A special Senate Finance subcommittee has finished a three-month-long series of hearings aimed at ending a conflict between state Treasurer Curtis Loftis and his fellow commissioners on the Retirement System Investment Commission, which handles state retirees’ $28 billion pension. Loftis, commission staff, the commission’s chairman, Reynolds Williams, and state Inspector General, Patrick Maley were among those testifying before lawmakers in the seven hearings from December 5 through March 4.
The centerpiece of a case by Loftis—an ex officio member of the commission—against his peers is a complaint over the approximately $420 million the commission shelled out in fees in 2013 for its low-ranking returns—the bottom 20 percent in the nation, according to Loftis. Also at issue is the pension’s $17 billion unfunded liability, which could impact taxpayers if the commission fails to average earning a 7.5 percent rate of rate of return over the next 30 years.
Cause and effect
Maley investigated a “red flag” letter by Loftis, alleging 33 concerns with potential wrongdoing at the commission. A former FBI agent, Maley found no instance of wrongdoing, though his follow up report did find merit in Loftis’ complaint that the RSIC had made gaining access to information cumbersome. Commission staff say they have addressed that concern by implementing a system in 2013 that lets all seven commissioners access confidential documents remotely.
Maley told the subcommittee last December that the big issue early on was access. The treasurer had access, but the RSIC resisted his requests for his staff to access confidential documents, said Maley. “That caused a lot of the initial friction that ended up in where we are today.” Maley said the debate had devolved into an information exchange resembling civil litigation in an acrimonious divorce proceeding.
Those testifying before the subcommittee were sworn in at Loftis’ request.
On the money
Caught in the middle are state retirees and, to an extent, the taxpayers outside the system who could face picking up part of the tab if the system is as fragile as the treasurer fears.
The nearly half a billion dollars in fees the commission pays to money managers—the highest in the nation, according to Loftis—is high compared to the reported national average of $154 million.
But that comparison doesn’t tell the whole story, say commission staff, who have researched how approximately 40 other states report the fees for their pensions. States vary on fee reporting because guidelines by the Governmental Accounting Standards Board—the body that sets accounting standards for governments—are vague on reporting requirements. In her testimony before the subcommittee, the commission’s Director of Operations, Sarah Corbett said the discrepancy is more of an industry issue than anything.
Today the nine-year-old RSIC reports all its fees, a transparency measure Loftis has pushed for. Corbett said she doesn’t know of any other plan that reports fees to the same extent.
Another central component on the money debate is the fund’s $17 billion unfunded liability. The commission’s Chief Operating Officer, former Sen. Greg Ryberg told senators in February S.C. has one of the most under-funded plans in the nation. To meet that liability, the General Assembly in 2012 set the rate of return at 7.5 percent—the annual rate the plan must average over 30 years to be fully funded. Corbett said the nationwide range is seven to eight percent.
If the commission misses earning the set rate of return, that would mean increased contributions by taxpayers and members paying into the plan or decreased benefits. The plan’s rate of return as of the end of January was 7.83 percent.
Loftis told the subcommittee in January he voted twice against the commission’s asset allocation plans. He favors a move toward a more balanced asset allocation structure, though he stops short of suggesting an alternative. “I don’t want to be the investor,” he said. “I don’t want to be the sophisticated person that has all the answers because I don’t have them.” He said the commission prods him to talk about the asset allocation, but that isn’t where he wants to go. He would rather focus on fee structure and pension performance.
Corbett told senators at a March 4 hearing that staff would be receptive to procedural
and other ideas anyone wants to suggest, indicating acceptance of Loftis’ solutions, if he were to offer any. By that hearing, the Senate panel’s tenor had become more critical. “If I’m going to attack a body or a group of people for not doing things a certain way, then I need to show them a better way to do it,” said Sen. Kevin Bryant, R-Anderson. Bryant and Sen. Joel Lourie, D-Columbia, together chair the subcommittee.
When asked in an email what alternative investments or other strategies Loftis’ administration might propose, Loftis’ spokesman, Alex Stroman wrote, “our investment in alternatives are twice that of the national average, we pay the highest percentage of fees in the country, and we have among the lowest returns in the country. Our retirees, current state employees, and taxpayers deserve a more balanced asset allocation that is more in line with our peers who pay less than we, but exceed our performance.”
The allocation is currently spread over 12 asset classes. The commission’s goal is to balance risk and return through its asset allocation, said Corbett in a phone interview. “We are consciously trying to produce a scenario that’s better funded and requires less contributions over time.”
Currently the staff tests the retirement system against various scenarios. For instance, they may manually test it to see what would happen if the stock market were to lose 30 percent. The RSIC hopes to streamline the pension’s testing technology to make it more efficient some time within the year. The retirement system has also requested five additional full time employees to aid in investment and information technology. If the General Assembly agrees to fund those requests, that would bring their total to 47 full time workers. This and other structural improvements may mean additional budget requests in the long run, Corbett told the Senate panel, though specific requests are still to come.
In conflict, but not of interest
But for now, if the pension is stable, it’s despite the inter-commission wrangling over the past couple of years.
Loftis prompted in the past year a couple of investigations into activity by the commission’s chairman, Reynolds Williams, a Florence attorney. The red flag letter alleged Williams may have benefited from a contract the commission entered. Neither the State Ethics Commission nor Attorney General Alan Wilson found evidence to substantiate the claim. Wilson quit his criminal investigation late last year.
Williams testified before the subcommittee in March on the nature of his firm’s relationship to that contract.
Williams’ firm formed American Timberlands—a timber and land management company—in the early 2000s before the investment commission began. The company’s president approached Williams twice about ideas he wanted to pitch to the retirement system—the first time was before the commission could invest in real estate. Williams told him he could have nothing to do with any business dealings between the commission and American Timberlands, but he did show him the proper channels for making a pitch, he said.
When the commission decided to do business with American Timberlands, Williams provided written disclosure of his firm’s relationship with the company. And he said his firm had no role in negotiating the terms of the commission’s business dealings with the company, which would have been the usual course. His firm did handle the company’s title work. That wasn’t a conflict of interest, said Williams.
In his opening remarks, Williams commented on what he called a “moral integrity, a moral core, a moral authority, a sense of obligation and duty” found at the investment commission. The Hilton Head Island Packet reported in January that Loftis told a Lowcountry Republican club that the commission’s work “lacks a moral core.”
Creating a constructive environment
Commission staff and lawmakers say they want to find a way to move past the tension. “As a member of the system, I want to stop that contentiousness,” said Corbett.
Already, the fund is audited. Established in 2012 to administer the state’s employee insurance and retirement, the S.C. Public Employee Benefit Authority prepares the fund’s financial statements. From there, the state auditor’s office hires an outside auditing firm to inspect each of the plan’s funds.
The auditor’s office also issued a clean opinion of the commission after investigating in 2012 fees complaints by Loftis.
A fiduciary audit is in progress. Required by 2012 reform legislation, the audit is overseen by the inspector general’s office. The office chose the consulting firm, Funston Advisory Services to conduct it. The commission expects that the audit will be completed some time in April. Corbet said by phone the RSIC may potentially have a lot of work to do to improve the system. But that’s okay. The commission’s duty is to serve the trust fund, she said. “How do we go about having a dialogue about it that can create a constructive environment?”
Lourie said the panel will submit a report on its findings to the full committee as early as next week. He declined to give specific recommendations the subcommittee might make, but said lawmakers will work with RSIC on any improvements.