Tuesday, August 16, 2011

PA State Treasurer Rob McCord at PA Press Club

On July 25th, Rob McCord, Pennsylvania Treasurer, spoke to the Pennsylvania Press Club. A video of his remarks and the question and answer session is available on the PCN website (www.pcntv.com, select PCN+, then Public Affairs; you need QuikTime to watch it.)

I watched the presentation and took rough notes. It is not intended to be a full transcript and there are several sections where Mr. McCord was discussing complex topics with terms I am unfamiliar with, and mentioning numbers I could not record quickly enough. Thus, interested voters are encouraged to watch themselves. As always, I apologize in advance for any errors or misconceptions.

[intro by John Baer]

Remarks by McCord:

Thanks. I am grateful to everybody. I thought with the rain and it being the dog days of summer, it would just be John, the waiter, and me. I am grateful to the Press Club, PCN, and John Baer. Like most smart people I had some fear of coming here. John said it would be a piece a cake and have no fear which I thought meant “I’m going to die.” Quasi-prepared remarks and questions. It’s okay to be wrong just don’t be dull. Had all of 30 months now as an elected officials. Wharton MBA, a couple decades in business, elected to be state treasurer at age 49. Learned while campaigning most voters did not know state treasurer was elected. In some states appointed or elected by legislature but here independently elected, off cycle from governor.

Some observations from a business point of view. This office can be a great profit center. That’s what makes it really fun from my point of view. Large and important role for treasurer to play as a fiscal watchdog. Some people think auditor general is a fiscal watchdog. Absolutely right, but they catch people after things happen, we catch before. Important to avoid making a mistake before it happens and not to catch it later. Treasurer can do a pre transaction audit. We’ve dropped from more than 500 employees to 409. We process $70B in transactions. We tripled audits, saved 45M, just doing pretransaction audits. We paid for ourselves just in pre-transaction audits. If you think of us as a profit center, we run a lot of important programs. Before I took office the trailing 5 years avg of largest pool of capital for which the treasurer is the sole [missed this word] is 1.9% sort of expect that because of bias towards near term capital. Taking advantage of secured debt, in year one returned 13.5%, in year one become billion dollar boy in terms of actual capital return. I had people from my side of the aisle said what are you doing, just put in t bills and don’t lose any money. You do that you got a good name. Just say McCord McCord McCord and you get name recognition equals re-election. I didn’t run just to get re-elected. I’m not interested in that I’m interested in rightsizing and doing good things. In addition we have these two large pension funds. The Psers largest driver of proterty taxes in PA, what happens there really matters. Not about pay. We need great leaders and career investors in those positions. It’s about gains and losses. You look at Psers and Sers they lost in 2008 and we’ve largely mended what happened there with strong years in 2009, 2010, and so far in 2011. We’re not losing 30B in a year we’re making 10B a year. A lot of times people ignore -30 or +10.

I’m COO; it’s a ton of fun. I’ve memorized a lot of names. People say I’ve worked here 20 years and no elected official has ever remembered my name. When you’re asking people to do three times as many audits and do all nighters to make up for payless paydays and work late to pay day care centers after budget debacle of 2009. A lot of people acted selflessly to get that done. I used to get bored hearing about Bureau of Unclaimed Property. But there are 100 employees there. Used to be a patronage place. I’m the anti-patronage pol. It’s a system where if you run it well you either win or you win. You’re either returning property to people who lost it or you’re returning it to the state in positive cash flow (sold on Ebay). (Look on patreasury.org to see if you have any unclaimed property). General fund got $115M last year. Cost 23M (?) but bring in $115M. Very excited about what we are able to do.

I’m often asked if the audits are worth the brain damage. Used to such an obsession with fraud. We’ve been able to increase collections by 96% decrease the time 64%. By using business logic and risk profiling we’ve been able to quantifiable yield higher returns with lower costs. With pension and other funds. We can be shareholder activists. We were an effective part of shareholder movement that changed Massey after mining disaster. Get a lot of press and make a real human difference. Similar with BP. What did get covered? When it bleeds it leads. Remember the DRPA? We think some upcoming audits will improve accountability there. Bond offering. In terms of local press, when we sued the gaming board. I got to serve on a lot of boards when I was in private equity. I was involved in a lot of turnaround. One of the key questions is “am I on the board” and “what kind of voting rights do I have?” Sometimes you just take observer rights, just to be in on the conversations. I was shocked when the gaming board, which has 10 members, 3 non voting who should be activist board members including treasurer, 7 voting, said non voting board members. Gaming board said non-voting can’t attend meetings. I wanted to represent the shareholders and also, sometimes in politics, the fix is in in closed meetings. So we sued.

