The single largest pot of public money in North Carolina is controlled by just one person. The pot is the state’s pension system, worth just over $90 billion. The person is state Treasurer Janet Cowell.
North Carolina is one of just four states where the treasurer has the final say on where and with whom public pension money is invested, though the General Assembly sets guidelines on how much of the fund can be invested in broad categories.
Still, even with that bit of oversight, the power wielded by North Carolina’s treasurer means Wall Street is eager to give out campaign cash in hopes of getting big fees to manage the state’s money.
In part one of this series, we reported on those fees, and the secrecy surrounding alternative investments. For part two we examine potential conflicts of interest with campaign donations, the state treasurer and the Wall Street firms that manage alternatives.
Any story about a public pension system relies on a lot of numbers. One number that raises a lot of questions: 1,239,064.
That’s how much campaign cash Treasurer Cowell received from out-of-state donors.
But 1,239,064 is just a number. It lacks context on its own.
So we asked the researchers at the National Institute for Money in State Politics to dig deeper. They run the “Follow the Money” database of campaign finance records from all 50 states.
Here’s what the researchers found:
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 (search their database here).
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.
That’s true, but the treasurer still needed donations.
"She realizes that it can put a candidate in a position that they don’t want to be in in terms of having to fundraise to run for statewide office. But the reality is to run for statewide office you have to raise money."
Money for ads like this:
This aired in 2008, when Janet Cowell first ran for state treasurer. That year she raised more money from out-of-state donors with ties to Wall Street than her opponent raised in total.
In 2012, the year Cowell won re-election, her primary and general election opponents raised just $23,000 in contributions. Cowell’s out-of-state total? $542,000. More than half that came from the finance industry.
Cowell took in more money from New York City than Charlotte.
"You have to ask yourself who are all these people in New York City that care so much about who the treasurer of North Carolina is?" says Ron Elmer who ran against Cowell in the 2012 Democratic primary for treasurer.
Campaign finance records show they are managers of hedge funds and private equity funds and other groups that invest in venture capital, distressed real estate, junk bonds and more. Collectively they’re called alternative investments.
These donors have a financial incentive to get Cowell’s attention.
As treasurer, she has final say on where and how the $90 billion pension system is invested. And, according to the treasurer's spokesman Schorr Johnson, the pension system doesn’t have the staff to manage the $90 billion fund in-house.
"Right now we have about 26 people," he says. "And that is by far the smallest staff of any pension fund that’s comparable in size in the country. By far."
The General Assembly just approved 10 more in-house investors, but that will barely move the needle. That means North Carolina’s pension system needs hundreds of Wall Street managers to fill the gap.
And those alternative investments that Treasurer Cowell has made a priority come with especially high fees. That’s another reason Wall Street loves doing business with the state pension system, says North Carolina State finance professor Richard Warr.
"Wall Street is a fee-based industry. It’s based on charging people for running people’s money." And if you’re smart, says Warr, "You’ll figure out how to make money whether the markets go up or down. You’ll just always be able to charge your fees."
Alternative investments generated $322 million in fees in 2013 alone. And their managers are smart by Warr’s standard. Take private equity, for example.
"You put your money in there and then you basically don’t have access to it for years." Often 7 to 10 years. All that time, money managers take 1 percent or 2 percent of the principle in fees each year. Plus 10 percent to 20 percent of any profit they generate. Private equity, hedge funds and many other alternative investments don’t trade on an open market, their value is not known at any given moment.
They’re more like a house; you only know what it is truly worth when you buy or sell it. In between, you can only guess.
But since alternative investment managers take a percentage of yearly profit, the state pension system relies on the managers to honestly report what they’re worth.
That’s a clear conflict of interest, says Ron Elmer. He ran against Treasurer Cowell in 2008 and is himself an investment manager who once ran $2 billion of North Carolina pension money.
"You’re essentially relying on a manager who you are paying, and you’re paying this manager in a way where he makes more money the better the investments do," Elmer says. So just think of the conflict of interest there."
Others noticed potential conflicts of interest as well. In 2010 the Securities and Exchange Commission enacted a rule barring investment advisors from donating more than $150 to out-of-state candidates such as treasurer. This after a major pay-to-play scandal in New York, another state where just one person is the sole fiduciary of the state’s pension. That case involved a private equity firm getting pension business in exchange for campaign donations.
Even with that $150 cap, campaign cash is still getting to candidates. Now, instead of fund managers making the big donations, it's law firms that write up the investment contracts that are writing the big checks. They, too, get fees for their work.
As it stands today, 22.75 percent of North Carolina’s pension fund - some $20 billion in all - are invested in alternatives.
When Treasurer Cowell took office five years ago it was just 5 percent. That jump, and the all the out-of-state money flowing into the Cowell for Treasurer campaign makes Ted Siedle believe there’s a pay-to-play scheme in North Carolina as well.
The State Employees Association hired him to investigate the state pension system.
"What my investigation found was that the treasurer’s political manipulation of the state pension fund has cost North Carolina $6.8 billion in fees and lost investment opportunities in her tenure," says Siedle.
And he thinks that number will go even higher.
"I estimate that figure will exceed $10 billion by the end of her current term."
Schorr Johnson, Treasurer Cowell’s spokesman, says that’s ridiculous.
"By policy and practice, investment decisions do not take politics into account in any way period. And that’s the way it works here. No political considerations are taken into account when it comes to investing."
Ted Siedle and the State Employees Association have submitted their report to the SEC’s Office of the Whistleblower. They’re waiting to hear if an investigation is launched.