December 12, 2002
The Honorable Ralph Campbell, Jr. State Auditor Office of the State Auditor 20610 Mail Service Center Raleigh, NC 27699-0601
Re: Advisory Opinion: Applicability of Certain Provisions of the North Carolina General Statutes and Constitution to the Department of the State Treasurer; Articles 1,2 and 3C of Chapter 143; N.C.G.S. § 147-68; N.C.G.S. § 147-69.2; N.C.G.S. § 147-69.3; Article V, Section 7 of the North Carolina Constitution
Dear Mr. Campbell:
In the course of performing your annual audit of the Department of the State Treasurer, questions have arisen regarding the legal authority for certain expenditures and practices of the State Treasurer in connection with the administration of the State’s investment programs. You have asked for our advice with respect to these legal questions.
1. To what extent are the State Treasurer, the State Auditor, and the Administrative Officer of the Courts subject to the Executive Budget Act?
Unless another statute provides otherwise, N.C.G.S. § 143-28 sets forth the applicability of the Executive Budget Act, Article 1 of Chapter 143 of the North Carolina General Statutes. Prior to 1985, N.C.G.S. § 143-28 contained the following language:
Provided, that notwithstanding the general language in this Article the expenditure of funds by or under the supervision and control of the State Auditor, State Treasurer, and the Administrative Officer of the Courts for their respective departments shall not, except as provided in G.S. 143-25, be subject to the powers of the Director of the Budget or the Office of State Budget and Management, it being intended that the State Auditor and the State Treasurer shall be independent of any fiscal control exercised by the Director of the Budget, and shall be subject only to such control as may be exercised by the Advisory Budget Commission.
This language and the same language in N.C.G.S. § 143.2, as well as the authority for the State Auditor, State Treasurer and Administrative Officer of the Courts to issue all warrants for the operation of their respective departments, was repealed by S.L.1985-290, Sections 1, 2 and 6. The General Assembly therefore clearly intended through this repeal to restore full application of the Executive Budget Act to the State Auditor and the Administrative Officer of the Courts.
Notwithstanding the repeal of these three provisions, however, the General Assembly did not repeal the exemption for the State Treasurer in N.C.G.S. § 147-68(e), which continues to provide:
The State Treasurer shall except as provided in G.S. 143-25 be independent of any fiscal control exercised by the Director of the Budget or the Department of Administration and shall be responsible to the Advisory Budget Commission, the General Assembly and the people of North Carolina for the efficient and faithful exercise of the responsibilities of his Office.
We have been unable to determine if the legislature intended to repeal this provision in conjunction with the three provisions in the Executive Budget Act. Such an intention, however, cannot be assumed. “The legislature is presumed to act with full knowledge of prior and existing law. Polaroid Corp. v. Offerman, 349 N.C. 290, 303, 507 S.E.2d 284, 294 (1998), cert. denied, 256
U.S. 1098, 143 L. Ed. 2d 671, 119 S. Ct. 1576 (1999).” Wells v. Consolidated Jud’l Ret. Sys. of N.C., 354 N.C. 313, 319, 553 S.E.2d 877, 887, reh. denied, 554 N.C. 580, 559 S.E.2d 553 (2001). “Repeals by implication are not favored, D&W, Inc. 268 N.C. 557, 151 S.E.2d 241, supp. op. 268
N.C. 720, 152 S.E.2d 199 (1966), and statutes dealing with the same subject matter will be reconciled and effect given to all unless some are irreconcilable with others. Person v. Garrett, Comr. of Motor Vehicles, 280 N.C. 163, 184 S.E.2d 873 (1971).” Comr. of Insurance v. Automobile Rate Office, 295 N.C. 60, 67, 241 S.E.2d 324, 329 (1978).
Applying the foregoing rules of statutory construction, it cannot be inferred that the repeal of the referenced provisions of the Executive Budget Act was intended by the General Assembly to also repeal, by implication, N.C.G.S. § 147-68(e). As such, it is our opinion that the State Treasurer is authorized to carry out his responsibilities independent of any fiscal control exercised by the Director of the Budget or the Department of Administration, except as set forth in N.C.G.S. § 143
We observe, however, that numerous provisions of the Executive Budget Act do not function as fiscal controls by the Director of the Budget or Department of Administration. For example,
N.C.G.S. § 143-16.3 restricts expenditures which have been considered, but not approved, by the General Assembly. N.C.G.S. § 143-3.2 references the issuance of warrants for the payment of money by the State Treasurer. N.C.G.S. § 143-23 regulates the transfer of agency appropriations between budget line items. The extent to which the State Treasurer is subject to the Executive Budget Act is therefore directly dependent upon whether an individual provision operates as a fiscal control by the Director of the Budget or the Department of Administration. Executive Budget Act provisions which do not function as such fiscal controls apply to the State Treasurer.
