PW special report: NC treasurer’s love for cash in the pension fund hobbled returns during the stock market boom  

By: - August 5, 2022 6:00 am

State Treasurer Dale Folwell addresses members of the NC Council of State on August 2, 2022. (Photo: Screen grab from video stream)

Key takeaways:
* The pension fund holds much more of its money in cash than other comparable state pension funds and more than its allocation policy suggests. State Treasurer Dale Folwell routinely overrides the policy to prevent “rebalancing.”
* Folwell emphasizes steeling the pension plan against stock market downturns. That’s led to the plan missing out on the big stock market gains of the last few years. Returns for the state pension fund are far lower than comparable public pension funds.
* Folwell repeatedly liquidated stock to shift money to bonds and cash.
*He has lowered the pension fund’s assumed rate of return in stages, which means the state and local governments have had to increase their contributions.
State Treasurer Dale Folwell addresses members of the NC Council of State on August 2, 2022. (Photo: Screen grab from video stream)

State Treasurer Dale Folwell refers to himself as the “Keeper of the Public Purse.” And since he was elected to the job that includes managing pension funds for state and local government employees, Folwell has been stuffing that purse with cash. 

Public pension investments are a complex mix of domestic and international stocks, private equity, real estate, bonds and commodities. Under Folwell’s direction, the pension fund holds more of its money in cash than the department’s own guidelines direct, and has considerably higher cash holdings than similar public pension funds. The department’s own reports show cash was a drag on returns when the stock market was booming.  

North Carolina’s pension fund is among the 10 largest public pensions in the country. None of the other nine holds close to as great a proportion of their assets in cash as North Carolina does, according to their most recent financial reports.  

In terms of its value compared to how much it owes current retirees and the value of accrued benefits for active workers, North Carolina’s fund is doing well. The state pension fund was valued at $119 billion as of March 31. It is healthy but it could be healthier.  

North Carolina pension fund performance is near or at the bottom, compared to other states’ funds, according to public presentations by the department’s investment managers.  


This compares state pension returns (NCRS) with other public funds worth more than $20 billion over time. Treasurer Dale Folwell took office in January 2017. The North Carolina pension fund ranks at the bottom for returns and risk. Source: NC Treasurer’s Office 

Even when the pension fund recorded its best performance in years over 12 months in 2020 and 2021 thanks to a soaring stock market, the 21% return fell short of key benchmarks.

Criticized at public meetings for his unorthodox approach, Folwell says that his strategy guards against major stock market shocks, mentioning specifically the market drop that followed the 9/11 terrorist attacks and the “great financial crisis” of the late 2000s. Most people remember the latter event as the Great Recession. A bursting housing bubble fueled by subprime mortgage lending led to the collapse of the investment company Bear Sterns, bankruptcy for the investment bank Lehman Brothers, and a $700 billion government bailout program for banks and car companies.  

Folwell says he needs to make sure there’s always enough in the fund to send retirees their benefits. “We’re in the check-delivery business” is one of his go-to lines.  

Pension fund managers must also take the long view. Many people who start government jobs today, tomorrow, and in the foreseeable future will be entitled to pension benefits in a few decades if they keep their jobs long enough to qualify. That’s why pension fund investment strategies are important. The money must keep growing. 

Folwell often mentions that workers retiring earlier and living longer are among the factors putting pressure on the plan. These conditions are not unique to North Carolina.  

It’s also significant, Folwell said, that retirees and people who no longer work for the government but will one day draw money from the pension plan outnumber employees paying into the system.

The state has about a half dozen separate pension plans for different categories of employees. The state treasurer’s office manages them together. The pension plans for teachers and state employees and for local government employees have the most members.  

More than 440,500 state and local employees are contributing to the pension system, according to the most recent information available. About 311,300 former state and local government employees or their beneficiaries receive money from the pension fund, and about 270,400 people no longer working for state or local government are entitled to benefits but are not yet receiving them.  

Conservative investment strategy, lagging returns

Holding significant amounts of cash and bonds in portfolios typically serves as ballast when stock markets fall.  

