State House approves riskier investments

The state House has approved legislation allowing the newly elected state treasurer, Janet Cowell, to diversify state retirement system investments. Less than a year after the collapse of the international financial market, North Carolina's pension funds might be invested in now-infamous mortgage-backed securities, which helped get us all into this mess. Cowell says she needs this option to maintain the fund's 7.25 percent growth rate needed for keeping the retirement system solvent. Because of declining interest rates related to the current recession, the fund is now earning around 6.9 percent. If that rate continues for five years, the retirement fund will have a $1.3 billion deficit, which will have to be made up, presumably, by taxpayers.

Thursday's House vote, which must be affirmed by the Senate, would allow Cowell to invest another 10 percent of the state's $56 billion retirement fund in riskier investments, such as timberland and mortgage-backed securities. Current law limits such risky investments to just 5 percent of the fund. She says the retirement fund is at stake, and it certainly is.

Cowell's request, and the House's approval, it seems to me, takes a short-sighted look at long-term state investments. The state's investments have done extremely well over the years, exceeding most other state retirement funds and certainly exceeding most people's IRAs and 401(k)s. But the fund lost money in 2008 as stock prices plummeted. Rather than "riding it out," as most investment advisers tell clients to do when the stock market falls, Cowell wants to leap into riskier investments that, potentially, could fall faster than stocks. They also could rise faster, but that's the nature of riskier investments.

I'm no investment expert (as my pitiful 401(k) will tell you), but it seems to me that it would be wise for the state to "ride it out" a little longer before panicking and grabbing for riskier returns. While a 7.2 percent average return is needed to sustain the retirement fund, that's an average return, not an annual mandate. Recent predictions say the recession might end by the end of this year. If so, everyone's investments will look better; if not, there still will be time to get into riskier investments.