2. Is the State Treasurer subject to N.C.G.S. § 143-16.3 and would this
law preclude him from retaining a Senior Investment Advisor based
on the facts provided?
In your request you provided the following facts:
By memorandum dated August 7, 2002, the State Treasurer acknowledged to the legislative leadership his unsuccessful attempts to convince the legislature of the need to restructure significantly the State Investment Officer position. In this same memorandum, he advised the leadership that he alternatively abolished the State Investment Officer position and executed a contract for a Senior Investment Advisor. Representatives of the Fiscal Research Division of the North Carolina General Assembly have stated to us their belief that the proposed restructuring was considered and denied by the General Assembly in a manner contemplated by G.S. 143-16.3. If their assertion is true, does this statute bar the contract for the Senior Investment Advisor?
We have not conducted an exhaustive investigation of the facts and will defer to those presented.
N.C.G.S. § 143-16.3 provides:
Notwithstanding any other provision of law, no funds from any source, except for gifts, grants, funds allocated from the Repair and Renovations Account in accordance with G.S. 143-15.3A, and funds allocated from the Contingency and Emergency Fund in accordance with G.S. 143-12(b), may be expended for any new or expanded purpose, position, or other expenditure for which the General Assembly has considered but not enacted an appropriation of funds for the current fiscal period; provided, however, that in the event the Director of the Budget declares that it is necessary to deviate from this provision, he may do so after prior consultation with the Joint Legislative Commission on Governmental Operations. For the purpose of this section, the General Assembly has considered a purpose, position, or other expenditure when that purpose is included in a bill, amendment, or petition and when any committee of the Senate or the House of Representatives deliberates on that purpose. (Emphasis added.)
As stated in our response to your first question, the State Treasurer’s exemption from the Executive Budget Act extends only to fiscal controls exercised by the Director of the Budget and the Department of Administration. The restrictions contained in N.C.G.S. § 143-16.3 primarily involve controls exercised by the General Assembly. It is therefore our opinion that the State Treasurer is subject to the provisions of N.C.G.S. § 143-16.3.
The facts you have provided, however, do not clearly establish that the State Treasurer’s request or discussions with members of the General Assembly relating to restructuring the Investment Officer position were ever memorialized in a bill, amendment, or petition and deliberated upon by a committee of the General Assembly. If these discussions were not the subject of a bill, amendment or petition which was deliberated upon by a committee, N.C.G.S. § 143-16.3 does not preclude the State Treasurer from retaining the Senior Investment Advisor.
3. Does the existence and use of the commission recapture account to
pay certain expenses without an appropriation violate the North
Carolina Constitution, particularly Article V, Section 7, or any
existing General Statutes, particularly N.C.G.S. § 147-69.3? Further
does the payment to the Senior Investment Advisor represent a direct
or indirect cost as provided within the provisions of N.C.G.S. § 14769.3(f)?
You have advised us that the State Treasurer has implemented a commission recapture program in connection with the State’s equity investment funds. Through this program State Street Bank and Trust (“SSBT”), the trustee for the State’s Equity Investment Fund (“EIF”), directs that a certain percentage of trades be implemented by brokerage firms which have agreed to rebate a portion of their normal commissions back to the EIF. These rebates are credited back to a special account administered by SSBT.
Your letter states that SSBT makes payments from this account, as directed by the State Treasurer, to cover program administration costs such as attorney fees, travel expenses for Investment Division staff, and the consultant acting as Senior Investment Advisor. Information we have received from the State Treasurer, however, indicates that funds in the commission recapture account are transferred monthly to the EIF and become part of the monthly net income credited prorata to the individual pension funds which comprise the EIF. Program expenses which are determined by the State Treasurer to be directly chargeable costs are then allocated, as appropriate, to the individual investment funds and funds necessary to cover these costs are transferred to a separate interest-bearing account. It is from this account, according to the State Treasurer, that state warrants are issued to pay the types of expenses referenced in your letter.
You have asked whether funds generated through the commission recapture program may be used to pay certain expenses related to the investment program without such expenses having been approved and funded through the appropriations process. N.C.G.S. § 147-69.3(d) requires, in the case of General Fund investments, that “ . . . the total return earned on investments shall accrue pro rata to the Fund whose assets are invested according to the formula prescribed by the State Treasurer with the approval of the Governor and Council of State.” Commission rebates, which are seemingly indistinguishable from commission discounts, constitute a portion of the total investment return and are required to be credited to the EIF and the individual investment funds. We therefore view funds generated through the commission recapture program as being available for payment of authorized expenses to the same extent as other income and assets of the State Treasurer’s investment programs.
