part by having witnessed past stock market crashes, defends his uber-conservative approach as one that is prudent 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 placing billions of important public dollars at needless risk.
That said, it’s also Folwell’s duty to invest these funds wisely to produce a healthy return so as to spare current employees and taxpayers from being required to make larger and larger contributions to the funds to keep them healthy. And as several critics have noted, that’s an area in which Folwell has been falling notably short.
According to Bonner’s report:
The state pension fund’s one-year return was in the 94th percentile compared to comparable public funds as of March 31, meaning 93% of pension plans had better returns, according to information from Folwell’s office. In comparison, the plan’s one-year return was in the 88th percentile at the end of December.”
What’s more, as Andrew Stilton, a former chief investment officer in the treasurer’s office and a Folwell critic, pointed out to Bonner, Folwell’s cash-heavy investment approach has almost certainly cost the fund huge sums in forgone earnings in recent years:
Silton estimated that the opportunity cost for Folwell’s strategy, or actual earnings versus what investments would have earned if Folwell had followed the asset allocation guidelines, was about $13 billion in early December 2021. With the stock market declines this year, the opportunity cost is now about $7 billion, he said in an email.”
Now add to this that Folwell has also lowered the pension fund’s assumed rate of return on more than one occasion – moves that have led to the state and local governments to, in turn, increasing their contributions to keep things adequately funded – and the true impact of the treasurer’s approach comes into sharper focus and greater question.
As Stilton points out, managing a massive pension fund in the modern American economy is not for nervous Nellies who see an economic collapse looming around every corner.
“The pension isn’t investing for a 65- or 70-year-old,” Silton told Bonner. “The pension is investing for people who will count on the money years from now. If you’re investing for the long term, cash is a bad idea.”
So, is there any kind of remedy for this state of affairs? One presumes that Folwell, a feisty, experienced and ambitious politician who seldom 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 a different one.
But, as a realistic matter, investment strategy is a pretty highfalutin topic on which to make the race for treasurer a voter referendum – especially when the office in question is buried at the bottom of a long ballot during presidential election years.
A better solution would be to empanel some kind of oversight group and charge it with monitoring and periodically signing off on the treasurer’s investment plans. After all, $119 billion is a heck of a lot of money to leave to the unfettered discretion of a single official. Interestingly, Folwell himself sponsored a bill to create an oversight commission in 2009 while he was in the General Assembly.
The bottom line: It’s hard to believe that the pension fund performance of recent years represents the best North Carolina can do. At a minimum, state lawmakers should investigate Folwell’s questionable approach and closely examine whether such momentous investment decisions need a higher degree of official oversight.