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House | June 18, 2014 | Committee Room | Personnel

Full MP3 Audio File

State Treasurer strongly supports. It's consistent with her longstanding commitment to protect and grow the pension system in the interests of the employees and retirees over the long haul. And this bill was developed through the work of an independent commission that the treasurer brought together this past January. It was 11 individuals including 4 elected officials, Representatives Dollar and Glazier, Senators Hise and McKissick and then folks from the private sector who have some expertise in investments as well as government affairs as well as active members and retirees of the retirement systems, all the systems that we're investing on behalf of, the participants. There was a lot of discussion over a 4 month period of this commission over some potential changes to the governance structure and the way that the investment program is operated and governed. There was not consensus through the discussions with respect to some very large policy decisions, whether there should be a board or there should be, continue to be a single trustee fiduciary in the form of the treasurer, but there was very strong consensus on a number of issues which is what resulted in this bill. So the 11 members had a very strong consensus and endorsed these items that are in the bill. The flavor of what guided and what ended up in the bill and what drove the consensus was to take some of the best practices that the treasury has had in policy and codify that into law. So there's a number of things that I'll touch on very briefly in terms of the sections of the bill that represent current practice, and then there are some new and evolving best practices in terms of accountability and transparency that the commission felt strongly should be put into law, and then there's flexibility in terms of how the investments are actually operated on a day to day basis in terms of staff and other types of resourcing flexibility. So would you like me to step through the sections of the bill. [SPEAKER CHANGES] Representative Rausch, it's up to you. [SPEAKER CHANGES] Yeah, sure go right ahead. [SPEAKER CHANGES] So I'll be brief and section 1 of the bill enhances the state's existing audit practices by requiring annually published financial statements that would be audited by an external expert auditor chosen by the state auditor and engaged by the state auditor. So there's independence between the treasurer, the operations of the actual investments and then this audit function, and the commission felt strongly that that was a good way to create some assurance for all of the stakeholders, the retirees and the participants in the financial controls associated with the investment program. Section 2 requires that the current treasurer and future treasurers would at least every four years bring in another expert firm that would look at the way and the manner in which the investments are effected over time. And so this is not an audit, this is a performance review that would be done by an external firm and they would look at cost effectiveness of the program, asset allocation, all of the policies that govern how the investments occur for the retirement systems. Section 3a expands and modernizes the reporting that is going to touch on the fees, the performance, all of the information relative to the individual investment managers that we utilize for the overall investment program. So the treasurer has already published this information on an annual basis, and this would codify this requirement going forward so that there would be more information in future years for the investment management program. Section 3b clarifies public record laws pertaining to the investment management program, so this bill would actually shorten the period of time for which certain investment information would be exempt from public records. So currently if an investment manager deems certain information to be proprietary and confidential or trade secret that information can be protected under this exemption for infinity, it's always protected. What this bill does is it creates a sunset, and it says at a certain point in time, 10 years after that investment's done, all that information would be subject to public records.

00:00 open invisible to anyone who wants to look at the information, we think that's a very good balance between the competing interest of trying to get the best investment managers having access to very sensitive private company information and individual information and the public interest in looking at how the investment program is actually working and being able to look at the contracts and those kinds of things so this would be when we compare it to other states this would be a significant change and a best practice in terms of setting a definitive timeline when all of the information would be subject to public records and be available for inspection, section 4 is something that the commission felt very strongly about in terms of creating flexibility for the state treasure, in terms of resourcing being able to hire individuals and compensate them to be competitive with market standards we're competing everyday to get the best and the brightest staff and the best and brightest investment managers in individual investments and this would give us the flexibility to do that, section 5 deals with registration placement agents as lobbyists, this was a recommendation that came to us through a study that was done jointly with the department of justice as well as external law firm and it was a recommendation that we took on board and have offered it up in this legislation, the sections 6 and 7 are more technical in nature and deal with the requirement to have a investment policy statement which is an over arching policy with respect to the way that we do the investments so I will pause there. [SPEAKER CHANGES] Okay thank you and I think we'll just would you just mind staying around on the side in case we have a question that neither our representatives or our sponsors cannot answer and thank you for that [??] summary anything you wanna add representative [??]