Thursday, April 4, 2013

Opacity: The Investment Performance of the Utah Retirement Systems

Opacity:  The Investment Performance of the Utah Retirement Systems

I’m adding John Dougall, Utah State Auditor, to my list of public servants who are trying to protect public employee pension plans.  Previously, I’d lauded the efforts of State Treasurer Curtis Loftis, who was censured by the South Carolina Retirement Commission for his efforts to gain a better understanding of the fees and performance of the pension plan (“South Carolina Investment Commission Airs Some Dirty Laundry [March 1, 2013]).  The Commission continues to deny the Treasurer basic information about the terms of contracts between the Retirement System and alternative managers.

Brazilian Hedge Fund (1999)

Now along comes Utah, which makes South Carolina seem amazingly transparent.  Unless I’m missing something, Utah reveals virtually nothing about its investment program for the defined benefit plans of the Utah Retirement Systems.  The 2012 CAFR (the annual financial report) provides high-level information on asset allocation and returns, as well as a list of managers, but that’s about it.  The Systems’ website does not appear to have any information about the performance of the defined benefit plan. 

In defending the lack of disclosure and the pension plan’s exemption from public meetings and public records laws, The Executive Director of the Utah Retirement Systems, Robert Newman, told The Wall Street Journal, “We are not doing the public's business.[1]”  What a preposterous claim.  The taxpayers are the guarantors of a public defined benefit plan.  If Utah’s investments fall short of providing sufficient funds to pay retirees, the taxpayers are on the hook.  That’s about as public as it gets.

Mr. Newman also claims that some hedge fund managers won’t do business with Utah if the state makes any disclosures.  While total transparency would be detrimental to the pension plan, there is plenty of information that should be revealed.  For starters, Utahan’s should know how their managers are performing.  Hedge funds are now at least 15% of Utah’s portfolio, and as of the last public report for December 31, 2011, they were well behind the benchmark.  Perhaps 2012 was a better year. In any event, no state or locality should be doing business with a manager that doesn’t permit a basic level of disclosure to the public.  Given the amount of dollars Utah and other states are throwing at hedge funds, there’s little risk the alternative managers will withhold their services.  And if they do; there are thousands of other hedge funds to chose from.

As a further defense, Mr. Newman cites Utah’s 79% funding level for the proposition that disclosure is unnecessary.  While Utah’s funding level is about 4% better than the average among all states, Utah has a sizable funding gap.  Public pension fund accounting tends to understate the pension deficits.  So while Utah is certainly not on the critical list, its pension will face challenges.  Mr. Newman also claims that Utah’s investment return for the past ten years is 8.3% versus their investment 7.5% assumption as of the end of 2012.  This would mark a tremendous recovery, because the last published data for 2011 showed the plan at 6.2% versus a benchmark of 6.8%.  In any event, the plan’s level of performance has nothing to do with the need for basic disclosure.

There’s only one reason why public pension plans don’t provide reasonable disclosure, and that’s to protect the trustees and staff from scrutiny and embarrassment.   They want you to believe that the lack of transparency is designed to protect the plan and its relationships, and money managers are more than willing to reinforce the argument.  However, the argument is rubbish.  As CIO for the North Carolina Retirement System, I didn’t particularly enjoy being second-guessed by legislators, auditors, retirees, and the press.  And admittedly, we weren’t leaders in providing public disclosure.  However, we were light years ahead of Utah.

In 2011, the Utah system doled out $40.5 million in fees to money managers.  The public should have some idea where that money went and whether they got any value out of the investment.  Auditor Dougall and Treasurer Loftus are asking the right questions.


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