Divisive Plan Scuttled by Investment Commission

November 4, 2010

Investigative Reports

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The NerveA proposal to set up a state-run company to manage the S.C. Retirement System’s private equity – the first of its kind in the nation – is off the table, the state’s chief investment officer told a panel Wednesday.

The entity, dubbed NewCo for “New Company,” didn’t get the necessary buy-in needed, Retirement System Investment Commission Chief Executive Robert Borden told the Special Subcommittee on Retirement System Investment during a meeting in Columbia.

“Part of the risk involved was political risk and it became clear that the input we were receiving about NewCo was mixed,” he said after the two-hour subcommittee meeting.

“Anytime you start up something new, there are going to be bumps in the road and we needed to know that the first time there was a problem, people weren’t going to be pointing fingers, saying ‘I told you this wasn’t a good idea,’” he added.

The idea behind NewCo was to hire Wall Street-savvy individuals to operate out of Charleston and invest a substantial portion of the Retirement System’s holdings – as much as $9 billion – thereby reducing substantially what the system was paying out in fees and other costs that outside managers charged.

That’s no small consideration given that the state Retirement System is underfunded by a projected $12 billion to $53 billion.

But with NewCo dead, Borden said he’ll push for the Investment Commission to ramp up internally, so it can take on more investing duties itself.

Borden would like to add at least 20 employees to the Investment Commission and triple the agency’s budget, which has been stagnant for the past three years.

“Our goal with NewCo was to have the cake, the icing and the cherry on top,” he told the subcommittee. “But I think with this scaled back plan we can still have the cake and some of the icing.”

The commission oversees the retirement system’s investment portfolio, which totals more than $24 billion, money from some 521,000 current or future state and local government retirees.

Sen. Phil Leventis, D-Sumter, one of three subcommittee members along with Sen. Greg Ryberg, R-Aiken, and Sen. Wes Hayes, R-York, said the new plan will require examination, but believes it’s a step in the right direction.

“What (Borden) is trying to do is save the state about half a million dollars a day in fees, so it certainly seems like something that makes sense,” he said.

The NewCo plan all but appeared out of nowhere six weeks ago, when Retirement System commission members voted unanimously on Sept. 23 to proceed with it. In so doing, the commission authorized $15 million in start-up costs for its would-be venture.

But a week later, the Budget and Control Board asked for more analysis before moving forward.

As The Nerve previously reported, the plan received considerable criticism because of the secrecy that shrouded the proposal. Among issues raised was the fact that state taxpayers could have been left holding the bag if the plan had gone awry.

The main drawback between starting a private company to invest state money and doing it within the confines of the Investment Commission is that the latter won’t be able to pay the high salaries necessary to lure top Wall Street talent, Borden said.

“The only way to get the top talent is to pay and pay big,” he said, adding that the Investment Commission will still be able to get good people, but they will likely have less experience or not quite as good a track record as the top performers.

The subcommittee asked Borden to submit a plan regarding a redesigned Investment Commission in time for them to review on Nov. 15.

That would be just before the Retirement System Investment Commission’s final meeting of the year, a two-day retreat scheduled for Nov. 17-18 at the Wampee Conference Center on Lake Moultrie.

Reach Dietrich at (803) 779-5022, ext. 110, or kevin@thenerve.org.