. [SPEAKER CHANGES] Thank you Mr chairman Kevin did a nice job in going through the provisions of the bill I would just like to add that this legislation if we pass this we'll bring us here in North Carolina into the forefront of transparency as far as pension reporting I don't think there's but maybe one other state that has as much transparency or will have as much transparency an that would be Florida and that puts us probably on equal ground with Florida so these are good measures and I hope that you will support it and we'll take questions. [SPEAKER CHANGES] Before we take questions from the committee I have had one member of the public that wanted to speak miss Watkins from [??] would you please put the mic there just give us tell us who you are and who you represent and you have the floor. [SPEAKER CHANGES] Thank you, my name is Artis Watkins I'm legislative affairs director for the state employees association of North Carolina I thank representative Collins and the rest of the members of this committee for a chance to speak with you briefly, we oppose house bill 1209 for a number of reasons we don't think the bill is entirely bad the audit section at the beginning of the bill an audit is something we've been calling for for quite sometime with the retirement system is overdue sorely needed but it's in the budget you already have a provision for an audit for the retirement system the rest of this bill though let's see if I can make this up in the allotted time, it's a large bill it does a lot of things but perhaps the most problematic for us is how it fails the people of this state with regard to secrecy I'm not even gonna use any other term it's secrecy when you make a public records request to say where is our money and when I say our money the numbers of the state employees association and all the other state employees and the retirees before them have regularly put 6% every month in this system that's where the money came from to be invested that and the employer contribution which is a benefit of their employment and they have worked for so that money being invested is the peoples' but when the people ask to see the details who's got it where are they putting it how much risk is associated with where we're putting it, this is the kind of thing we got back completely redacted even under the who part who's in this company and then best yet it said there're inherit risks that are large involved with this type of investment as outlined below welcome I think we've passed one of these out for most of you but if you hadn't seen it please come see me some time this is not acceptable this kind of behavior fails the employees and retirees it fails the tax payers and it fails you. 05:00

It is a body of you passes the session what you are doing is saying 10 years after this contract the public can know what they did. These contracts run for 12 to 15 years on average. Now that's according to the industry not according to me. So you would be binding the state keeping the people out for generating. For what purpose? I heard you said nobody do business with is and that's absolutely untrue. Pennsylvania appointment, teacher's retirement system rather accidentally oops put some of their records online. The sky didn't fall but you know what they found out waterfall agreements rolling interest all kind of interesting things. Multiple fees, last year you all took a step to put the 34% in the retirement system on the table available for alternative investments, higher risks high fees stuff. The rest of the country is taking some steps to sort of tighten the belt on these things. Calipers the largest retirement system in the country has cut their allocation by half down to 10%. Placement agents New York City retirement system and three use of those and we're still embracing them here. This bill is bad it's gonna enshrine bad practice it's not gonna be a balance it's gonna for generation keep the public out of what they have a right to know and I will close with this because I see the chair reminding me of my time I appreciate him ?? but I will close with this. We have a billon dollars in this retirement system that has a nexus with credit swiss that company felt guilty to tax evasion to stealing from the US government we have a billion with our 87 billion with them. I am not okay in North Carolina with saying we don't need to see what's going on. I am not okay with getting from blacked out pages from people who have said yes we stole from the government and I am asking thou not to be okay with that and vote no to that. I thank you again Mr. Chairman ?? [SPEAKER CHANGES] Thank you Mr. Chairman I am Jack ?? I represent North Carolina retire government employee association and it's 54000 members we are very much in support of this bill we think that the right balance between giving the treasure the flexibility to run the program with a lot amount of transparency and a lot of amount of control so we are in very much favor and we thank the study commission to bring this forward. I can also say that retired school personnel will also represent here today to support this bill thank you. ?? [SPEAKER CHANGES] Well just the first speaker mention two pension plans they are pulling back on alternative investments and I would just like to point out that the two pension plans mentioned or to which you read about in the news all the time is being underfunded in a lot of trouble I think they may be pulling back for another reason as fast as the issue raised as far as reporting of certain provisions, reporting certain items from outside managers I would just like to say I have been in the pension business probably for close to 40 years and if I had the trade ?? that the lot of the independent managers have I would be as rich as Warren Buffet but unfortunately these individuals have companies that do this work for very, very sophisticated programs they use to accomplish the goals to accomplish whether it be in currency or whether it be in future whatever the investment may be and those who are protected from other competitor. It's very competitive environment and I think it's important to understand just like in any other industry that you get pet protection you got all the protections that take place, managers are protected or they protect themselves through contracts that they have both with our pension plane and other pension plans and if we state violating the contract provisions that we have some of these managers we will lose some of our best and brightest managers and I think that is something important to me.