Cash and bonds did not, however, provide the expected protection in the latest stock market downturn. Pension fund returns slipped in the first three months of this year relative to other large public pensions. That’s because the value of the pension’s fixed income investments dropped along with stock prices.

The state pension fund’s one-year return was in the 94th percentile compared to comparable public funds as of March 31, meaning 93% of pension plans had better returns, according to information from Folwell’s office. In comparison, the plan’s one-year return was in the 88th percentile at the end of December.

North Carolina’s returns would probably rank better in comparison to other states if fees paid to investment managers were included in the calculations. But not all states report those investment costs, making comparisons impossible. 

Folwell noted that though the pension fund lost money in the first three months of this year, it still outperformed one of its benchmarks.  

“I don’t know how we could be more diversified,” he said in an interview this week.  

However, a persistent critic of Folwell’s strategy, Andrew Silton, said Folwell is mismanaging the pension fund by sacrificing gains that would help sustain it for future generations of public employees.  

Andrew Silton (Photo: LinkedIn)

Silton was chief investment officer in the state treasurer’s office in the early 2000s. He has written extensively about Folwell’s investment decisions. 

The fund doesn’t need exorbitant cash holdings to keep pension checks going out on time, Silton said.  

“The pension isn’t investing for a 65- or 70-year-old,” Silton said in an interview. The pension is investing for people who will count on the money years from now, he said. “If you’re investing for the long term, cash is a bad idea.” 

Under allocation guidelines – a plan for how investments should be divided among stocks, private equity, bonds and other assets – the fund had a target of 1% cash, with a range of 0% to 10% for most of the time Folwell has been in office.  

In March 2017, a few months into Folwell’s tenure, cash was about 2.4% of the pension portfolio. 

By the middle of May 2022, however, about 13% of North Carolina’s pension fund was held in cash. That’s a much greater percentage than other public pensions hold. According to a national database reporting assets, distributions, and investments for about 130 public pension plans, those plans had in aggregate 2.1% of their assets in cash in 2021.  


This shows pension fund investments compared to policy ranges set by the treasurer’s office. More than 13% of pension funds are held in cash, far above the 1% target. Nearly 40% of pension funds are invested in bonds or held in cash. A new policy adopted this year has updated allocation targets. The target for pension cash has gone from 1% to 5%, and the target for stocks has dropped from 42% to 38%. Source: NC Treasurer’s Office 

Silton estimated that the opportunity cost for Folwell’s strategy, or actual earnings versus what investments would have earned if Folwell had followed the asset allocation guidelines, was about $13 billion in early December 2021. With the stock market declines this year, the opportunity cost is now about $7 billion, he said in an email.  

Folwell said in an interview with Policy Watch earlier this year that he didn’t take office in 2017 intending to increase cash holdings in the pension fund. In his election campaign, he emphasized moving away from outside investment managers to cut fees.   

Once elected, he regularly publicized savings from fee reductions. The move to a greater reliance on cash in the pension portfolio was bubbling in the background.

To deviate from office asset allocation policy, the treasurer must sign a memo that freezes rebalancing.  

Folwell started selling stocks to keep the cash or buy investment-grade bonds soon after he took office. Stock investments were 4% “underweight,” or below the guideline minimums, according to a June 2017 memo Policy Watch obtained through a public records request. Rebalancing was frozen until Oct. 5 of that year to give Folwell more time to review office policies for managing investments, according to the memo.  

Folwell continued to sign a series of these memos every year suspending rebalancing as he favored cash over stocks. 

According to a July 2019 memo, Folwell told the investment team to reallocate about $7.5 billion from the public stock portfolio and move it to the cash portfolio.  

Folwell wanted to sell stocks “due to continued concerns with the economic environment and with equity valuations,” as well as a desire for “additional downside protections,” according to the memo.  

The stock portfolio, which was 2% below target would sink to 9.4% below target, and estimated long term investment returns would drop by about 0.6%, the memo said.   

Folwell was worried about the downside. However, the stock market was rising at the time and would move even higher by the end of that year. 

Stocks fell sharply in the early months of the pandemic in 2020, but then rebounded to rocket to record levels by the end of that year in a boom that continued in 2021.  