In regard to whether the State Treasurer is authorized to use such funds to make payments for expenses which have not been approved and funded through the appropriations process, a review of N.C.G.S. § 147-69.3(f) is required. Prior to 1984 N.C.G.S. § 147-69.3(f) provided:
The cost of administration, management, and operation of investment programs established pursuant to this section shall be apportioned equitably among the programs in such manner as may be prescribed by the State Treasurer.
See S.L. 1979-467. In 1984 the General Assembly amended subsection (f) by adding:
[A]nd the costs so apportioned shall be paid from each program and deposited with the State Treasurer as a General Fund non-tax revenue. The cost of administration, management, and operation of investment programs established pursuant to this section shall be covered by an appropriation to the State Treasurer for this purpose in the Current Operations Appropriations Act.
- 1984-1034, sections 116 and 117. Subsection (f) was amended again in 1987 and presently reads as follows: The cost of administration, management, and operation of investment programs established pursuant to this section shall be apportioned equitably among the programs in such manner as may be prescribed by the State Treasurer, such costs to be paid from each program, and to the extent not otherwise chargeable directly to the income or assets of the specific investment program or pooled investment vehicle, shall be deposited with the State Treasurer as a General Fund non-tax revenue. The cost of administration, management, and operation of investment programs established pursuant to this section and not directly paid from the income or assets of such program shall be covered by an appropriation to the State Treasurer for this purpose in the Current Operations Appropriations Act.
- 1987-751, section 6.
It is our interpretation of these provisions that the 1987 amendment was intended to authorize the State Treasurer to charge certain investment program costs directly to the appropriate program, thereby eliminating the previous requirement that all costs be paid from the programs into the General Fund and subsequently reimbursed through an appropriation by the General Assembly. The 1987 legislation, however, did not define the types of costs which are “chargeable directly to the income or assets of the specific investment program or pooled investment vehicle”. Nor are we aware of any longstanding administrative interpretation, sanctioned by the legislature, of directly chargeable investment program costs. We are therefore unable to offer an opinion as to the distinction between the types of “direct” costs which the State Treasurer is authorized to charge against investment assets, and other costs which are required to be funded through the appropriations process. A more explicit definition of “direct” program costs would be an appropriate issue for legislative consideration.
4. To what extent is the Department of State Treasurer subject to the
General Statutes regarding Purchase and Contracts?
Unless otherwise exempted, state agency procurement is required to be conducted in accordance with Article 3 of Chapter 143 of the North Carolina General Statutes. Contracts to obtain services of a consultant or advisory nature are also subject to justification and approval by the Governor under N.C.G.S. § 143-64.20. Personal services contracts have been exempted from review by the Division of Purchase and Contract pursuant to 1 N.C.A.C. 5B.1601(10).
Prior to 1979, N.C.G.S. § 135-7(a) authorized the Board of Trustees of the State Retirement System “. . . to retain the services of a reputable investment counseling firm to assist in management of the system’s investment program.” This provision was deleted by S.L. 1979-467, section17. During the same session, the General Assembly enacted N.C.G.S. § 147-69.3(g), substituting the State Treasurer for the Board of Trustees and expanding his authority:
The State Treasurer is authorized to retain the services of independent appraisers, auditors, actuaries, attorneys, investment counseling firms, statisticians, custodians, or other persons or firms possessing specialized skills or knowledge necessary for the proper administration of investment programs created pursuant to this section.
S.L. 1979-467, section 3.
In 1978, this Office opined that “. . . contracts with investment counseling firms under G.S. 135-7(a) are not subject to the requirements of G.S. 143-64.20, et seq.” Letter to Harlan Boyles, State Treasurer, dated 14 September 1978. We believe that this opinion also applies to the broader authority vested in the State Treasurer by N.C.G.S. § 147-69.3(g).
Where two statutory provisions appear in conflict, such conflict can be resolved by applying a well-established rule of statutory construction:
Where there is one statute dealing with a subject in general and comprehensive terms,
and another dealing with a part of the same subject in more minute and definite way,
the two should be read together and harmonized, if possible, with a view to giving effect to consistent legislative policy; but, to the extent of any necessary repugnancy between them, the special statute, or the one dealing with the common subject matter in a minute way, will prevail over the general statute . . . unless it appears that the legislature intended to make the general act controlling; and this a true a fortiori when the special act is later in point of time.
Food Stores v. Board of Alcoholic Control, 268 N.C. 624, 628-29, 151 S.E.2d 582 (1966). (Emphasis in original.) As applied to the conflict between Article 3 of Chapter 143 and N.C.G.S. § 147-69.3(g), we believe the later-enacted, more specific provisions of N.C.G.S. § 147-69.3(g) supercede the more general requirements of Chapter 143.
