North Carolina Treasurer Janet Cowell sent state lawmakers a list of four recommendations to improve transparency of the state pension system.

BRADENTON, Fla. - As a union in North Carolina presses for a Securities and Exchange Commission inquiry into investment practices, State Treasurer Janet Cowell says she champions legislative reforms that would increase oversight of the state's public pension funds.

Cowell, sole trustee for investing contributions of more than 900,000 teachers, state, and local employees, asked lawmakers this week to approve four changes to increase "transparency" for the North Carolina Retirement Systems.

Governance structure changes sought by the State Employees Association of North Carolina won't be among those Cowell asks the North Carolina General Assembly to pass. The Tar Heel State is only one of four in the nation that delegates pension fund investing to the state treasurer.

The legislature's annual session started Wednesday. There is no deadline to adjourn, but the session is expected to be short and focused on repairing a $455 million budget hole in a major election year. Leadership will determine the issues and bills to be considered, including those proposed by Cowell.

SEANC, Local 2008 of the Service Employees International Union, filed a whistleblower complaint with the SEC on April 22 alleging that $30 billion is "unaccounted for" in secret accounts of the Teachers' and State Employees' Retirement System.

SEANC also claimed that a former SEC attorney hired to do a forensic investigation uncovered "hundreds of millions of dollars in fees paid to money managers" not disclosed to the public or state lawmakers "and what appear to be several violations of state and federal securities law by the Treasurer's office."

The status of the SEC's inquiry is unknown, SEANC spokeswoman Toni Davis told The Bond Buyer Tuesday.

Under the whistleblower program established as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, the SEC cannot confirm or deny any investigations, according to the commission's website.

"The [whistleblower] report is simply wrong," said Schorr Johnson, spokesman for Cowell's office. "Every dollar of the pension fund is documented in the annual report, which is publicly available on the treasurer's website."

Johnson also said that a comprehensive response is being compiled, and will be released soon.

SEANC insisted that its investigative report "shows the dangers of the sole fiduciary governance model for the state pension plan and the need for reform."

The four legislative changes Cowell advocates for the pension system were unanimous recommendations of the Investment Fiduciary Governance Commission that she appointed in January to evaluate the governance of the state's pension funds.

The commission recommended that the pension funds be audited by a commercial independent third-party firm. Pension system financials are now part of the state's comprehensive annual financial report done by the state controller's auditors.

Cowell recommends that statutes require an independent performance review of the state's investment practices every four years. The treasurer has done this as a matter of policy since 2009, though future office holders are not required to follow the practice.

She said the reporting system for external investments should be expanded and modernized, and public records laws about the investment program should be clarified. Schorr said current law is "open to interpretation" and Cowell is not proposing any limitations.

The final recommendation is that the treasurer's fiduciary duties over the trust funds should include greater "resource flexibility," including the ability to determine the size of the investment staff. A strong executive framework to maintain the state's well-funded and managed pension fund is a crucial element in retaining North Carolina's triple-A bond rating, the Governance Commission's report said.

The treasurer's recommendations to the Legislature are a "methodical approach," commission chairman Michael Kennedy told the News Observer. Kennedy is an Atlanta-based senior partner at recruiting firm Korn/Ferry International. He also chairs the Federal Retirement Thrift Investment Board and is a Georgia Employees Retirement System Pension Fund trustee.

The commission also recommended in a 6-to-5 vote that pension fund governance shift to a "board of trustees model" from current sole trustee system. Its 62-page report spends considerable time discussing the structure of such a board overseeing the system.

In a letter about potential governance changes to House Speaker Thom Tillis and Senate President Pro Tempore Phil Berger, Cowell said the Governance Commission was "split" on moving to a board structure. She also said "based on initial feedback from legislators, legislation concerning a potential board will likely need to wait" until the longer session in 2015.

"SEANC finds it ironic that the treasurer is trying to control the debate about her controls of the North Carolina Retirement System," said union spokeswoman Davis. "She hand-picked that investment advisory commission and now she's disregarding the premier finding of it, which is to move away from a sole fiduciary system."

The TSERS is one of four pension funds overseen by the treasurer. The combined North Carolina Retirement Systems describes itself as the eleventh largest public pension fund in the country.

The $86 billion pension fund is 94% funded, which ranks third nationally, according to Morningstar.

North Carolina's system is also generally regarded as being well run and among the best funded, said Greg Mennis, director of the pension project for the Pew Charitable Trust.

The state is "somewhat unique" in using a sole trustee to govern the pension system, though there is no one-size-fits-all governing model, he said.

"What's ultimately important is that the fund makes the right investment decisions," said Mennis, including good investment practices.

The vast majority of public pension funds produce audits performed by outside, independent firms.

"The standard practice is that the retirement system has an outside auditor review the financial statements and those statements include detailed information on the investments," Mennis said.

The $153.3 billion Florida Retirement System, for example, has independent auditors prepare the CAFR annually. The fiscal 2013 audit was done by Ernst & Young LLP. Florida's system - the fourth-largest public pension in the nation - conducts valuations of its plans annually, and was 85.9% funded as of July 1, 2013, according to its website.

As for releasing details about investments and fees paid to managers and funds, Mennis said that some states consider certain information proprietary such as that related to hedge and private equity funds.

"That is the exception rather than the rule," he said. "And most funds provide some level of detail on investment fees."

The California Public Employees' Retirement System releases information on about 200 external managers and fees, while the Massachusetts Public Employee Retirement Systems releases details on total expenses by asset class and the total cost of fees, Mennis said.

In the 148-page SEANC-commissioned report called "North Carolina Pension's Secretive Alternative Investment Gamble: A Sole Fiduciary's Failed 'Experiment,'" investigator Ted Siedle accuses Cowell of "political manipulation of the state pension fund" and said it has cost North Carolina $6.8 billion in fees and lost investment opportunities.

"In this preliminary investigation, Benchmark identified widespread potential violations of law within the TSERS investment portfolio," wrote Siedle, founder of the forensic pension investigative firm Benchmark Financial Services Inc. "It is our view that these concerns should be investigated by the SEC, Internal Revenue Service and law enforcement."

SEANC, which represents 55,000 state employees and retirees, filed its SEC whistleblower complaint about $30 billion in "unaccounted for" money in the pension system largely based on the initial report of Siedle, a former SEC attorney, and public records obtained as part of its investigation.

The whistleblower program allows the SEC to pay an award, under certain circumstances, to eligible informers that provide information about federal securities law violations leading to a successful enforcement action. Financial awards are offered if there are more than $1 million in sanctions, according to the SEC's Whistleblower Office.

The union is aware of the potential to collect up to 30% of recoveries by the SEC, said Davis. She denied that had anything to do with filing the complaint, and cited the 6% that union members contribute from their paychecks monthly to their pensions.

"We're really looking to safeguard our members' money," she said. "They deserve to know exactly how much they are paying in fees. We want to put the public back into the pension system, which is right now cloaked in secrecy."

Schorr Johnson said the pension fund's external fees are listed on the treasurer's website, and legislative changes being sought by Cowell will "increase transparency by proposing a sunset on confidential and proprietary information."

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