Kim Mackey, a Wake County teacher who keeps track of pension investments, is critical of Folwell’s decision to hold so much in cash.  

“You don’t time a market with a giant fund like that,” she said in an interview.   

Ardis Watkins, executive director of the State Employees Association of North Carolina, said she was pleased with Folwell’s investment strategy. The fund’s value did not drop as much in the 2020 pandemic stock market crash compared to other states’ pension funds, she said in an interview.

A Dec. 23, 2020, memo describes other stock liquidations. Folwell told staff to liquidate $873 million in stocks in October 2019. Five months later, in March 2020, he approved a staff recommendation to buy $1.5 billion in stocks. Then came a quick reversal. About a month later, the office took that money back out of stocks and put in back into bonds and cash.

At the end of 2020, Folwell decided to take about $3 billion out of stocks and stash the money in bonds and cash.

The public purse 

“Keeper of the Public Purse,” is a book by Harlan Boyles, a conservative Democrat who was state treasurer for 24 years. Published in 1994, it is a mix of political philosophy, short biographies of the state’s treasurers, and ideas for keeping taxes low. His last term in office ended in January 2001, and he died two years later. 

Folwell, who was appointed to run the Division of Employment Security under former Gov. Pat McCrory’s administration, will drop references to Boyles into conversations and talks about how Boyles managed money. Folwell used “Keeper of the Public Purse” as a prop when he posed for a photograph soon after he took office in 2017. A few weeks ago, Folwell started handing out his own award called “Order of the Keeper of the Public Purse.” 

In the interview earlier this year, Folwell said that the pension fund had more than enough money to pay accrued benefits when Boyles was running it.  

Folwell said three factors pushed him to greater cash investments. The plan had about $11 billion in “uncalled capital,” or commitments to invest with money managers, when he took office in 2017. 

(Data from his office show that the value of those commitments dropped substantially the year Folwell took over and has stayed low.) 

Additionally, the office was still in the early stages of learning how to manage money internally, Folwell said. “We had no capabilities to manage money in equities inside this building,” he said.  

And, he wanted to make sure that state legislators and local government officials are happy with pension management. Folwell calls them “the funders” and says these officials were shaken by the steep declines in the pension’s value after 9/11 and in the “great financial crisis.” 

“What I did not realize is the anxiety that the funders of this plan were feeling about the ability to keep it funded, given the fact that Treasurer (Richard) Moore suffered from 9/11, which he had nothing to do with, and Treasurer (Janet) Cowell suffered under the great financial crisis, which she had nothing to do with, except that the combined losses were something like $39 billion.” 

Folwell said he fights pressures to “do away with the plan.” 

Folwell served four terms in the state House and was a member of the chamber’s Pensions and Retirement Committee during the Great Recession.  

“I was observing a situation this pension plan had never faced,” he said this week.  

In 2009, Folwell was one of the main sponsors of a bill that would have set up a commission to study several aspects of state employee retirement and health benefits, including:

  • whether the changing state employee demographics required amendments to the pension and health plans;
  • if there was a need to establish a normal retirement age when benefits would begin;
  • whether the retirement plan should have a defined contribution component; and
  • if the current benefits plan served the need to recruit and retain the best teachers and state employees.   

That bill died in committee, but other studies launched around that time. Cowell, who was treasurer at the time, created a Future of Retirement Study Commission, which met in 2009 and 2010. The legislature’s Program Evaluation Division conducted a study comparing North Carolina retirement benefits to other state’s benefits published in 2011.  

At least a handful of legislators over the last few decades have suggested that the state phase out its pension plan. The proposal with the highest profile came from then-Sen. Andy Wells who, with a few others, filed a bill in 2017 that would have cut off membership in the pension plan for newly hired employees. That bill never got a hearing.  

A 2001 House bill — another that failed to gain traction — would have set up a committee to study whether a defined contribution plan should replace the pension plan or be offered as a pension alternative. A 401(k) is an example of a defined contribution plan, one where employees decide how much of their money to invest and where to invest it. Employers may or may not match employee contributions.  

