Retirement Plan Raises Questions

October 13, 2010

Investigative Reports

Print Friendly, PDF & Email

The NerveSouth Carolina’s state retirement system faces billions of dollars in unfunded liabilities. But is creating the nation’s first state-run investment firm to manage part of the system’s assets the right way to help meet those obligations?

That is perhaps the central question surrounding a plan by the S.C. Retirement System Investment Commission to do just that.

Billions of dollars hang in the balance for some 521,000 current or future state and local government retirees.

State taxpayers also have an enormous stake in the matter because they could be left holding the bag if the commission’s plan goes awry.

South Carolina taxpayers already could be on the hook for the retirement system’s billions in unfunded liabilities. “I think it’s a ticking time bomb that has yet to go off,” Gov. Mark Sanford, speaking to reporters in late June, said of the system’s unpaid-for promises.

Sanford, who has been voicing concerns about the issue for several years, plans to host a roundtable discussion on the future of the state retirement system next Wednesday.

The event is scheduled for 10 a.m. in room 252 of the Edgar Brown Building on the grounds of the State House in Columbia. State officials, retirees and members of the public are invited.

Given the stakes of the commission’s plan, it’s probably no surprise that it has provoked trenchant concerns and raised many other questions: Who stands to gain from it? Who might lose? What’s the risk factor? How transparently, or not, would such a new investment entity operate?

After virtually no public airing of its plan, the six-member commission 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.

The commission oversees the retirement system’s investment portfolio, which totals about $24.2 billion. Roughly 20 percent of that pie, approximately $5 billion, is private equity, or investments that are not publicly traded in the stock market. Examples of private equity include real estate and working capital loaned to small companies.

Currently, the Retirement System Investment Commission retains private-sector investment managers to handle its private equity holdings.

What the commission aims to do is cut those managers loose and form a separate, state-run company to manage the retirement system’s private equity.

It has been widely reported that such an entity would be the first of its kind in the United States.

And it’s a very big deal.

“South Carolina to Start an Investment Firm for Its Private Equity Bets” The New York Times headlined a Sept. 27 story about it.

The commission argues that by doing so it can exercise greater control over that part of its assets, and, over the years, save hundreds of millions of dollars by eliminating fees and other costs that the outside managers charge.

“There are layers of fees, your control rights are zero and your costs are astronomical,” The New York Times quoted Robert Borden, the commission’s chief executive and chief investment officer.

Borden was unavailable to speak with The Nerve on Monday and Tuesday, according to his assistant, commission employee Heather Muller.

Muller said she would relay a message to commission Chairman Allen Gillespie, but she would not provide a phone number for him, saying that’s commission policy.

Serving as commission chairman is not Gillespie’s full-time job. Rather, he is employed in the financial services world as a principal at GNI Capital, an investment management firm with offices in Greenville and the Dallas area.

A woman answering the phone at the Greenville location said Gillespie was out of the office until Thursday.

Also in The Times piece, Borden touts the commission’s plan as a way to provide “greater transparency” to the state’s private equity investments.

To many stakeholders in the retirement system, however, thus far it has appeared more opaque than transparent.

For example, a more than 40-page report on the plan says the state-run investment firm will require 50 full-time employees, “but individual compensation data will be protected and not disclosed as public information.”

That doesn’t sit too well with some interested parties amid recent media reports and assertions by Sanford and others that the average annual salaries of those employees would top $500,000.

It also prompts yet another question: Would the state’s new investment firm be subject to the S.C. Freedom of Information Act?

Upping the ante, the report, prepared for the commission at no cost by global management consulting firm Booz & Co., calls for increasing the retirement system’s private equity investments from 20 percent to 24 percent.

Doing so is necessary, the study says, in order to achieve an 8 percent return-on-investment target the commission has been projecting.

Many observers say that expected yield is overly optimistic during the Great Recession and its after-effects.

A March 15 cover story in Barron’s, a respected financial industry magazine, cited a recent academic study that said many state pension plans are underfunded, partly because, the article said, “state funds are using an unrealistic long-term annual investment return of 8% to compute the present value of future payments to retirees, as is permitted in government standards for pension-fund accounting.”

The story also referenced the results of a recent survey by the Pew Center on the States, a highly regarded nonpartisan research group, that ranked South Carolina’s state pension system the 11th most underfunded in the country.

“We’re roughly 65 percent funded any way you cut it, which is the kind of thing that would put you in jail if you’re at the corporate level,” Sanford said in his session with the reporters in June.

With billions of dollars in play and dozens of six-figure-salary jobs potentially up for grabs, skeptics naturally have questioned who might be in line to benefit, or lose, from the commission’s plan.

As it follows, reactions to the idea of a state-run investment firm have been tepid at best.

“My thoughts were they were moving too far too fast,” says Curtis Loftis, the presumptive state treasurer-elect. “The idea may be good, but it’s going to take more time to study it.”

The state retirement system is a politically sensitive issue, Loftis says. Therefore, he says of the commission’s plan, “It still needs to be worked from a political angle, too, as well as a financial angle.”

Indeed, that side of the story got a healthy dose of sunlight at an S.C. Budget and Control Board meeting less than a week after the commission voted to move ahead with its plan.

Retirees from a swath of state employee groups attended the meeting, brows furrowed as to what exactly the commission has in mind.

“We’re concerned about it because we don’t think it’s been vetted enough,” said Sam Griswold, a retiree and a former director of the state departments of Social Services and Health and Human Services. “No retiree group was consulted in the development of this.”

In an unusual move, S.C. House Speaker Bobby Harrell, R-Charleston, appeared before the Budget and Control Board and advocated caution.

“I think the process needs to slow down dramatically,” Harrell said of the commission’s plan. He added, “I am not opposed to where they’re headed, particularly.” But he said it should be thoroughly scrutinized.

S.C. Sen. Greg Ryberg, R-Aiken, was on hand at the meeting and questioned the wisdom of the commission’s plan. “We’re going to take equity positions in small businesses or in private equity when the banks aren’t willing to put their money forward?” Ryberg said, alluding to tight, recessionary credit markets.

He equated the idea to the state acting as a bank to “take a higher risk,” adding, “The banks aren’t taking the risk.”

The Budget and Control Board has five members and they act as trustees of the retirement system: the governor, treasurer, comptroller general and the chairmen of the Senate Finance and House Ways and Means committees.

Gillespie and other commission representatives attended the board’s meeting to explain and answer questions about the idea of creating a state-run investment company.

With sometimes tense exchanges between the sides, that back and forth ended with the commission officials pledging to hold up on their plan and conduct outreach to stakeholders about it.

But, under tough questioning from Sanford, the commission officials said they believe that they have the authority to put their plan in motion without the Budget and Control Board’s blessing.

Reach Ward at (803) 254-4411 or eric@thenerve.org.