A legislative fight between North Carolina Treasurer Janet Cowell and a state employee association is signaling growing tension over disclosure practices as public pensions seek to improve returns with alternative investments.

Cowell, a 45-year-old Democrat, opposed a bill by the State Employees Association of North Carolina to require more disclosure about deals with Wall Street firms hired to manage alternatives to stocks and bonds for the $87 billion pension she controls. Cowell warned that giving out more information would cost more than $1.8 billion for violating secrecy agreements, and instead supported a bill that would conceal details for five years after a contract is completed.

“Our pensions get huge amounts of money to invest from the employees,” said Representative Nathan Baskerville, a Henderson Democrat who co-sponsored legislation requiring immediate disclosure. “I need to be able to tell my constituents that we’re protecting their money. I need to know how much we’re paying.”

The dispute comes as states invest more in private equity and hedge funds in a bid to meet average return targets of 7.7 percent. Stocks and bonds no longer consistently deliver as the U.S. Federal Reserve holds benchmark rates near historic lows. When state can’t achieve their planned investment returns, they must increase funding out of their budgets or cut benefits.

Secrecy Agreements

Since 2001 states have increased allocations to alternatives to $460 billion, or 15.3 percent, from $66 billion, or 3.3 percent in 2001, according to the National Association of State Retirement Administrators.

Most private-equity and hedge-fund investments come with agreements that prevent pensions from disclosing certain information, including details on fees, investment strategy and other “trade secrets.”

Unlike fees for stocks and bonds, those for alternatives tend to be opaque, so the only way to get a complete picture of performance is by knowing how much the state is paying, Baskerville said.

Without that, taxpayers and employees have no way to know whether an investment is a good deal, said Andrew Biggs, resident scholar of the American Enterprise Institute, a Washington research group that studies politics, government and policy.

Inherent Opacity

“Alternatives are inherently less transparent,” Biggs said in an e-mail. “Hedge funds are understandably loath to discuss their trading strategies, since that’s what differentiates them from their competitors. But the public wants to know what investments are being made, what the risks are, and how much the pension is paying in fees.”

North Carolina assumes its pension must earn 7.25 percent annually to cover promised benefits and to calculate what local governments and the state must contribute. Some funds, such as the California Public Employees’ Retirement System, the biggest of its kind in the U.S. with almost $300 billion, have lowered return assumptions under pressure to reflect market realities.

North Carolina has about $18.7 billion of alternative investments, or 21.5 percent of its assets. In 2007 it was 3 percent and the state has authority to increase it to 35 percent. The pension lagged behind both of its benchmarks for private equity and hedge funds for the past 10 years, according to its financial report.

Still, the state paid $416.2 million to firms hired to manage pension money last fiscal year, according to its annual report. A footnote says that it didn’t disclose all fees, such as those for fund-of-fund investments.

Fee Inflation

Alternative investments have led to battles over disclosure in other states. Last month, the Pennsylvania Public School Employees’ Retirement System removed such contracts posted prior to 2012 from the treasurer’s website.

In May, U.S. Securities and Exchange Commission Chairwoman Mary Jo White told Congress that hedge funds and private-equity firms have created bogus service providers to boost fees from portfolio companies and investors. More than half of about 400 private-equity firms that the SEC staff examined charged unjustified expenses, Bloomberg reported in April, citing an unnamed person familiar with the findings.

Pension Sleuth

In January, North Carolina’s state employees association hired Edward Siedle, a former SEC attorney and now president of Benchmark Financial Services, to investigate the fund’s investments. Siedle found what he said are hundreds of millions of dollars of undisclosed fees. That led the association to push for legislation that would require information about alternative investments to be disclosed as soon as July.

In a legislature that has used its veto-proof Republican majority to pursue an agenda of tax and service cuts that set off weekly protests at the statehouse, the pension battle is striking for its bipartisanship.

Republicans are the majority of primary sponsors for both the bill backed by Cowell and the union-supported disclosure bill she opposes. Only the treasurer’s bill is moving forward so far. Governor Pat McCrory, a Republican, doesn’t comment on pending legislation, said Rick Martinez, a spokesman.

The five-year period of secrecy the treasurer supports would mean the statute of limitations for securities fraud claims would expire before documents are made public, said the employees association’s general counsel, Tom Harris.

“This bill is bad,” Ardis Watkins, a lobbyist for the association said at a committee hearing June 18. “It’s going to enshrine bad practices. For a generation it’s going to keep the public from knowing what they have a right know.”

Sole Authority

North Carolina, New York, Connecticut and Michigan are the only states that have a single person overseeing their pensions, and Cowell has close ties with the financial services industry. She has taken campaign contributions from some companies that have won contracts to manage alternative investments.

Of the $1.1 million Cowell received for her 2012 campaign, $196,710 came from the financial industry, according to the National Institute on Monday in State Politics in Helena, Montana. People in New York City donated $133,300, more than came from Charlotte, North Carolina’s biggest city.

Cowell’s spokesman, Schorr Johnson, said the pension has grown 45 percent under Cowell and that she is committed to protecting its integrity.

“The performance of the pension fund is paramount,” he said in an e-mail. “Transparency is strongly valued by the department of State Treasurer, and key to confidence in the investment process. Treasurer Cowell has implemented numerous ethics and disclosure reforms which make North Carolina’s investment program one of the most transparent in the nation.”