State Pension Performance, Fees at Heart of South Carolina Feud
Curtis Loftis has made it his mission to overhaul the investment commission that oversees the state’s pension fund. But it hasn't been easy.
The last thing you want to tell Curtis Loftis is that he can’t do something.
That’s one mistake the former South Carolina Treasurer made when Loftis was considering a bid against him. “He reminded me that a Republican has never beat an incumbent in a primary election,” Loftis, 54, recalls. The native of Columbia went on in 2010 to become the first South Carolina Republican to oust a sitting Republican, launching a combative primary campaign, then easily winning the general election that fall.
And that was just the beginning of the upsets.
Since he took office more than two years ago, the former businessman has made it his mission to overhaul the state investment commission that oversees the state’s pension fund. The conflict has included Loftis prompting an investigation into South Carolina Retirement System Investment Commission (RSIC) Chairman Reynolds Williams for allegedly steering commission business to his firm, Loftis and Williams using the media to trade insults and a nearly unanimous commission vote to officially censure Loftis (the treasurer, who sits on the commission, was the lone vote against).
Most recently, a lawsuit filed by the commission against Loftis for holding up an investment contract was thrown out by the state supreme court because Loftis had authorized the contract the day before the court hearing, saving the commision from going into default. It won both sides a public scolding: “We don't appreciate trying to referee kids in a sandbox,” Associate Justice Donald Beatty reportedly said at the April hearing.
After two years of conflict, both sides say they are eager to move on. But at the base of their disagreement is a fundamentally different view on how the $26 billion retirement fund should be performing. Loftis has seized upon what he calls an imbalance between the fees the commission pays (which have ranged between $304 million and $344 million over the last three years) and its rate of return when compared with other sizeable public pension plans. In 2012, for example, the investment fund earned a net $105 million after paying out $304 million in fees. The rate of return that fiscal year ending June 30, 2012, was 0.4 percent after deducting the cost of management fees, according to the fund’s Annual Iinvestment Report (AIR).
When compared with other public pension plans valued at greater than $5 billion, that performance puts South Carolina’s ranking in the 63rd percentile, or in the lowest 40 percent, according to data collected by the investment advisory firm Wilshire Associates and provided to Governing by the treasurer’s office. The Wilshire data includes major plans like CALPERS, CALSTERS, Washington State, Oregon, and Texas Teachers.
Even a good year of returns is all relative for Loftis -- in 2011 the fund earned roughly $4 billion, or a return of 18.3 percent on investment and paid fees of $343.6 million, according to that year's AIR. But compared to other plans, RSIC finished in the 87th percentile that year, or in the lowest 20 percent. (The top returns in 2011 were above 26 percent while the lowest were below 10 percent, according to Wilshire.)
“If we were number one in returns and in fees I’d love it,” Loftis says. “But you have to pay fees commensurate with what you’re getting. What we’re paying for is a Rolls Royce. And we’re driving off in a [Ford] Pinto.”
But that’s not how the commission sees it.
“What I’d encourage everyone to stop and think about … we’re not thinking about putting ourselves in a horse race with other public pension peers,” says Hershel Harper, the commission’s Chief Investment Officer. “We look at what it is in relation to our expected return of 7.5 percent [over the long term], and what are the risks we are comfortable taking.”
Although Loftis has lamented that the fund’s investment in hedge funds or other “alternative investments” generate the higher fees, Harper noted that the underperforming investments in 2012 were generally in the traditional asset classes, not the alternative ones. Still, in January of this year, the investment commission did something it hadn’t done before: it attached an addendum to its 2012 AIR that provided a second summary letter to the original November 2012 report. The addendum gave the investment fund’s totals for the 2012 calendar year -- a far rosier picture (an 11.5 percent rate of return, in fact) than the fiscal year stats.
A spokesman for the commission said the January letter was attached to give lawmakers and the public a more up-to-date summary of the fund and that the decision to do so was made after it became clear that the final six months of 2012 were financially far better than the first half of the year. The spokesman, Danny Varat, added that he imagined such updates for timeliness would also occur in the coming years.
On fees, Harper warns that it is misleading to compare RSIC’s fees with other public pension plans because there are no uniform guidelines for reporting fees. For example, he said, the commission includes auditor expenses in its fees and other plans don't. “We feel we cast possibly the broadest net in capturing every fee out there,” he said.
Some public pension plans elsewhere are taking a stab at lowering management fees. This spring, the $10.5 billion Orange County Employees’ Retirement System (OCERS) approved a plan that would bundle pension fund assets together in an effort to be able to negotiate lower management fees (a kind of pension fund collective bargaining). The plan was projected to spend $52 million this year in fees, according to media reports.
Loftis’ recent announcement he will seek a second term in 2014 has quelled for now any musings that his pot stirring is part of a larger effort to run for governor. “When I lay my head down at night, I don’t think about that rickety old mansion on Charles Street,” he says. “I can’t stop what I’ve started [here].”
But if there is an understanding to be reached between the South Carolina treasurer and the commission he serves on, neither side has found it. At the last commission meeting in April, the commission's vice chairman threatened to resign on May 31 if the relationship with Loftis was not resolved, adding “there is little or no common ground between” the two sides.
The investment commission’s Chief Operating Officer, Darry Oliver, says he doesn’t think the commission “gets enough credit” for the improvements it has made in recent years such as establishing an internal audit and compliance function. The commission also plans on more transparency in reporting, including more frequent updates on the investment fund’s statistics. The feud with Loftis, Oliver says, is detracting from that. “My view is that the negative publicity isn’t good for anyone -- it’s not good for the commission, it’s not good for the treasurer, it’s not good for the stakeholders.”
But Loftis, who says he initially planned on handing over his commission seat to a staff member but felt compelled to stay on, dismisses that notion. “This is high finance,” he says. “When they say things like, ‘People won’t want to do business with us,’ that’s pure silliness.”