Sunday, February 2, 2014

Further thoughts on politics in the state pension fund.

Today, the N&O ran a letter from Ron Elmer that sharply criticizes Andy Silton's recent column about politics in the state pension fund.   I wrote about that here.

The N&O printed Elmer's letter and Silton's response.   Because neither are on the N&O website, I've linked to Silton's blog where he posted them.

Elmer's letter makes two simple points.
1. The pension fund is underfunded.   The amount it is underfunded is subject to debate, but it ranges from a little to a lot.  The reason for the variation is simply because in order to estimate how well funded a pension plan is, you must make assumptions.   The disagreements are all due to the assumptions.

That said, most people who understand the issue, and that includes Mr. Silton and Ms. Cowell, would probably concede that there is an underfunding problem.   This problem faces all states, thankfully, NC is in better shape than most.

2. The pension fund is underperforming.  Here is where it gets tricky.  Elmer argues that this is in part because of allocations to alternatives.  Silton, on the other hand says that the underperformance isn't actually underperformance per se - but a result of a more conservative strategy overall.  More conservative portfolios will have lower expected returns than more risky portfolios.

Here's my take:
1. Yes, the fund is underfunded.  This should be addressed immediately, but dealing with item 2, will help.

2. Assuming that Silton is correct, and that this is an asset allocation issue, then I would argue that the asset allocation is wrong.   The pension fund is too conservative.  But this is overly simplistic.  A better allocation would be one that has limited exposure to alternatives and instead focuses on more traditional investments while minimizing fees.   When the fees on the fund are running close to $400 million per year, reducing fees will have a big impact on helping that underperformance.

I commend both Ron Elmer and Andy Silton for engaging in an open, public discussion of this very important issue, although Silton's comment that Elmer looks like he's running for state treasurer again was a bit of a cheap shot.   Resorting to an ad hominem attack is a common strategy when you don't have facts to support your argument.