The state started a voluntary 403(b) plan in 2014 that government workers could establish as an addition to the pension, but Folwell’s office announced this year it was being discontinued because not enough people used it. Two optional retirement plans, including a 401(k), remain. They are offered as supplements to the state pension.  

Mickey Michaux, a former Democratic state legislator from Durham, was a chairman of the House budget committee at the time of the Great Recession. Michaux said in an interview that he could not recall anyone talking about phasing out the pension plan back then.  

Former state Rep. Chuck McGrady, a Henderson County Republican, was a House budget writer for three terms starting in 2015 before he retired from the legislature. Lawmakers kicked around the idea of creating alternatives to the state pension, he said, but the talk didn’t go very far.  

“It was discussed, looking for something other than your traditional sets of pensions,” he said. “It takes a lot to get there. You can only transition over a period of time. I wouldn’t say it ever got totally fleshed out.” 

Reliance on taxpayers 

State Treasurer Dale Folwell (at podium) addresses a legislative committee in June.

Folwell said his investment strategy is sound. A law passed during his predecessor’s term has contributed to the pension fund’s stability. The law required government contributions to the fund to match actuarilly determined increases, on the recommendation of a board of trustees. A separate trustee board for the local government pension plan agreed to a similar arrangement. Those policies were revisited to lock in government contributions to the pension through 2027. 

“I don’t have a crystal ball, but I’m not going to gamble with the hard-earned assets,” Folwell said at an investment advisory committee last year after two retired teachers questioned his investment choices.  

In an interview this week, Folwell said other states are gambling with their assets, trying to “hit grand slams” because their pensions are not as well funded as North Carolina’s.  

The government contribution policy was key to a positive 2019 assessment by the Pew Charitable Trusts. Analysts concluded, “North Carolina shows especially well in stress test analysis due to strong funding policy and funding levels.” 

State employees contribute 6% of their salary to the pension fund, while the state and local governments contribute substantially higher percentages of employee salaries.  

Folwell began reducing the pension’s assumed rate of return in stages beginning in 2017 from 7.25% to the current 6.5%. The assumed rate of return is an estimate of how much the fund will earn over a period of years. With that rate lower, state and local governments must contribute more money to stabilize or increase funding levels. Folwell’s rationale for the reduction is that the fund had not reached 7.25% returns historically – looking at annualized returns over 10 and 20 years – and was unlikely to reach that mark in the future.  

Folwell talks about reducing the rate as an act of courage. Not only must governments chip in more money, but reducing the rate of return lowers the pension’s “fundedness,” one of its measures of health.  

“It takes courage to do that, not cowardice,” he said. “It takes courage.” 

Pension system contributions for teachers and state employees are in the state budget. The state paid 16.38% of covered salaries into the system last year and is paying 17.38% of salaries this year. 

Folwell acknowledges that the increases in local government pension contributions likely fall hardest on rural residents, low-income residents, and people on fixed incomes.  

A major chunk of local government revenue comes from property taxes, so increases to pension contributions could eventually show up in higher homeowner tax bills as well.  

Local governments have increased their payments into the pension fund in steps, from 7.75% of salaries in 2018 to 12.1% of salaries this year.  

Scott Mooneyham, political communications director for the NC League of Municipalities, said cities and towns value a stable pension plan, but they’re feeling the effects of increased pension fund contributions in their budgets.  

“We are concerned about the increasing contribution rate,” he said.  

“No city managers or elected officials like the fact that they have to put more money into the pension system, but there is a desire to keep the pension system sound so they can continue to use it to attract (workers) to municipal employment and keep them there,” he said.  

The pension is not as significant a recruitment tool as it was 10 or 20 years ago, Mooneyham said, but “it’s really still a really good means of keeping people in the jobs and creating stability once they are in the jobs. Once they’re there, they want to get vested in the system.” 

Pension costs for municipal governments grew by $80 million a year over three years to reach $240 million. “Local taxpayers pay that,” Mooneyham said. 

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Lynn Bonner
Lynn Bonner

Investigative Reporter Lynn Bonner covers the state legislature and politics, as well as elections, the state budget, public and mental health, safety net programs and issues of racial equality.