Speaker: Thank you Mr.Chair i have question in how the treasure's office does investments do they have individual people like ,do their trading their or that it's a complicated process because they are all number of different investments involved some of them are done in house and some of the more don't want call it simple some of he transactions that can be done in house are the ?? the more sophisticated programs more sophisticated types of investments are done outside because it's very hard to have the capability and the resources to do what the different managers do they all different they all have the different process and ?? that part is done outside, Speaker Changes: How different peoples are the managers of different thing since about the specific in the treasure ??, Speaker Changes: With respect to the specific question how many peoples are i involved will have the 28 positions ?? about the quarter of average of pension fund of the same size if you look at other state pension funds we use external managers extensively to make an umber of more complicated investments ?? and for state operating money about 40 million dollars fixed internally with the staffs with high quality government bonds and thinks like that, Speaker Changes: I'm the ten years to be able to be knowing what's going on there after the last investment they are how will you do recover anything from there if your tenure is after stopping something at ten year twelve year contract, Speaker Changes: To be very clear the ten years in exemption from public request but for staff for the state auditor for the state controller the auditor for be controlled for state auditor they have unfed ed access to all of the contracts in part of our issue is trying to get a balance to receive as a part of our diligence potential manager and then I'm going monitoring of existing managers wells and wells of private information highly sensitive so we are monitoring that and our consults are monitoring at the legislature is well as unfed access to any of these contract ans any of these arguments so this is really the process we are talking about public ??, Speaker Changes: Representative bell, Speaker Changes: Thank you Mr.Chairman i have lot of constituency to affected by ?? so my question is how important that we pass the bill during this short session or to be a probable to be waited for long session, Speaker Changes:I think that one of the first thing that strikes me is ?? and get the independent audits if their dates in the bill if we wait for along session pass the date for setting for some of the reports and requirements.That's probably the biggest reasons, Speaker Changes: I have the questions from the committee Representative ??, Speaker Changes: I'm having some problem with page 4 ?? that this provision little D and i don't remember that from the study committee that ?? need for that because i remember a long ago the law school take up security regulation course and the only thing i an really remember of it was all the rules governing this closure and we are talking about public investments here and buying security's regulation i think that almost everything with pension plan that treasure would be dealt with security,

Speaker: Which is highly regulated under federal law i just cannot get a grasp of what process you were using publicly securities on open exchanges and may be we do private placements but i don't know even a lot of regulations on what constitutes someone who can qualify for private statements even this whole industry is highly regulated and opposed open to the public i don't understand what we need to keep hidden of the ten years after the end of the contract ,I'm sure that we cant do anything that would go federal regulations of all these different investments vehicles so the i would lie some guidance system why the needed some examples of what would be non disc losable cannot be a public record, Speaker Changes: Let's let us information of soon ??, Speaker Changes: ?? you're absolutely correct a security is a regulated instrument well to talk about on whatever in fact all securities regulated were you get into the issue is trading platforms are not necessarily regulated like a security,trading platforms are proprietary you may have manger that have a very sophisticated trading platform,he doesn't want to share with the competition you know and so for that reason they keep a lot of mathematical help ?? all kind of things way beyond may kind of grass ?? these trading platform were very secret with the end street among mangers that don't want to know in competition ?? because that gives them a unfair advantage n trying to get investment returned because we are all competing against each other for investment return were you run ?? here is an end of a contract we may have a contract terminating with a investment manager bu just trading platform is gonna go on ?? it's wanted trade secrets ??, Speaker Changes: So I'll go with a different type of investment where we do have a very sensitive information in addition to what Representative ?? is discussed so there is number of investments outside of public securities ?? thee could private little states there could be private companies were we are getting