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$500M Wall Street Contracts Going Down if NC Candidate Has His Way

By: Rebeca Morla - @RebecaMorla - Jan 5, 2016, 2:21 pm
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Ron Elmer says that internal management of North Carolina’s pension fund would put a stop to the waste of hundreds of millions of dollars each year. (Indy Week)

Ron Elmer, a candidate for North Carolina treasurer, is a certified public accountant and financial planner with more than 20 years of experience in multi-billion-dollar pension investments.

He asserts that North Carolina pays Wall Street investment bankers nearly US$500 million each year in fees simply for managing pension-fund investments. Meanwhile the state’s employees, teachers, retirees, and taxpayers worry about ominous unfunded liabilities with their retirement fund and their health-care insurance.

“I am a professional money manager, not a professional politician.” That is Elmer’s slogan and, in his view, his strongest selling point for North Carolina’s statewide elections, to be held in November 2016.

In an exclusive interview with the PanAm Post, the candidate commented about his proposals to improve the NC State Treasury and to put an end to the cronyism he has been denouncing since 2012.

How did you learn of the cronyism between the State of North Carolina and Wall Street Investment bankers? Is it consistent across all the states?

Every state manages its pension funds in a different way, and North Carolina has a unique system. We elect a Treasurer, and he is the sole trustee over the pension funds. So while there is an election, once the person who wins is in office, he is a kind of a dictator over these funds.

There is no process to approve whatever the Treasurer wants to do with the pension funds, and this is one of the essential problems. NC is one of the four states in the US where we elect somebody and give him complete control over $90 billion without any checks and balances until the next election.

Regarding the US $500 million that the state hands over to Wall Street bankers, the Treasurer’s office manages a third of total investments in-house themselves; basically the bonds. They have done a great job for decades, and at a cost that is minimal.

The other two thirds (stocks and alternative investments) have been outsourced, currently at a cost of $500 million. 15 years ago, these external costs were less than $50 million, so in 15 years the external manager investment expenses have gone up 10 times, which is remarkable because no other state budget has increased like that. These are the teachers’ and state employees’ pensions that are being looted by Wall Street.

You are proposing to have a local team to manage pension investments instead of having Wall Street Bankers do it. How will you keep this in-house team efficient?

We have a perfect example of how to do this and that it can be done right there in the department of the Treasurer’s office, because we have the bond team currently managing money. So we only need to duplicate the system for the stocks, for example.

What is interesting is that two thirds of the pension funds are outsourced to more than 200 external managers scattered all over the country, and I’ve actually been one of those managers. I used to run Equity Division at a local Raleigh bank, and we were the lowest-cost manager because we were asked to run an “equity index investment strategy”.

That’s what I think we should use internally, and save the state hundreds of million of dollars. I know that we have more than enough talent to do this in North Carolina.

You brought this up last time you ran for State Treasurer. Why do you think it did not garner attention?

When I ran in 2012, I was frustrated because I had seen this slow-motion train wreck taking place in the state’s pension funds. I started managing money in 1999, so I had followed the Treasurer’s office closely for 16 years. I watched as the expenses managed externally increased from around US $45 million to US $300 million in 2012, and I was just astonished at that.

But I couldn’t find anyone else in the state who was paying attention to this problem. The reason why nobody knew the expenses had gotten out of control is that the last time financial statements were published for the state pension funds was in 2001, so there had been basically no reporting.

It is very difficult to find where the expenses are. It took me about five years to find this information, because it is not part of the State Treasurer’s Annual Report. So in 2012, I had spent a couple of years being critical of what was happening with these pension funds, but nobody from any party had filed to run against the current Treasurer.

I was so frustrated that I decided to put my name in the ballot. I didn’t expect I would win, I just wanted to get this problem exposed. I refused to take any Wall Street money or any campaign contributions from investment managers, so it was not a run that I really thought I could win in 2012.

However, this time is different. I do think I can actually win this time.

Why don’t you propose that state workers be able to manage their own retirement funds?

Well, there is a 401(k) plan in which the state employees can participate. I like the idea of state pension funds as a benefit for state employees. But again, this pension fund is not just for state employees, but also for teachers, policemen, and firefighters in NC.

The vast majority of them are relatively low-income folks. People that go to work for either a state government or a city government generally accept payments that are lower than what they can get in private industry. And they are willing to do that because they think quite often that benefits are a little better in a state government, for example.

I think that the pension is a great benefit that helps us attract talent without paying market rate salaries. I think if we were to eliminate the state pension, then there is really no reason that any person would like to work for the state since the pay will be low, and there will be no pension.

I think the average person who is making US $40,000 a year working for the state would rather have a pension than a 401(k) where they have to figure out what to do.

A lot of people think that the state pension is too expensive, so maybe we should implement a more defined contribution structure, such as the 401(k). The thing is that the way the pension fund is run now is too expensive. Although we pay US $500 million a year to external managers to manage two thirds of the fund, the investment performance has been horrible.

So we are not getting anything for our US $500 million. We underperform as far as investment returns by about 1 percent. We earn about 1 percent per year less than the average pension fund. And on a $90 billion pension fund, 1 percent is almost a billion dollars every year in underperformance.

And just as a reminder, 6 percent of every participant’s paycheck goes to the pension fund. It is sort of a forced savings plan, and it is not state money, but private money. And if you do the math, that should be enough to self-fund the pension fund.

The state has had to put in US $1 billion in the fund is because the money has just not been invested properly. With the right Treasurer, we can save the money we are paying to external investment managers, we can close the gap with the average pension funds returns, and use this $1 billion for something else.

Rebeca Morla Rebeca Morla

Based in Guayaquil, Ecuador, Rebeca Morla works as an editorial assistant with the PanAm Post. She is a political scientist and an Executive Board member of EsLibertad. Follow @RebecaMorla.