News: CJ Exclusives

Folwell pursuing fees from pension fund managers

Treasurer want to tighten up fee policy, boost performance of pension and health funds

State Treasurer Dale Folwell, shown here at a January swearing-in ceremony at the Executive Mansion. (CJ file photo)
State Treasurer Dale Folwell, shown here at a January swearing-in ceremony at the Executive Mansion. (CJ file photo)

State Treasurer Dale Folwell wants to know if Wall Street investors charged the state fees on $9 billion of state pension plan money that never got invested.

At the same time, unfunded liabilities in the retirement system grew to more than $13 billion.

Folwell said some investment fund managers collected all the fees they were entitled to receive from the $91.7 billion retirement system but left some of the money idle. Others didn’t invest all of their obligations because they never withdrew it from the treasury in the first place.

Folwell, who has been on a 100-day reform blitz since taking office in January, said he would seek repayment of any fees improperly paid on the $9 billion of uninvested money.

He said he was disappointed the state recently paid tens of thousands of dollars for a compliance and fees report commissioned under previous Treasurer Janet Cowell that was delivered in February.

The project should have been designed to examine every contract and ensure that fees were paid according to the terms, Folwell said. “That’s not what occurred.”

Folwell comments came during his second monthly Ask Me Anything teleconference series with reporters in April. He was featured in a recent Bloomberg Businessweek profile.

He’s trying to determine where fund managers made alternative investments — investing in non-traditional assets like real estate, hedge funds, or derivatives contracts — and will examine the billions of dollars the state has invested in what are known as a fund of funds. Under that arrangement, one investment manager gets a state contract but spreads the money around to let multiple fund managers who do not have state contracts invest it.

The state will begin shifting alternative investments into indexed funds, Folwell said, which should be more transparent and generate higher returns.

Folwell said he is continuing to work with his investment management division to whittle down other investment management fees, in keeping with a campaign promise to eliminate $100 million in Wall Street payouts.

He talked to 170 investment agents with state contracts, and immediately saved almost $25 million in recurring annual fees, he said.

By the end of his four-year term he would have hit his $100 million target, but he’s seeking even more, because it would represent only 5 percent of the nearly $2.5 billion the state would pay in  fees during his term.

A substantial portion of the $25 million savings came from investment managers who did not deliver promised returns. He said the state could have earned more money if those investments had gone into an index fund.

His office also is looking at investment arrangements that are 10 to 12 years old “to make sure that they’re even supposed to be charging us fees,” he said.

Folwell warned there is a looming financial problem with the State Health Plan.

“We’re going to run out of reserves sometime in the next 30 months,” Folwell said.

The State Health Plan lost $125 million in 2015, and is projected to come up short $160 million when 2016 figures are finalized. Losses are projected to be $300 million in 2017, $500 million in 2018, and $550 million the year after that.

“There’s a very strong possibility that the appropriation in the State Health Plan this year is going to exceed the appropriation to the university system,” which would be a huge change, Folwell said.

The State Health Plan will charge members a $25 monthly premium (they now pay nothing), and premiums now charged by other state plans will increase to help offset the drain. With the changes, the state will pick up 82 percent of the health plan’s costs, with employees responsible for the rest.

Folwell said several large contracts are coming due in the State Health Plan over the next 19 months. He intends to use the state’s clout as the largest purchaser of health care to negotiate better deals.

He has initiated an eligibility audit to root out fraud and abuse. The last audit, conducted in 2012, found 7,103 ineligible people on the State Health Plan at a cost of $22 million.

“I think this eligibility audit will be even more dramatic,” Folwell said, promising stiff penalties against individuals who deliberately enrolled ineligible spouses and dependents over the past two or three years.

Other State Health Plan reforms will deal with cleaning up enrollment processes, and eliminating other poorly functioning programs and paperwork that gum up the system.

The Senate is pushing a $1 billion tax cut package, and the House plan might end up with a larger proposed cut. Folwell said he has neither reviewed the competing plans nor received legislative feedback on them.

“This is like yoga for us. We are trying to breathe and pay attention to our own mat,” Folwell said. House Bill 651 would create a State Health Plan solvency fund. He said he’s curious to see how that fits in with the tax package proposals.