information about actual operation using plans for these states and real states office buildings so ?? who they are leasing to we get information about individual companies in the business plans their employees success plans all of the information comes to ?? and we get tit before invest with the managers and see what drove their performance over time in this part of how we drive managers and determine time ?? have sufficient skills and ability to to deliver it over time for the retirement system,i think the either thing that is relevant is we are investing alongside with other investors and we do get information about who these investors are is that private foundation ?? and individuals and public pension plans and corporate plans and we know how much they are investing with the manager alongside and that information they prefer not to give into the public domain either so those things are some examples ?? follow up with the additional information, Speaker Changes: Then i would like to do something to change ?? later when the information's made public can someone might find information out for the first time it's not too late for them to act on it and so me sort of legal fashions, Speaker Changes: Well again he people who operate on legal fashions ?? we are talking about making it ?? public knowledge and again to bring down to,

Shoe leather, what Mr. Seeger is talking about, our pension plan invests in a lot of things; you could become, anybody in here, Representative Elmore could become a very successful, could come up with some kind of new restaurant, be a very successful restauranteur, who's got franchises sellin' like hotcakes all over the place, and our pension system could study that and find out if the business model is correct, and if all his numbers are good, and if his growth potential is whatever, we could invest in that and Representative Elmore certainly wouldn't want all of his business information, as you wouldn't if you were the business owners, made public. It can be as simple as something like that. Representative Michaux, I saw your hand. [SPEAKER CHANGES] Yeah, Mr. Chairman, I walked in here, I think, having an idea about this, but I wanna be, try to let the shoe have to hit the pavement. What does this bill do? Does this bill do anything to restrict the treasurers ability to make the investments needed in our fund? I've heard, I'm trying to find out why there are some folks opposed to it, why there are some folks for it. [SPEAKER CHANGES] I don't think, correct me if I'm wrong, staff, I don't think this bill does anything to restrict investment choices or do anything like that, that's not really, it seems to me that the main matter of contention so far has been the length of time for public disclosure for all contracts. [SPEAKER CHANGES] May I ask a further question? [SPEAKER CHANGES] You may. [SPEAKER CHANGES] Okay, I just, for some reason I had that idea somebody spoken to me about this bill. I guess it's, the problem, then, is the length of time that it takes for disclosure for the public. [SPEAKER CHANGES] That has been the point of contention so far in this meeting, yes sir. [SPEAKER CHANGES] Well, why can't we extend the statute of limitations on it, for any action that's necessary beyond that ten year period? [SPEAKER CHANGES] Well, again, I'm not sure we need to do that, because the only -- in other words, there is still full disclosure for our state auditor, for our controller, for us, as -- [SPEAKER CHANGES] I understand that, but I guess what a lot of folks are concerned about is that somebody from the public goes out there and finds something that the state auditor or somebody missed during that period of time, and you got a ten-year statute of limita-- you can make it from the point -- even, you don't have to have a statute, you could say at the time it's discovered, up to 15 years, at the time it's discovered, or something like that, to be put in there. [SPEAKER CHANGES] I think one of our Representatives may have an amendment that may take care of part of this issue. The other thing to keep in mind, committee, is that currently there is no public disclosure requirement whatsoever. If we don't pass this bill, the treasury can continue not to disclose anything about these contracts they don't want to, forever. So, we're not lengthening something to ten years, we're contracting it from infinity to ten years right now. But I believe we do have an amendment being forwarded to you from Representative Conrad, and I'll give that time to be passed out. And Representative Michaux, I think this will take care of the issue you were talking about. If indeed -- and I'm not a lawyer -- if indeed the statute of limitations is ten years, then this should bring it within that. Does everybody that this amendment before them by this point in time? Anybody not? Anybody not have it? It should have Representative Conrad written at the top, it's 1209 ASH 18 Version 1. If you notice, it's a pretty simple amendment, it changes that ten years that we were talking about to five, which, again, would now bring it below the ten years -- [SPEAKER CHANGES] That, I think, might make it a little bit more palatable. Ten years is a long time. And I hate to keep the public out, but here again, I agree that you've got all the others' failsafe methods in there, I don't have any problem once if you put this in there. [SPEAKER CHANGES] So now our five years does bring it below the ten-year statute of limitations you were talking about, okay? Representative Ross, you have any comment on the amendment? [SPEAKER CHANGES] The bill's sponsors would be agreeable. [SPEAKER CHANGES] Okay. Anybody else have any comment or question about the amendment? All right. All in favor say "Aye" [multiple responses] Aye. [SPEAKER CHANGES] All opposed, no. [silence] Thank you very much. Also think we have one more amendment that we need to bring forward. Representative Brawley has an amendment that he would like to bring

