Janet Cowell | Pension360

North Carolina Pension Changes Go Into Effect Jan. 1

As of January 1, 2015, highly paid government workers in North Carolina will no longer be allowed to boost their pension benefits with accumulated sick leave or other perks, according to a law signed over the summer by North Carolina Gov. Pat McCrory.

The law also lowers the “vesting period” for benefits of public employees from 10 years to 5 years.

Pension “spiking”, as the practice is sometimes called, happens when workers accumulate sick leave, vacation time, bonuses and other benefits until the year before they retire. In their final year on the job, they cash out all those benefits—inflating their final year salary.

Since final year salaries play a big role in calculating a worker’s pension benefits, spiking can increase a retiree’s annual pension by thousands of dollars per year. The practice is currently legal in most states.

But the practice is now outlawed in North Carolina for all state and local workers who make $100,000 or more annually. From the News & Observer:

The new law, which takes effect Jan. 1, comes after The News & Observer in November reported how four community college presidents and their boards converted tens of thousands of dollars in perks to pay as they neared retirement age, creating pension boosts the retirement system will have to subsidize. The retirement system is funded by contributions from employees, taxpayers through employer contributions, and investment returns.

“This law prevents North Carolina state employees from having to subsidize artificially inflated pensions of high earners at the end of their careers,” McCrory said in a statement. “It protects the retirement system from abuse and ensures state employees are rewarded for their important investments in our state.”

State Treasurer Janet Cowell has claimed in the past that pension spiking in the state is limited to only the highest-paid state workers. Thus, the current legislation outlaws spiking for those workers by creating a “contributions cap”. The News & Observer explains:

The law creates a new method of identifying pension spiking through a contributions cap that is based on the actual amount of money state and local employees and employers put into the retirement system. Those hired before Jan. 1 would continue to receive the difference created through the pension spiking, but it would have to be paid for by that unit of government, not the retirement system. Those hired after Jan. 1, would have the choice of the employer paying, the employee paying or a reduced benefit.

The law also returns the pension vesting period for state and local employees to five years. Three years ago it was doubled to 10 years as a cost saving measure, but Cowell’s staff said the savings were minor, roughly $1 million a year, while making the state less competitive in the job market.

“Returning to a five-year vesting period is critical step in North Carolina becoming more competitive in recruitment and retention relative to other public and private employers,” Cowell said in the release.

Union Files SEC Complaint Alleging Pension Pay-To-Play In North Carolina

A North Carolina labor group has filed a whistleblower complaint with the SEC over what they believe to be a violation of the SEC’s pay-to-play rules.

The group alleges that Erskine Bowles held a fundraiser for state Treasurer Janet Cowell at his home in 2011. Just weeks later, Bowles’ investment firm was chosen to handle investments for North Carolina’s pension funds, of which Janet Cowell is the sole trustee. From Bloomberg:

Former White House official Erskine Bowles was accused by a North Carolina workers’ association of violating political fundraising rules for money managers.

Carousel Capital, the firm Bowles co-founded in 1996 and where he is listed as a senior adviser, was selected to manage state pension funds a few weeks after a June 2011 fundraiser for North Carolina Treasurer Janet Cowell was held at his home, the State Employees Association of North Carolina said today in a whistleblower complaint to the U.S. Securities and Exchange Commission.

The fundraiser violated the SEC’s pay-to-play rule that bars investment advisers from managing state funds for two years following a campaign contribution to political candidates or officials in a position to influence the selection of advisers to manage public pension funds, according to SEANC’s complaint.

SEANC, which has about 55,000 members, also questioned whether Bowles’ wife, Crandall Bowles, was in violation of pay-to-play rules because she is on the board of JPMorgan Chase & Co., which manages several hundred millions of dollars for the $87 billion North Carolina state pension fund, which Cowell oversees.

David Sirota talked to Cowell and Bowles about the allegations:

In a statement emailed to IBTimes, Cowell’s spokesperson Schorr Johnson said:

“More than two years ago, the Department of State Treasurer verified with outside legal counsel that neither Erskine nor Crandall Bowles were covered by SEC prohibition. The Department then took it a step further by ensuring contractually with Carousel that they were compliant with this SEC rule. If Carousel failed to comply with the rule, the investment would likely end.”

In a previous statement to IBTimes, Erskine Bowles said, “I have had no active role [in Carousel] since 2005 (and) I am not involved in the management of the firm nor do I [have an] office there.” He also said the fundraiser was held at his home by his wife, Crandall, but that he was not affiliated with the event.

North Carolina Fund Draws Fire For Fees, Conflicts of Interest

North Carolina Treasurer Janet Cowell is the sole trustee of the state Retirement System. That gives her power and control over the state’s pension investments that very few Treasurers share—but it also puts her in a position to take the brunt of the blame when things don’t go as planned.

Cowell is drawing an especially large amount of flak the past few months from critics condemning for her habit of accepting donations from investment firms—and then outsourcing investments to some of those same firms. Tom Bullock of WFAE reports:

During Cowell’s two successful campaigns to be North Carolina’s state Treasurer, 41 percent of her campaign donations came from out-of-state. Much of that money came from investment firms, insurance companies and lawyers…

The national average for state treasurers over the last two election cycles? Just shy of 11.5 percent.

In fact, over that same period 89 candidates vied to be a state’s treasurer. Only four had a higher percentage of out-of-state contributions. But in terms of total dollars, Janet Cowell is squarely at the top of that list.

Cowell declined to be interviewed for this story. Instead, her spokesman, Schorr Johnson, was made available.

“I’ll say that throughout Treasurer Cowell’s term in office she has been a consistent and vocal advocate for public financing for the office of state treasurer,” Johnson says.

Critics say there’s a reason for the influx of out-of-state cash (particularly from New York)—investment firms want the pension fund’s money, and Cowell is the one who makes those investment decisions.

Accordingly, Cowell is drawing fire for the fees paid to investment managers. Critics say the fund’s performance doesn’t justify the fees being shelled out—and some even claim that North Carolina is paying more fees that it’s letting on. David Sirota writes:

According to documents from the North Carolina Treasurer’s office, taxpayers paid $1.6 million in fees (or 0.7 percent of the $230 million Innovation Fund) to Credit Suisse for managing the fund last year. That, however, may not be the entire outlay on fees. As [Ted] Siedle’s report notes, the Innovation Fund directs capital through “fund of funds.” Those investments can also extract fees, which can be hidden in the lower returns passed on to investors.

Assuming these underlying funds charge the standard 2 percent management fee and 20 percent fee for investment performance, and taking into account private equity’s typical transaction, monitoring and operating fees, Siedle estimates that the fund is paying as much as $15.2 million in management fees each year (and that’s without factoring in any additional fees for investment performance). In all, Siedle estimates that since North Carolina’s Innovation Fund launched in 2010, as much as $65 million that was billed as going to local entrepreneurs may have gone to financial middlemen in the form of fees.

[…]

While there is no publicly available independently audited evidence of the Innovation Fund’s returns, fund officials said in 2013 that it had generated a 15 percent return so far. By comparison, the Russell 3000 has generated a 16.5 percent return since 2011, and the S&P 500 has shown a 58 percent return since 2011.

Ted Siedle, whom Sirota mentions above, has claimed for months that North Carolina was under-reporting the fees they paid to managers. He submitted his report to the SEC.

Photo by Emmanuel Huybrechts