Friday, November 22, 2013

South Carolina Retirement System: At It Again

South Carolina Retirement System: At It Again

Let’s begin with the old news. South Carolina’s various public pensions have very high fees, and those fees continue to grow.  For the year ended June 30, 2013, SC incurred fees of $419 million with $233 million contained in an amorphous category called strategic partnerships.[1] A year ago the fees were $304 million.[2]  They are paying management fees of about 1.61% of investment assets due in large measure to their 44% commitment to alternative investments.  Most pension plans have fees that are 65% to 70% lower.  The plan returned 9.99% for the fiscal year, which isn’t likely to compare favorably with other public pension plans that have more conventional asset allocations.  These results will allow State Treasurer Curtis Loftis and the other members of the Investment Commission to continue their political battles.  Of course, there’s not much that South Carolina can do about these fees as they’ve made long-term commitments to private equity, real estate, and hedge fund managers.  The Treasurer has made his point and should probably move on to other issues.

Restatement (1999)
However, the Treasurer’s battles aren’t confined to the pension assets.  A few months ago he entered into a legal settlement with Mellon/BNY over losses in the securities lending program.  The financial recovery under the settlement was relatively small and was accompanied by a new contract giving SC a bigger share of the securities lending revenue (90%), as well as an explicit fee for custody.   I think the settlement is a better deal for Mellon/BNY than South Carolina because it offers the bank a ten-year contract on very favorable terms.

It turns out the State Treasurer hasn’t signed the contract yet because he needs concurrence from the Investment Commission and other agencies.  As you’d expect they aren’t acceding.  The Commission’s new COO has rejected the contract.  There is no surprise in his reaction. The COO is former State Senator Greg Ryberg, who as a Senator tried to remove the Treasurer from the Commission.

From what I can tell, the Treasurer probably had authority to enter into the contract for custodial services.  He is custodian of the pension assets, and historically his office has made these arrangements for the retirement system.  Former Senator Ryberg and the Commission are paying the Treasurer back for dragging his feet on funding an investment mandate earlier this year.  See, “Skirmish Avoided: The SC Investment Commission versus Treasurer Loftis (April 15, 2013).”

According to newspaper reports[3], the Treasurer’s critics seem to think that the contract should either be subject to a legislative appropriation or be paid by the Treasurer’s office.  Both these arguments are wrong.  Custodial expenses are a legitimate requirement of the pension plan and should be netted from pension assets.  If the custodial contract were to be subject to an appropriation, then the $419 million of management fees should also flow through the legislature.  I doubt South Carolina’s laws have any such requirement, and I doubt the Investment Commission could function if money management fees had to run the legislative gauntlet.

The Treasurer’s critics are also asserting that South Carolina has never paid custody fees in the past.  This is a ridiculous assertion.  Before Treasurer Loftis was elected, the fees were hidden inside securities lending income.  In other words, the securities lending program generated income for the pension plan but the custody fees were netted out before the income figures were reported to the pension.  My former boss, Treasurer Richard Moore of North Carolina, walked into the same situation and renegotiated the custody and securities lending relationships so that fees and income were transparent.  Critics claimed that we were now paying for a service that had been free.  The critics were wrong.

The war between the Investment Commission and the State Treasurer has just extended to 115 iPads.[4]  The Treasurer has been handing out the iPads to schools in order to promote financial literacy.  The Commission chairman heard that the iPads were funded by a money manager, raising the juicy prospect that the Treasurer had some type of untoward deal with one of the pension plan’s advisors.  It turns out the iPads were supplied under SC’s college savings plan, which is overseen by Treasurer Loftis and administered by Columbia Management.  The computers are part of a financial literacy program. 

Once again the retirees, public employees, and taxpayers of South Carolina are seeing their public officials feud instead of managing the pension plan.  The Investment Commission needs to talk about investments instead of iPads.


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