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Dale Folwell

Dale Folwell

It won’t get any publicity given the Trump vs. Clinton and McCrory vs. Cooper matchups, but one of the more important elections in North Carolina is the contest to replace Janet Cowell as state treasurer.

The winner will become manager of the state’s $90 billion pension plan and a state health plan that spends $3 billion annually on more than 700,000 teachers, state employees and retirees and their dependents. “The responsibilities of the state treasurer are about five times greater than the annual state budget,” says Dale Folwell, a former state representative who is the Republican nominee in the November race.

One intriguing issue facing the winner is whether the pension plan should slice much of the $500 million in fees spent annually on hedge funds, private-equity groups and other alternative investments. That pays for a lot of money managers’ spending on college tuition and country club memberships.

Ron Elmer, a former senior investment officer for BB&T and First Citizens, ran in the Democratic primary. He proposed shifting most alternative investments into basic stock and bond index funds, citing reams of research showing active management doesn’t produce better long-term returns. Some major U.S. pensions are making the shift, having tired of low returns and high fees of alternatives.

Dan Blue III

Dan Blue III

Elmer got beat in the Democratic primary by Dan Blue III, who isn’t expected to make significant changes in state investing strategy. Blue is the son of Raleigh lawyer and state Sen. Dan Blue Jr. The younger Blue worked on Wall Street briefly for now-defunct Bear Stearns, but since 2009 has practiced law with his father. He says he’ll study Elmer’s suggestions.

A more likely change agent is Folwell, a former investment adviser in Winston-Salem who served four terms in the N.C. House. In Gov. McCrory’s administration, Folwell was assistant secretary of the N.C. Commerce Department and oversaw elimination of the state’s $2.5 billion debt to the federal government for unemployment insurance payments. Oversight of unemployment benefits had grown lax, and Folwell helped overhaul the system. It helped that a rebounding economy cut demand for government checks.

A second key decision facing the state treasurer involves setting the pension fund’s expected investment return. A panel of public officials and private citizens set the rate annually. It is now 7.25%.

That’s an optimistic outlook — does anyone really think their investment portfolio can grow by 7.25% annually over the next 20 years, without taking significant risk? It’s a benchmark that the N.C. fund has not met consistently over the last 15 years.

Unfortunately, if the rate were cut to a more realistic level, state lawmakers would be forced to shift millions of extra dollars to the pension to keep it nearly fully funded and make good on its pledges to state workers. That’s millions of dollars not spent on schools, parks, prisons and other public services.

North Carolina has always prided itself on a fully funded pension, but Folwell says the trends aren’t positive and will require tough decisions by the next treasurer.

Third, the next guy will need to address the $30 billion gap between what North Carolina is promising its employees for retirement health care benefits and the state’s reserves. “It’s a huge issue that is the result of 35 years of promises without ever putting money aside,” Folwell says.

With so much at stake, it’s no wonder the current treasurer, Cowell, has received bipartisan criticism for joining two corporate boards before her departure in December. She says the directorships, for which she stands to receive more than $250,000 in compensation, don’t affect her day job. If elected, Folwell says he’ll stay too busy to sit on outside boards.

 

Images courtesy of Dale Folwell and David Mildenberg | Business North Carolina
David Mildenberg
David Mildenberg is editor of Business North Carolina. Reach him at dmildenberg@businessnc.com.
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