Bring forward. Has this one been distributed? You should already have this one, I believe this is [129ASH17] version 1. If doesn’t have a name on it, the name is Representative Brawley. [SPEAKER CHANGES] If I might explain the amendment? [SPEAKER CHANGES] Go right ahead, Representative Brawley. [SPEAKER CHANGES] What this amendment does, the way the bill is currently written, it allows the employees in the treasures department to participate in political activities. What my amendment does is say that they come under the same rules of political activities as the rest of the state employees and the treasures office is agreeable with the amendment. [SPEAKER CHANGES] Any response, Representative Ross? [SPEAKER CHANGES] No. The bill sponsors will be agreeable with this amendment. [SPEAKER CHANGES] Okay. Any question or comment about this amendment? If not, all in favor please say Aye. All opposed no. The amendment passes. We’re back to the bill. Is there any further question or comment on the bill itself? Let me make sure there’s no other questions or comments. Alright, Representative Brawly, you’re on. [SPEAKER CHANGES] Make a motion that we give the bill a favorable report, I’m sorry roll the amendments into a proposed committee substitute, give that a favorable report. Unfavorable to the original bill. [SPEAKER CHANGES] And refer to appropriations. [SPEAKER CHANGES] And refer to appropriations. [SPEAKER CHANGES] Thank you very much. You did a better job on that than I would have ??. All in favor, please say Aye. All opposed no. The Ayes have it, thank you very much Representative Ross. We do have one more bill for consideration today. That is House Bill 1036 and I believe Representative Howard is gonna grace us with the presentation of this. Representative Howard, the floor is yours. [SPEAKER CHANGES] Thank You, Mr. Chairman and members of the committee. [SPEAKER CHANGES] I’m sorry Representative Howard, this is a PCS as well, a motion please, Representative McNeill. Thank You. All in favor, say Aye. Aye and I’ll try to quit interrupting you, Representative Howard. [SPEAKER CHANGES] That’s quite alright. The reason that this bill has come before you today, in the last few months and may be even in the last year we look back and we see people who have been hired by state agencies and at certain times there are contracts for computer services and programs and most cases these are very lucrative and we spend a lot of money on these contracts. And the next thing we see that happens is the state employee who has been charged to help negotiate those contracts they leave state agency and they go to work for the vendor. And I’m not gonna be disappointed as to tell you exact cases and names but I think each of you have recall on these. So, basically what this bill does, It just prohibits the secretary of administration and other entities of the state from contracting for goods or services with the vendor that employs or contracts with the person who is a former state employee and uses that person in the administration of contract with state. And then there’s a definition for the former state employee. I’ll be glad to go in more depth, Mr. Chairman I’m honored to have one of the counsel persons being [Walker Regan] to give more depth to the bill. [SPEAKER CHANGES] Okay. Knew I’d seen you before the meeting and you were just hidden. Alright. We do have Mr. Regan here if we need his help. Do we have questions or comments from the committee at this time? Yes, sir. Representative Ford. [SPEAKER CHANGES] Just for a motion when appropriate. [SPEAKER CHANGES] Okay. I already have a request for that. Thank you, I’ll do that now. Mr. Regan, do you think we need to know about this bill that we don’t know yet? Sometimes I feel like we don’t know enough as a committee to ask the right question. [SPEAKER CHANGES] Don’t think I would just say as that the approach this PCS has taken is a little bit different than was originally proposed that the program evaluation committee, which focus more on trying to make a conduct by these former employees criminal which has some constitutional issues and when probably also be a little bit more difficult than force. This turns it around to the agency that you do have control over that being state agencies and prohibits from dealing with these contracts, it also puts the vendors on notice when they enter into these contracts that they’re not gonna be allowed to do this. And the real enforcement part of this statement is it says that the contract.

