South Carolina is giving away billions, but there’s a catch

June 2, 2017

Investigative Reports

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You have to manage a hedge fund to get it

By ROBERT MEYEROWITZ

Legislators finalized a budget deal this week that was thought to have patched up the underfunded public employees’ pension plan. While it goes some way to addressing funding, it doesn’t do much to address the fund’s investing and spending.

There’s been much talk lately of bailing out the plan. If there’s a whole in your hull, however, bailing water might not be the shrewdest tactic. A report last month from the Pew Charitable Trusts, “State Public Pension Funds Increase Use of Complex Investments,” suggests that South Carolina’s hull has gone on leaking, and some reasons why.

The study compiled data through 2015 from the 73 largest public pension funds, across all 50 states, using annual financial reports published by the pension plans, and data from the U.S. Federal Reserve and the Wilshire Trust Universe Comparison Service.

The 73 funds, with a combined $2.875 trillion in assets, represent about 95 percent of all state pension fund investments. The South Carolina Retirement System, with $26.8 billion, was ranked 30th from the top for size of investment.

The Pew report found that:

  • South Carolina had 39 percent of its funds in “alternative,” risky investments — private equity, hedge funds, commodities, real estate, and junk bonds. The 73 funds averaged about 25 percent, up from 11 percent in 2006.
  • That 39-percent level ranked South Carolina sixth from the top for alternatives exposure, after the Arizona Public Employees Retirement System (56 percent), the Missouri State Employees Retirement System (51 percent), the Pennsylvania Public School Employees Retirement System (53 percent), the Pennsylvania State Employees Retirement System (42 percent), and Utah Retirement Systems (43 percent).

“These investments typically lack an established public exchange, have low liquidity, and can be more difficult to value. Alternative investments usually carry higher fees,” Pew notes.

The South Carolina Retirement System began its push into alternatives in 2007, following an amendment to the state constitution allowing it to do so, under Chief Investment Officer Robert Borden. Borden resigned in 2011 but his legacy persisted.

  • In fees as a percentage of assets, The Pew study shows South Carolina at 1.56 percent for investment expense and 1.52 percent for external management fees.
  • For investment expense, that percentage ranks South Carolina third among all 73 funds, topped only by the Arizona Public Safety Personnel retirement System (2 percent), and the Missouri State Employees Retirement System (1.7 percent). Few other funds even come close.

A 2015 Maryland Public Policy Institute study based on 2014 data found that South Carolina paid the second-highest fees of any state pension fund.

In the Pew study, for amount of external management fees, South Carolina by percentage ranks third again, following the Arizona Public Safety Personnel Retirement System (2 percent), and the Missouri State Employees Retirement System (1.64 percent). Most other funds are far lower.

The office of State Treasurer Curtis Loftis estimates that, from 2005 to 2016, the state pension fund paid nearly $3 billion in fees, with a jump in 2007 from $39 million to $130 million a year, topping out at $469 million in 2014. Loftis’s report concluded, “We pay too much, we earn too little, our portfolio is overly expensive and complex.”

The fees, of course, reduce the money available to pay benefits. They’re paid to achieve good returns on investment — which is where the comparisons from the Pew data begin to look damning:

  • In the measure of 10-year investment return, South Carolina had the third-worst performance of the 73 largest funds, at 5.06 percent. Only the Indiana Public Retirement System (4.73 percent) and the Wyoming Retirement System (4.5 percent) fared worse.
  • In the measure of five-year investment return, South Carolina had the eighth-worst performance of the 73 largest funds, at 8.87 percent. It again trailed Wyoming and Indiana’s retirement systems, among others.
  • In the measure of one-year return, in 2015, South Carolina, at 1.6 percent, had slipped to twelfth-worst, again trailing Wyoming and Indiana, perhaps because several states had sunk into negative growth that year.

The next year, as it paid $263 million in fees to manage its money, South Carolina’s return had fallen to 0 percent.

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