South Carolina has given oversight of $26 billion in state
pension money to a group of appointees who answer to no one but
themselves.
Creation of the six-member S.C. Retirement Investment Commission
follows a national trend of entrusting private financial advisers —
rather than state employees or elected politicians — with public
pension money.
But experts say requiring the investment commissioners to police
themselves is fraught with legal and ethical pitfalls.
“It’s the equivalent of the fox guarding the henhouse,” said
State Treasurer Grady Patterson, a commission member who argued
unsuccessfully for more oversight of the panel when the Legislature
was setting it up.
One of the trickiest issues could be adhering to ethics rules
intended as a firewall between commissioners’ personal investments
and pension assets promised to more than 90,000 state retirees and
those yet to retire.
It’s up to the individual commissioners to make sure the
guidelines are followed because no state agency has the authority to
monitor for violations.
One commissioner who works in the investment industry already has
said he might have conflicts under the new law, and the group will
ask the General Assembly to clarify the regulations.
“You’re damned if you do, damned if you don’t,” said John
Freeman, a USC law professor who advised the group. “You don’t want
people who don’t have a clue about investments, but you end up
increasing the risk of conflicts of interest.”
The General Assembly created the commission to streamline the way
the state invests its pension fund and, hopefully, earn more on
those investments.
The commission, which meets today, will hire portfolio managers
to invest part of the pension system’s assets. The panel also will
decide the fund’s overall investment strategy. A chief investment
officer eventually will be hired to oversee day-to-day operations of
the pension system.
The commission replaces a system criticized by some lawmakers and
business leaders.
Under the old system, an investment panel handled stocks for the
pension plan, and the State Treasurer’s Office was responsible for
the bond portion of the portfolio. All major decisions, including
hiring fund managers, had to be approved by the Budget and Control
Board, made up of elected state officials.
When setting up the new commission, lawmakers required each of
the appointees — who are unpaid except for Patterson, who gets a
seat by virtue of his post as state treasurer — to have an extensive
investment background.
That means that members presumably can make better decisions on
how the pension money should be invested. But it also raises
questions of oversight since insiders could exploit the system for
personal gain.
Other public pension plans have been rocked by scandals,
including still-developing kickback scandals in Illinois and
Ohio.
The new S.C. commissioners must fill out statements of economic
interest, which cover gifts they may get as officials and their
business dealings with the state. However, the form does not require
commissioners to disclose their own personal investments or
connections they might have with investment firms.
The issue of officials profiting from public pensions is not a
widespread problem, said Ron Snell, who tracks pension systems for
the National Conference of State Legislatures.
Commissioners here say they will head off potential problems by
making full public disclosure of their dealings.
But they’re off to a rocky start.
At a meeting last month, commissioner Blaine Ewing, senior vice
president of investments for Smith Barney in Charleston, said he was
worried about potential conflicts.
Ewing said he had done research on several companies under
consideration for pension contracts as part of his work with Smith
Barney.
Commission chairman Reynolds Williams, a Florence corporate
attorney, later said the group would discuss conflict-of-interest
rules in a closed-door meeting.
When a reporter from The State newspaper challenged whether that
was allowed under the state’s public meetings law, Williams
responded: “So sue me.”
While commission members said they steered clear of discussing
conflicts in that closed meeting, some observers say the incident
highlights the need for tighter disclosure guidelines.
“We’re troubled that they think certain discussions should not be
held in public,” said Sam Griswold, president of the State Retirees
Association, which represents retired state employees .
Ewing said he wants to set up a wall between pension investment
decisions and his personal business. That could mean hiring a
consultant to screen potential new fund managers.
Robert Klausner, a Florida attorney who advises pension systems
but is not working with South Carolina’s, says officials should
craft a detailed selection policy for portfolio managers and make it
public. They also should submit written explanations when conflicts
of interests arise.
Commissioners also must be mindful of more subtle potential
problems. For instance, the law forbids “any direct or indirect
interest in the gains or profits of any system investment.”
Commissioner Allen Gillespie, a partner in GNI Capital, said that
rule could bar commissioners and their private clients from
investing in something as simple as an index fund or a mutual fund
that could hold pension assets.
State Sen. Nikki Setzler, who pushed for the inclusion of the
ethics rules in the pension law, said he’s open to refining the
language in the law but any changes will take careful consideration.
“Tighten the regulations, yes, but not weaken them.”
Griswold of the Retirees Association agrees. “If you violate the
trust of these public funds, you’re pretty low-life.”
Reach Stensland at (803) 771-8358 or jstensland@thestate.com.
