COLUMBIA, S.C. (AP) -- Seven months after South Carolina Treasurer Curtis Loftis promised a new contract to the Bank of New York Mellon Corp. as the holding bank for $40.3 billion in state money, Loftis has signed a 10-year agreement that cuts the bank's share of profits on short-term investments but also pays new quarterly fees that will likely boost the bank's take.
Loftis says the contract affecting taxpayers' and retirees' money is an improvement over the state's previous agreements with the bank, which his office sued in 2011, and it offers better safeguards.
Previously, the bank waived payments for holding the state's assets, in return for a 15 percent share of profits from securities lending. The bank's share had reached a high of nearly $5 million in 2007-08, as it made risky investments over which the state later sued. The bank's take has been far less since then, reaching a low of $201,600 in 2010-11. Last fiscal year, it tallied $317,400.
The drop meant no bank was willing to continue such a fee-waiving arrangement, Loftis told state officials in a letter Monday.
The new contract, effective Jan. 1, calls for the bank to take 10 percent instead of 15. But Loftis also must make quarterly payments from state and retirees' funds, which his office has estimated at between $1.5 million to $2.25 million annually. Even the low estimate exceeds what the bank made from its 15 percent for the last four years combined.
But Loftis says the new arrangement is more transparent than the old contract.
"This method of directly paying custodial fees increases transparency and accountability in both the state's general fund and in the retirement system," Loftis wrote Monday. It also "prevents the possible overpayment of custody fees."
Loftis' office last spring promised a new contract to the Bank of New York as the holding bank and securities investor of state assets as part of a negotiated settlement. Loftis had sued in January 2011, accusing the global investments company of losing $200 million in retirees' money through bad investments that violated its contract.
Under last May's settlement, the bank returned $25 million to South Carolina's accounts, with $20 million of that going to the fund that pays public workers' pensions. It provided $9 million to two attorneys who represented the state — $2 million to a long-time friend of Loftis. The settlement called for a new, 10-year contract to be signed "as soon as reasonably possible" covering the $27.6 billion pension portfolio as well as $12.7 billion in state funds that include tax collections, insurance reserves and local governments' money.
Loftis spokesman Alex Stroman said the contract's terms have not changed since the settlement. Asked what took so long to finalize it, he said, "contract negotiations that manage $40 billion rightfully take a long time."
One issue was how the treasurer would pay for direct fees associated with the pension portfolio, since they weren't included in the state's 2013-14 budget.
In November, as negotiations were wrapping up, the treasurer's attorney, Bill Condon, gave state officials his arguments for taking the money directly from retirees' trust fund. Condon contended the payments didn't need to go through the budget process — at least, not this year. While the state constitution bars disbursements without legislative approval, that applies to public funds, not trust funds, he wrote in a Nov. 12 letter obtained by The Associated Press.
He likened it to investment management fees paid from the fund.
Condon wrote that he was seeking agreement on that question, but there's been none. The chief operating officer of the agency that invests the pension portfolio, former state Sen. Greg Ryberg, vehemently disagreed in writing with Condon's arguments.
Stroman did not directly address Tuesday whether there were any other discussions with state officials regarding legislative approval. Instead, he said the contract is between the treasurer's office and the bank, and Condon's memo was sent to explain the process.
Loftis says the contract will mean better accounting of investment funds outside of the Bank of New York's custody; it will provide $150,000 annually to the treasurer's office for "supplemental training and services;" and it will make investment services available to the pension fund.
Those offerings were part of what was blacked out of the contract copy the treasurer's office provided the AP.
They're unlikely to be used. The Retirement System Investment Commission, which invests the pension portfolio, has said the additional services are being handled by others at a lower cost. As treasurer, Loftis is a member of the commission but has publicly feuded with his fellow board members since taking office.
The redacted sections, according to a full copy obtained by the AP, include savings that 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. 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.