Benefits of S.C. settlement with N.Y. bank questioned
COLUMBIA — Critics said the $25 million settlement Treasurer Curtis Loftis signed with Bank of New York Mellon Corp. is a bad deal for South Carolina’s retirees and provides an unexplained high payout to the two attorneys representing Loftis.
Loftis responded Friday that the deal’s value tops $100 million when including potential savings over a 10-year contract awarded to the bank as part of the settlement. He said the attorneys’ $9 million was “paid according to state practice.”
He did not provide a breakdown of how he calculated that value, as requested, other than citing a combined $1.5 million worth of training over a decade the bank agreed to provide state employees on its services. The Retirement System Investment Commission said the savings don’t exist.
“The settlement provides the potential for outsized savings on certain investment and custody services,” Loftis said in an emailed response, following weeks of interview requests. “We are excited about the potential for this revitalized relationship with a long-time provider of valuable services to South Carolina and the opportunities that it presents.”
The contract, not yet signed, would keep roughly $40 billion of the state’s assets with the Bank of New York Mellon, which has held them since at least 2000.
The bank has credited $25 million to the state’s investment accounts under the settlement first reported by the AP in May. Of that, $20 million went to the state Retirement System Investment Commission, which oversees public workers’ $27 billion pension portfolio. Another $5 million went to the treasurer’s office, whose responsibilities include writing the checks for state government and investing for college savings programs and retirees’ health insurance.
The treasurer’s office sued the bank in January 2011, accusing it of losing $200 million in retirees’ money through bad investments that violated its contract for conservative, short-term securities lending. The actual loss 2 ½ years later is roughly $120 million, due to partial recovery from those investments in sub-prime mortgages and bankrupt Lehman Brothers, according to the investment commission, which had no say in the settlement.
State retirees have questioned why the state would reward such behavior with a 10-year deal.
“That makes no sense to me,” Wayne Bell, former president of the State Retirees Association, told several hundred attendees at its annual conference last month.
Commission Chairman Reynolds Williams said he believes the bank negotiated a great deal for itself while leaving retirees with a net loss of $100 million.
“I am amazed that anyone thought this was a good idea,” he said last week. “There are no demonstrable future savings here and the restitution is measly.”
Loftis says the commission chose not to participate in the lawsuit, while Williams said Loftis refused assistance it offered.
While the settlement calls for South Carolina to receive a greater profit share on securities lending, at 90 percent instead of the current 85 percent, it also creates custody fees it never paid before. So revenue gains are far outweighed by upfront fees, Williams said. The arrangement will cost the pension portfolio more than $2 million in additional fees per year for existing services, while additional services it offers are being handled by others at a lower cost, according to commission estimates, using figures it recently received from the treasurer’s office.
Other savings depend on South Carolina investing at least $3 billion with HedgeMark, a Bank of New York Mellon affiliate founded in 2009 that manages hedge fund investments. If that happens, the state would receive an estimated annual credit of $2.6 million.
That appears unlikely.
“In order for these supposed benefits to come into play, the retirement system would have to invest $3 billion with this untested, unproven firm,” Williams said.
That would exceed the commission’s lower, 8 percent portfolio target for hedge funds, which took effect July 1, and there’s no money in the commission’s 2013-14 budget to pay HedgeMark’s proposed upfront fees, he said.
Loftis did not respond to questions about HedgeMark. A company spokesman was unavailable Friday.
Under the settlement, Loftis promises to consolidate as many assets as possible with the bank and HedgeMark, as well as facilitate meetings with the investment commission. As treasurer, Loftis is the legal custodian of state assets, giving his office authority to negotiate the custody contract. But he can’t make commitments for pension investments.
Loftis is a voting member of the commission, but he does not get along with his fellow commissioners, especially Williams. They have publicly clashed frequently since Loftis took office in 2011.
Bell fears that if Loftis takes an advocate role for HedgeMark, a position he questions as a conflict of interest, the tension will only increase.
“That’s something we do not need. It’s something that needs to stop,” he said. “The bottom line for me is, $20 million may seem like a lot of money, but it’s $20 million to sign a contract with a firm that’s violated the previous contract, to give the lawyers $9 million. The lawyers got a good deal out of this.”
Loftis has not answered questions on how the $9 million was calculated.
Under the retention agreement that former Treasurer Converse Chellis, who started the lawsuit, signed with attorney Mitch Willoughby in 2010, attorneys were to get less than $4.5 million of any judgment or settlement up to $25 million.
However, the settlement provides $7 million to Willoughby’s firm and $2 million to the attorney Loftis brought on board, his long-time friend and fraternity brother Mike Montgomery.
Neither attorney returned messages seeking comment.
Their payout riles retirees, whose average annual annuity is $22,000. The attorneys met privately with officers of the retirees association. Bell said he did not get the answers he sought.
“I tried to help him understand why there was so much talk about their fees. It is very difficult for people who have to live off only $22,000 a year to understand how you all can justify $9 million,” he said he told Willoughby. “Basically he held up a piece of paper and said, ‘This is the result of our two years’ worth of work. This justifies it.”’