Will be void. So, if these vendors violate these prohibitions on using state employees for the administration of these contracts, they can lose their contracts, and, so, I think that’s the real teeth to this process. This is also a process that we've done, as the staff member already talked about, for other situations where people have gone out and hired people who have prior convictions for security fraud violations. Also, for companies that are trying to use tax havens in foreign countries to avoid having to pay North Carolina income taxes. So, we've done this in the past as conditions of contracts. [SPEAKER CHANGES] All right. Representative Michaux. [SPEAKER CHANGES] Yeah, my question is why is it a, why are you making it a felony and not the highest type of misdemeanor? [SPEAKER CHANGES] The felony that is in here is for the falsification of the documents presented to the state agency that they’re relying on. That’s the same penalty as the penalty of perjury. So, without saying these have to be under oath, the fact that we just said that if you falsify these certifications that you are not going to use these employees, then you have committed perjury. [SPEAKER CHANGES] All right. Follow up, Representative Michaux? [SPEAKER CHANGES] Yeah, you going around the definition of perjury to get the definition of perjury in here. That’s what my problem is. You ?? skating the issue on perjury. Why don’t you just go ahead and charge them with perjury and be done with it? [SPEAKER CHANGES] Well, one of the issues would be that the statement would had to have been made under oath in order for it to be perjury. This basically says it doesn't have to be under oath. That if they just submit that certification as part of the admissioner of the contract and knowing that it was false then that constitutes a felony. [SPEAKER CHAGNES] I, I, I, I- [SPEAKER CHANGES] Representative Michaux- [SPEAKER CHANGES] I guess I didn't make myself clear. Saying it under oath is one thing. Saying it outright is another. If you tell a lie outright, you lie. You tell a lie under oath, you perjured yourself, and it seems like to me that if that’s what you’re trying to get at you need to go ahead on and perjure yourself rather than lie about it. Because a lie, I mean it might be a little white lie or a little black lie or something, but- [SPEAKER CHANGES] Representative Michaux, if it makes you feel any better, it certainly does me, this deal has a referral to judiciary. Does that? Does that? [SPEAKER CHANGES] I hope it comes to be. [SPEAKER CHANGES] It helps me. Actually, it’s judiciary AA. So you might want to let your fellow legal friends know that. [SPEAKER CHANGES] Thank you, Mr. Chairman. [SPEAKER CHANGES] But seriously, Mr. Chairman, I mean if you are going- You’re putting another definition in my mind. You’re putting another definition on perjury which says that you can lie. We don’t know how far this is going to be extended. You can lie and still be charged with perjury even though perjury is defined as lying under oath. So that’s, to me, that’s a federal problem. It’s stretching it a little bit. [SPEAKER CHANGES] I understand your concern. I really do, and I’m just not sure how much legal expertise we have in this room, and hopefully, if that’s something that needs to be dealt with, I hope judiciary AA will certainly pick up on that. I’d feel a lot less, I’d feel a lot less comfortable passing this on if it didn’t have a referral to judiciary committee, frankly, with that issue. But anyway, because I’m not a lawyer I just don’t know. But we do have that referral. So, anyway, that’s why I feel like we’re okay not necessarily dealing with that in this committee. [SPEAKER CHANGES] That’s why I’m trying to raise this question in my mind, too, whether I’m a lawyer or not. [SPEAKER CHANGES] Other question or comments from the committee? All right, if not, Representative Waddell. [SPEAKER CHANGES] Thank you, Mr. Chairman. I move that we give House Bill 1036 a favorable report and send a referral to- [SPEAKER CHANGES] Yeah, this- Excuse me, I’m sorry. The PCS. [SPEAKER CHANGES] PCS, Excuse me. [SPEAKER CHANGES] Correct. [SPEAKER CHANGES] Give the PCS for House Bill 1036 favorable, unfavorable to their original and referral to judiciary AA. [SPEAKER CHANGES] Correct. Thank you very much. You've heard the motion. All in favor say aye. [SPEAKER CHANGES] Aye. [SPEAKER CHANGES] All opposed no. The ayes have it. Thank you, Representative Howard. And since I do believe this is going to be our last meeting probably, it may not be, but I've been kind of forewarned that it might be. So, in case it is, I would like to that our clerk, Wes Householder. I would like to thank our staff, Teresa Matula. Craig, Brad ?? and David Vanderwhite, although his names not in front of him, for making these meeting possible each week, and I’d like to thank each one of you for being faithful to come, and if you have another meeting you can go to it now. This meeting is adjourned.