We got positive returns for the taxpayer, driven up transparency, we’re already driving up return on investment. We commissioned a marketing study. There’s talk of maybe doing an auction. How do you auction it without knowing location. How do you decide the location without marketing survey. The last market service was done in 2003. That was before casinos here now we have ten and all sorts of stuff happening near us – Delaware, West Virginia, Ohio, Maryland, all of which is relevant. In a month or two we will have that data for you.

Core observations: treasury can be a profit center and watch dog. Need to beware of rhetoric. I believe we are getting painfully close to govt by talking points, policy by taking pledge loses context. Very unwise. Talking point -- we don’t have a tax problem we have a spending problem. Imbedded in that is all govt spending is bad. We need govt resources. To say there is no such thing as a profitable investment form the public sector is boneheaded. Just not true. We pay for ourselves 4 times over at least before taking investments into account. In private equity had to do with internet, traffic, life sciences, and medical sciences. Internet invented by DRPA, fed made grants to MIT to commercialize it. Govt largest or only customer of semiconductors throughout 1970s. Over the long run semiconductors and internet have created their fair share of jobs. Similar with traffic. Think about Chicago without O’Hare airport. Same with life sciences, if you didn’t have appropriate investment in incentive, regulation, and review, everyone would be a snake oil salesman.

Q: if there is a federal debt default what is impact on state govt
A: Very bad in general. Drives up cost of capitol. Impact on credit cards or mortgages. People get badly badly hurt. Depression in equity markets which hurts returns in large pension funds. On and on. Good quotes from Reagan – bad idea to play chicken with debt limit

Q: planning on state level, advice for us?
A: Planning office by office. Planning over at Psers and Sers. I’m an old capitalist, sit around with CIO and ask how can we make money for this place. In terms of advice diversity, have rainy day fund, avoid having to buy, sell or borrow at bad time.

Q: What is situation on state debt?
A: General debt situation in PA is at worst medium. I worry about unfunded liability in pension funds and off budget debt, particularly things like acid run off from coal mines. Main thing we need to do is stop governing by talking point. I as a business person want to ask what is our ROI and cost spread on return. In early 2009 I said we ought to consider pension obligation bond. This would bring the debt on to the budget. What gets dangerous is people saying all debt is bad. No real business leader would say all debt is bad. Look at terms and conditions of debt. For example, in infrastructure if it yields a long term benefit, it’s good.

Q: selling liquor stores
A: Let’s calculate the numbers. Is it a one time windfall? Not always a good thing. Want to wait for PFM review. Leary of selling long-term assets, wants to look at price. If you look at business models, consumer might spend more and consume less in a monopoly. I’m not sure average Pennsylvanian wants to increase amount of booze used. Some don’t want a gas and go culture with booze. We’re more a resource than a vote in this.

Q: How do you get cities off financially distressed list?
A: I don’t know enough about Act 47 to say. The rolling problems in 3rd tier cities, like old saying, all happy families happy in same way, all unhappy cities are different. We’re going to have a lot of tough questions but you can’t ignore vital organs of a Commonwealth. You can’t say I’ll hang out in my malls and exurbs and not worry about smaller cities but we can’t do that. We can’t be like Detroit and have a donut hole and limp along. We all have a stake in reversing some bad decisions in the past.

Q: What is biggest diff between private sector and public sector management?
A: I try to bring a business sense of govt, which is not the same as privatizing. A little harder to recruit quickly and make decisions quickly.

Q: Any sense to take no tax pledge?
A: It’s a bad idea – policy by rent a pledge. I think Tom Ridge was right to get into a battle with Grover Norquist. Transportation Dept had good ideas for long term investment. Pledges constrain your ability to make decisions.

Baer: [Thanks McCord.]

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