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Sparks Fly Over Investment Strategy — and Personalities

By Porter Barron Jr.
Wednesday, December 4, 2013 |
Telling what’s what over at the South Carolina Retirement System Investment Commission is no easy feat for the layperson, but one fact stands out: South Carolina’s pension fund pays out more in investment management fees to Wall Street than that of any other state, at least according to what other states have publicly reported.

At around $27 billion, the state pension fund is South Carolina’s largest financial asset, but it took a beating in the recent recession that left it only 60 percent funded (i.e. unable to meet all its future obligations to retirees).
Consequently the question of whether focusing heavily on alternative investments — commodities, private equity, hedge funds, real estate, which require more active management than traditional stocks and bonds and therefore high management fees — is the most sensible way to make up that unfunded liability has now become a matter of hot, sometimes rancorous, dispute.

Treasurer Curtis Loftis, the only elected official to sit on the commission and its sharpest critic, portrays the high fee payments as a sinful transfer of wealth from the working people of South Carolina to the fat cats of Wall Street. His office points out that between 2007 and 2013, fee payments have increased more than 10 times, from about $39 million to about $420 million.

South Carolina’s retirement system pays “$420 million in fees, which is tops in the country, and our performance is in the bottom 20 percent,” Loftis says. “Had we paid $420 million and we were making a lot of money, I would be happy, but we didn’t do that.”

“Our rate of return was 10 percent. The average was just over 12 percent. Two percent when you’re talking about $27 billion adds up. So we pay too much in fees, probably $250 million to much, we underperform and that left, say, $500 million on the table.”

The treasurer’s office points to a study released in July by the Maryland Public Policy Institute and the Maryland Tax Education Foundation. It concluded that high investment fees do not necessarily translate into higher returns and that, in fact, the opposite may be true.

“The top 10 states — in terms of Wall Street fees — had a lower pension fund investment performance — over the last five fiscal years — than the bottom 10 states,” the study reported.

Consequently, Loftis’ office, citing the National Conference on Public Employee Retirement Systems, says that South Carolina’s money-management fee expenses should be more in line with the national average, around $154 million, and Loftis says the other $250 million and change should have been returned to pensioners.

“That’s roughly $1,700 a retiree that we could have given a one-time check. Would the retirees rather send their $1,700 each to the money managers on Wall Street or would they rather have an envelope under the Christmas tree with $1,700 in it?”

But according to former state senator and the investment commission’s recently installed chief operating officer, Greg Ryberg, there is no such thing as an apples-to-apples comparison when it comes to analyzing different states’ pension funds.

He maintains that the investment commission’s investment decisions reflect what the best money minds on hand think is most beneficial for South Carolina’s retirees.

“Public pension plans that are nearly full-funded [able to meet at least 80 percent of future payout obligations], such as Georgia Teachers at nearly 85 percent and Tennessee Consolidated at over 90 percent, may prudently invest in a low-fee, 60/40 (stocks/bonds) portfolio because they can tolerate the higher volatility of such a heavy equities position,” Ryberg said by email, essentially arguing for diversification through alternative investments as a buffer against volatility, the strategy embraced by the investment commission as a whole up until now.

“The need to mitigate risk through alternative investments incurs fees that well-funded, high-risk plans do not pay. Commissioner Loftis has proposed not one single alternative to our investment plan,” Ryberg adds.

As Palmetto State political observers know too well, the differences between these two Republican politicians extend far beyond investment strategies, as Ryberg, an ally of commission chair Reynolds Williams, tried to boot Loftis from the commission in February 2012 when Ryberg was still in the state Senate.

When Williams welcomed Ryberg to the commission at a public meeting on Nov. 21, Ryberg gave a speech in which he identified the office of state treasurer (without naming Loftis) as the only unqualified member of the commission and then defended the “excellent moral core at the Investment Commission that has been unjustly belittled and demeaned.” That Loftis was Ryberg’s target was obvious.

When Ryberg finished, Loftis attempted to respond but found himself firmly shushed by Williams. Shortly afterward, Loftis’ campaign for reelection sent out an email to supporters that began: “At the Investment Commission meeting today, staffer and former career politician Greg Ryberg went on a 20-minute rant against both YOU and me. He levied multiple allegations against me that were false, distorted and politically motivated. Since the Chairman won’t allow me to speak and defend myself I just have to laugh it off and get back to work.”

It was the latest evidence of what S.C. Inspector General Patrick Maley termed “relationship dysfunction issues” between the treasurer’s office and the commission in a July report that many hoped might impose a measure of civility on the opposing actors but instead left them claiming qualified victories over one another.

The following week, Loftis described Ryberg’s speech to Free Times, which had been present at the meeting, saying, “He spent 20 minutes insulting me, as a staffer he spent 20 minutes insulting his boss, and I wasn’t allowed to speak. Is that not cowardly? That’s against everything we know as Americans.”

Ryberg disagreed with that characterization, writing to Free Times, “I did not name any individual during my remarks, but when Mr. Loftis admits to the crude and boorish behavior, then I suppose that I don’t need to. He also is confused about who is our boss. Our boss is the half million participants in the plan. It’s not all about him.”

While both sides claim to have only public employees’ interests at heart, it is clear that the gloves are off and the knuckles are taped.

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