Mending Fences and Fixing the State's Pension Fund

Friday, August 19, 2016

See the original article that appeared on the "Statehouse Report." It was written by senior editor Bill Davis.

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"Statehouse Report" -- Just in time for a House-Senate review later this month, state Treasurer Curtis Loftis and the state Retirement System Investment Commission have called a truce.

Earlier this summer, after pressure from legislators, House Speaker Jay Lucas (R-Hartsville) called for an Aug. 30 joint legislative hearing on the health of the state’s multi-billion-dollar pension fund, which helps fuel the state employees’ retirement system.

Lucas said this week that reforming the state’s pension system “must be a top priority for the General Assembly next session. This joint legislative panel will serve as the first major step to help find a solution and address one of our state’s most significant fiscal issues.

“South Carolina must follow through with its commitments to state retirees who have voluntarily contributed into the system. In order to do that, the General Assembly must take responsible action and put the retirement system back on a path to solvency.”

Unfunded portion of pension fund has grown

State officials have reason to be worried about the pension fund.

Over the past 17 years, according to state numbers, the unfunded portion of the fund has grown from $200 million in 1999 to more than $20 billion in 2016 — close to 30 years’ worth of payouts.  Virtually all agree that’s a considerable sum, considering that the total valuation of the fund has not topped $30 billion in years.  The most recent valuation is $27.9 billion as of June 30, according to RSIC officials.

State officials say there are close to 187,000 active contributors to the system, and close to 135,000 recipients currently.

In a single day during the Great Recession, the fund lost $1billion in value.  It was bad news for state retirees, employees, politicians and taxpayers, as any actual and realized shortages in the future will have to be mitigated by either decreased benefits or from increased contributions from employees and the General Fund, which could mean higher taxes.

“Where’s the outrage?” asks Loftis.  “People have gotten upset over bathrooms – what about all this?” A past critic of the RSIC panel, Loftis has raised alarms about the amount of money the commission has paid in management fees relative to is modest returns on investments.

External criticism, internal pressure

RSIC Executive Director Michael Hitchcock praised Loftis, who has been clashing with his agency and its former heads for the past five years, for forcing the issue and making sure a better and more transparent job gets done.

Cognizant of the fund’s relatively poor performance over the past decade, Hitchcock has pushed the commission in a host of new directions since taking over in 2014 and said he looks forward to the Aug. 30 hearing in Columbia.

One of the biggest changes Hitchcock has instituted has been changing the asset allocation of the commission’s portfolio to a more flexible and selective model.

Even though those changes won’t be complete for another two years, Hitchcock said the commission has already moved $8 billion in investments, equal to about 80 percent of the total realignment, so far this summer.

Additionally, the commission no longer pays bonuses to its managers, the director said.  A previous investment guru who guided the fund received a several hundred thousand dollar bonus after the fund lost money, but outperformed the market and similar pensions.

No more, said Hitchcock, as the commission is now going solely with a “fee and carry” system where it pays investment managers some up-front fees and then pennies on the dollar going forward. The commission has also greatly reduced the total number of outside managers it hires to help invest retirees’ pensions.

Hitchcock said after reviewing the commission’s practices, he found the agency didn’t always have a clear understanding of why some managers were getting paid for their expertise.

He said the current policy is for the commission to go the “easiest and cheapest” investment route, unless the commission could get a clear understanding of why and how a certain expert, such as a hedge fund manager, might perform better and might bring specific extra skills to the table.

Hitchcock added these changes would be crucial going forward, as he believed the stock market, being a cyclical beast, is due for a downturn. “Basically, we’ve had a bull market for the past six years,” he said.

Turnabout and fair play

In years past, any statement issued from the RSIC has been a target of criticism for Loftis.

But this week, Loftis, who still has a host of criticisms and concerns, expressed confidence in the changes.

“They’ve made the turn,” said Loftis. “I believe they have a better investment strategy and better portfolio than in years past.

“I like the new talent they’ve brought on.”

The treasurer does quibble that some of the officials and commissioners who he blames for the past struggles have retained positions within the agency.

Loftis said he has confidence in Hitchcock – a major reversal from past directors – and that he understand that it will take years for the fund to make up for lost years, “I like the direction it’s going in.”

Loftis, worried by what he says is a $1.7 billion loss on the books this year, still praised the drop in management fees from close to a half-billion dollars in 2014 to just over $300 million last year.

According to RSIC officials, pension dollars have been invested in as many as 205 funds and as few as 197 funds over the past three completed fiscal years, with management fees paid out ranging from $467,000 in fiscal year 2014 to $362,000 as of the fiscal year ending in June 2015.

Those same officials report that the fund has lost 0.39 percent so far this year, as of June 30, and that it gained 1.6 percent the previous fiscal year.  They said it gained more than 15 percent the year before that.

Hitchcock continued to stress that, “improved performance, both total and relative, is essential for RSIC.”

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