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.

Nerve stories are always free to reprint and repost. We only ask that you credit The Nerve.

 

 

  • Maris

    The State’s pension system is the center of corruption in SC. Old Carolina families have made millions, politicians have made money and their children got great jobs in the financial industry. Greedy people have run the system for 20 years and they are laughing all the way to the bank.

  • Philip Branton

    Hmm….all these fees should be trackable all the way back to who was paid. Board members, traders, administration, secretaries, IT workers and if they even live in South Carolina and send their kids to private or public schools and to which ones. That is total transparency. These teachers and state workers would love to know. How much of the fees were generated via frontrunning from dark pools..? How were the profits used…?

    Solicitor “fiasco” Pascoe should have the criminal justice students at USC all over this data for class assignment. Have those students start trolling the Pension board with daily updates…! https://uploads.disquscdn.com/images/6ce760d3c094d3355a8be89fce39bfa82ae70b374fe6a60dc8c6ba0858ff8586.jpg

  • Philip Branton

    What is so outrageous is the fact that this article will not be run in any of our state papers or be recited from our pulpits this next week to inform the state taxpayers of what really is going on. This is exactly the type of informational deception that led to the collapse of the cotton economy that ushered the Civil War..! You mean that our pension board is this blind..?
    Curtis Loftis could be doing so much more than what he is doing presently..!

  • Philip Branton

    Hmm……the clock is ticking on this article and the Templeton campaign has failed to ad to the comment section or get some stiletto time in front of the Nerve to ask and answer some pension questions..?

    Does Catherine want to spank McMaster or not..? https://uploads.disquscdn.com/images/87ae60fce5ac2bad41066b0c41677b28392ad4a3c45d9fec423778c7a2a7b115.png