It is therefore our opinion that the State Treasurer has statutory authority, pursuant to
- § 147-69.3(g), to contract with independent appraisers, auditors, actuaries, attorneys, investment counseling firms, statisticians, custodians, or other persons or firms possessing specialized skills or knowledge necessary for the proper administration of investment programs without adhering to the requirements set forth in Article 3 and Article 3C of Chapter 143 of the North Carolina General Statutes. We believe the examples in your letter fall within the authority granted by N.C.G.S. § 147-69.3(g). Otherwise, the Department of the State Treasurer is subject to Article 3 and Article 3C of Chapter 143 of the North Carolina General Statutes. 5. Do the requirements of N.C.G.S. § 147-69.2(b)(8) regarding listing on national exchanges, cash dividends, etc. apply to all stock investments under this subdivision, including the North Carolina Equity Investment Pooled Trust managed by State Street Bank and Trust Company, or just those investments made directly by the State Treasurer?
- § 147-69.2(b)(8) authorizes the State Treasurer to invest assets of the Teacher’s and State Employees’ Retirement System, the Consolidated Judicial Retirement System, the Firemen’s Rescue Workers’ Pension Plan, the Local Governmental Employees’ Retirement System, the Legislative Retirement System, and the North Carolina National Guard Pension Fund (“Retirement Systems”) either directly or indirectly. The third paragraph of N.C.G.S. § 147.69.2(b)(8) authorizes indirect investments [of Retirement Systems’ assets] “. . . through individual, common, or collective trust funds of banks, trust companies, and group trust funds of investment advisory companies so long as the investment manager has assets under management of at least one hundred million dollars ($100,000,000).” The fourth paragraph of N.C.G.S. § 147-69.2(b)(8) authorizes the State Treasurer to also make direct investments if each of the conditions set forth in subdivisions a. through g. are met.
- § 147-69.3(8) through the North Carolina Equity Investment Fund Pooled Trust and
We believe that under the plain language of this provision investments made pursuant to managed by SSBT are not subject to the conditions set forth in N.C.G.S. § 147-69.2(8)a.-g. These conditions are applicable only to direct investments made by the State Treasurer.
6. Does N.C.G.S. § 147-69.2(b)(9) permit investments in limited
partnerships or limited liability companies that invest in derivatives
such as options, futures, forwards, or swap? If derivatives are
permitted, are they limited to debt or equity securities, such as bonds
or stock, or are derivatives involving foreign currency and
commodities also permitted?
N.C.G.S. § 147-69.2(b)(9) provides:
With respect to Retirement Systems’ assets, as defined in subdivision (b)(8) of this subsection, they may be invested in limited partnership interests in a partnership or in interests in a limited liability company if the primary purpose of the partnership or limited liability company is to invest in public or private debt, public or private equity, or corporate buyout transactions, within or outside the United States. The amount invested under this subdivision shall not exceed five percent (5%) of the market value of all invested assets of the Retirement Systems.
Subject to his fiduciary duties, this subdivision permits the Treasurer to invest in limited partnerships or limited liability companies but does not specify or limit the types of investment vehicles in which the limited partnerships or limited liability companies may invest. The only limitation on the Treasurer’s authority to invest under this provision is that the limited partnerships or limited liability companies must have as their primary purpose investing in public or private debt, public or private equity, or corporate buyout transactions, within or outside the United States.
There being no limitation on the types of investments that can be made by limited partnerships or limited liability companies, we must conclude that investments in derivatives are not prohibited. We also find no basis for a conclusion that the legislature intended that investments in derivatives by limited partnerships or limited liability companies be limited to debt or equity securities, or that such investments cannot involve foreign currency or commodities. Evaluating limited partnerships or limited liability companies that invest in derivatives involving foreign currency or commodities secondary to the required primary purpose is the responsibility of the State Treasurer.
7. As fiduciary for the State’ retirement funds, does the investment by the State Treasurer of retirement system assets for purposes of economic development conflict with the State constitution or statutes?
The State Treasurer’s fiduciary duties include, among others, investing retirement funds in the qualifying investments permitted by N.C.G.S. § 147-69.2 and 147-69.3. As long as an investment is authorized by statute, the fact that it might indirectly facilitate economic development does not disqualify the investment. By copy of a letter to you dated 1 November 2002, we were advised by the State Treasurer of his opinion that investments solely for purposes of economic development would be a breach of fiduciary duty, that such investments have not occurred, and that he will make no such investments absent specific legislative authorization. We concur in the State Treasurer’s opinion on this issue.
Ann Reed Senior Deputy Attorney General
John R. Corne Special Deputy Attorney General
cc: State Treasurer Richard H. Moore