Columbia, S.C.


MANY mornings, the yellow Lamborghini would swing into view, sweep past tree-softened streets with a low, smooth rumble and throttle down outside an office near the State House downtown.


Behind the wheel was a financier named Robert L. Borden. Around Columbia, a city decidedly more Ford than Lamborghini, his exotic supercar gave him the air of a Wall Street hotshot. In truth, Mr. Borden was a civil servant — a very highly paid one. Until recently, he was the investment chief of South Carolina’s giant public pension system.


It turns out that Mr. Borden liked his investments the way he liked his cars. Which is to say, fast. With the help of some big names on Wall Street and a nod from officials here, he transformed this state’s go-slow public pension system into one of the most high-octane in the nation. So far, though, the results have been mixed. The long-term consequences — for retirees, public workers and taxpayers here — are as yet unknown.


What is sure is that while he was running things, South Carolina ended up paying hundreds of millions of dollars in fees — $344 million last year alone — to a Who’s Who of hedge fund managers and private equity deal makers. In return, it got a trove of investments that haven’t really provided the bang that people here had hoped for. Today, the pension fund has a higher share riding on private-equity and hedge-fund plays — called “alternative investments” in some circles — than almost any other state’s: $13 billion, or more than half its total.


What is also certain is that Mr. Borden is long gone. Mr. Borden, who resigned last December to join a private investment firm, says he is proud of what he accomplished in his nearly six years at the helm of the $24.5 billion South Carolina Retirement Systems.


Still, like other pension funds across the country, South Carolina’s faces a shortfall — in its case, an estimated $14.4 billion. But, as in other states, the scary thing is that no one really knows how bad this could get. A firestorm over pensions and other benefits for public workers is raging nationwide. It reared up with new fury last week, with the failed recall election of Gov. Scott Walker of Wisconsin, and votes in two big cities in California, San Diego and San Jose, to sharply cut pension payouts.


But here in South Carolina, the state treasurer, Curtis M. Loftis Jr., is worried that pension officials have had their heads turned by Wall Street players who stand to benefit from the state’s money. “This is a world where people have private jets, massive apartments overlooking Central Park, people who live exotic lives,” said Mr. Loftis, reclining in a chair in his baby-blue office at the State House, as his black Labradoodle, Camey, snoozes nearby.


It all sounds like one of those classic tales of a lot of public money meeting a little private greed, of locals wooed by big-city slickers. And Mr. Loftis provides some juicy tidbits, including meetings with Wall Street types within the black-lace covered walls of the Provocateur nightclub in the meatpacking district of Manhattan — and even a dinner with a centerfold model.


But the most remarkable thing about this story is that it could have unfolded — and, indeed, has unfolded — to greater and lesser degrees at pension funds across the nation. Hedge fund and private equity firms are selling, and taxpayers — in the form of public funds — are buying, and buying big.


FOR years, states and localities have scrimped on pension funds, which are now alarmingly short of the money needed to pay future claims. Nationwide, these deficits are estimated to total $1 trillion to $3 trillion.


Because of that gap, many funds have been scouring the more exotic corners of Wall Street, seeking the returns needed to keep promises to retirees. By the end of 2011, retirement systems with at least $1 billion in assets had raised their stake in real estate, private equity and hedge funds to 18.3 percent, from 10.7 percent in 2007, according to the Wilshire Trust Universe Comparison Service.


But hedge funds and private equity stakes don’t come cheap, and their returns are not guaranteed. Funds like South Carolina’s are now left with many high-cost investments that in many cases have fared worse than old-fashioned stocks and bonds. The South Carolina fund earned 3.1 percent, annualized and before fees, in the three years through last June, the end of its fiscal year, versus 4.6 percent for all public pension funds tracked by Wilshire TUCS. (But the fund would fare better in the next six months, besting the national average for the three years through December.)


A Republican who took office in January 2011, Mr. Loftis is the only elected official on the state fund’s six-member investment commission, which oversees pension investments. And he says he has seen up close the way Wall Street tries to lure state money.


He recalls attending a dinner with hedge fund executives one evening last fall in New York, when he was asked to sit next to a centerfold model. And on another visit to New York, Mr. Loftis says, he found himself with a hedge fund group in a banquette at the Provocateur, at the stylish Hotel Gansevoort, where bottles of liquor were passed around the table. (He says he personally paid his share of the bill.)