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Article published Apr 17, 2005
State retirement system: Bill provides little state oversight of
public assets
The South Carolina Senate rushed to the brink of
fiscal folly by passing Senate bill 618 last week. The bill was supposed to
address cost-of-living adjustments (COLAS) facing the state retirement
system.The legislation would take the retirement system's $25 billion and put it
in the hands of a (part-time) five-person state Investment Commission. The
commission would then place the $25 billion with private investment groups --
the same groups we have paid more than $56 million to produce a rate of return
of less than 1.5 percent. Our $25 billion system would become a system with no
true lines of authority or accountability.This bill ensures that there would be
no direct state oversight, nor would the state dictate the standards of
performance and conduct of the investment professionals who would have our
money. The state would have little ability to recover damages. Dismissed money
managers have never been penalized for their failure to perform. One need not
look back too far in recent history for examples of good judgment falling prey
to temptation at the investing public's expense.Relinquishing state assets to a
commission of disinterested parties contradicts the daily calls from editorial
boards, the Legislature and the governor for the restructuring of government in
the name of accountability. Granting sole fiduciary responsibility for investing
$25 billion to an untested investment commission should concern taxpayers.I am
convinced that the Senate sought a quick fix for both the immediate and
long-term challenges the system faces. I must agree with Sen. Greg Ryberg, who
called this legislation a "Band-Aid solution." The grave danger ofthis
legislation is that it would create the illusion of higher earnings on
investments in order to grantcost-of-living adjustments.For years, we have had a
solid basis for projecting the investment returns of our pensions. Anyone who
has watched the stock market jump and stutter knows how important it is to be
conservative in those projections. This year, the projected return on investment
is 7.25 percent.Senators -- fearing they could not grant a COLA to our retirees
-- and private investment groups insist that the projections for earnings should
be 8 percent. They are wrong. On March 15, the actuary for the system stated
that an 8 percent return could not be reached, even with liberal changes in
investments and strategy.This change would make state investments like the
family who needs extra money. They are making $50,000 a year, but they hope for
a raise -- so they go out and spend $60,000. If they don't get the raise, who
pays their bill?Increasing the assumed rate of return would allow the actuary to
make a paper adjustment, but the assumption would have to consistently
materialize in actual returns to avoid an increase in the unfunded liability.
This is an accounting gimmick to create a false positive so that COLAS can be
granted. Once we artificially increase the rate of return to pay for COLAS, we
will never be able to stop.This legislation runs the state from its traditional
investing strategy, which produced the highest rate of return among public
pension systems in 2002 and 2003, into increasingly aggressive investments that
automatically expand our risk.Like the members of the Legislature, I want to
grant a COLA to those who dedicated their lives to South Carolina. But it is
profoundly shortsighted to assume that changing our investment policies and
structure will bring quick resolutions to current needs.Only a combination of
factors will determine whether we will be able to meet the needs of the
retirement system for years to come. This bill overinflates earnings
projections, increases our risks and dismantles our current system of
accountability.Why does this matter to you? If a private investment board makes
bad decisions for your public pension systems, South Carolinians will have to
bail the systems out with tax dollars. And you would not be able to hold its
members accountable at the ballot box.Holding an elective office in public
service for 34 years is largely achieved by stewardship and acting in the
interests of those being served. My objection to the bill arises exclusively out
of the plan's complete absence of that stewardship. This proposal is an
abdication of responsibility, accountability and common sense.As your state
treasurer, I have never written such a strongly worded letter of caution. I do
so because I believe that accountability and honesty -- not illusions -- should
be the foundation of investing the public's money.Grady L. Patterson Jr.is state
treasurer.