By Paul Gable
“The treasurer has a legitimate concern. He has the right, if he is putting his signature on there, to have staff to give him confidence that what he is doing is right for the people of the state.” Governor Nikki Haley
Better oversight and more transparency of investment decisions for the state’s $25 billion pension fund may result from a vote taken by the S.C. Budget and Control Board Thursday.
The board, chaired by Gov. Nikki Haley and including Treasurer Curtis Loftis, Comptroller General Richard Eckstrom, Senate Finance Committee Chairman Hugh Leatherman and House Ways and Means Committee Chairman Brian White as members, unanimously (5-0) approved a motion by Loftis to “hire a counsel to determine the fiduciary and statutory responsibilities of all trustees, custodians and commission members” with regard to investment decisions and contracts of the pension fund.
As state treasurer, Loftis is custodian of all state funds as well as a voting member of both the B&CB and the S.C. Retirement System Investment Commission. Since being sworn in as treasurer in January 2011, Loftis has complained of a lack of transparency with respect to investment contracts and claims by the SCRSIC that only commissioners and commission staff are allowed, by state law, to have access to commission files.
“The Attorney General can find no limit on the obligation of one fiduciary to give information to another,” Loftis said. “We have the obligation and liability to get the best information we can.”
Loftis said he believes the position taken by the retirement commission on state law is inaccurate because it is essentially based on Freedom of Information Act, which limits public access to confidential investment information.
To assist him in his tri-fold fiduciary responsibilities, Loftis wants key members of his staff to have access to files and contracts of the SCRISC. Loftis said members of the B&CB should also have access to commission files in their fiduciary role as overseers of state funds.
“My interests are not always aligned with investment commission custodial arrangements,” Loftis said. “I don’t believe we have meaningful oversight until we have the ability to have credentialed people have access to the confidential information.”
Retirement commission chairman Reynolds Williams countered Loftis’ arguments. Loftis and Williams have had an adversarial relationship since Loftis’ election as treasurer.
Loftis was the object of a SLED investigation earlier this year on a ‘pay for play’ scheme alleged by Williams. Loftis was totally exonerated of all allegations by SLED.
A letter containing concerns by Loftis, of work done by Williams’ law firm for a client of the investment commission, was recently forwarded by the Attorney General to SLED for investigation.
“The investment commission has exclusive authority to manage and invest the moneys we hold,” said Williams. “The statute does not have a provision for oversight of the commission. The commission should make decisions about access.”
Williams said future investment contracts of the commission could be negotiated on a case by case basis with regard to access for members of Loftis’ staff.
“We will work in good faith to include it in all future contracts, but it is not wise to go back to existing contracts,” Williams said. “We cannot unilaterally decide to breach a contract (by giving Loftis’ staff members access to existing contracts).”
Williams is an appointee to the investment commission of Sen. Leatherman. Leatherman questioned Loftis’ desire to have members of his staff have access to investment contracts.
“The commission sits as a body and receives information on potential investments,” Leatherman said. “Any commission member can ask any question of any (commission) staff member they want. Quite frankly, Mr. Treasurer, the question is why you need to review decisions you were a part of.”
Loftis responded that the final contracts for an investment are often negotiated after the commission has voted to move forward with the investment. Final contracts are often delegated to the chairman and commission lawyer to review and sign, Loftis said.
“We never see the final product,” said Loftis. “If only the group (commission) itself provides oversight, then, do we have oversight?”
“I totally reject that confidentiality agreements won’t allow my staff to see the contracts,” Loftis said. “Is it too much to say, before we send $250 million of state money we are sure it is going to a safe place?”
Loftis said the internal operations of the commission have never been audited.
“The commission is not audited, just the funds,” he said. “The people of this state have to know that (the handling of) their $25 billion is being looked at.”
Commission member Allen Gillespie told the board that the “statute is silent on issues that need better definition.” A commission staff member told the board that the commission had asked for additional resources to monitor risk assessment, due diligence, evacuation and cross trades.
Loftis countered the statement by saying the commission had the money and chose not to use it. “They have returned money (from the budget) at the end of the year up to $1 million” he said.
Leatherman asked whether the treasurer and commission members believe the state statute (regarding the investment commission) is being complied with. Williams responded “absolutely”. Loftis said, “I do not.”
Comptroller General Eckstrom said he felt the issue was coming down to interpretation of the statute.
Gov. Haley said, “The treasurer has a legitimate concern. He has the right, if he is putting his signature on there, to have staff to give him confidence that what he is doing is right for the people of the state.”
Loftis made his motion. It was approved unanimously. A lawyer will now be sought to interpret the statute, provide an opinion as to who, if anyone in addition to commission members and staff, has the right to see investment contracts and provide fiduciary oversight of investment deals and funds.
It certainly seems reasonable that oversight beyond the commission members and staff is prudent. Williams said it often takes several months up to a year to finalize investment contracts. This is certainly enough time for members of Loftis’ and the B&CB staffs to peruse documents and make recommendations if appropriate.
During the course of the discussion, Williams, a lawyer not an investment professional, made several statements that seemed absurd. He said the commission was getting investments with “higher return and less risk.”
Any investment professional will tell you that risk and return are directly, not inversely, proportional – the higher the potential return, the greater the risk.
Williams also said that the commission reports higher than average fees, in the interest of transparency, because it reports more fees than are reported by similar public investment funds.
The investment commission has been criticized for obtaining a lower rate of return and paying higher fees than similar funds. An outside audit should be conducted just to see if Williams or the critics are correct in their statements.