NEWS: Fixing the ‘unfixable’ S.C. pension mess

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By Bill Davis, senior editor  |  Figuring out how much a recent plan to save the state’s pension system might cost the average taxpayer is close to impossible, with State Treasurer Curtis Loftis saying that seems to be on purpose.

A special House-Senate pension systems review committee last week introduced a series of recommendations to increase how much the state, counties and municipalities will have to pay to solve the state pension system’s unfunded liability, frequently reported to be about $22 billion.

The proposed plan would cap contributions by employees at 9 percent of their paychecks, increase employer contributions by 2 percent initially, with each percentage point bringing in $100 million annually. Then over the next four years, the employer contributions would be increased an additional 1 percent a year, topping out at close to 18 percent.  In other words, after six years, employers using the plan would add $600 million annually to the pension plan to fix the problem.

Additionally, the plan would call for an expected rate of return on the massive pension funds to be dropped from 7.5 percent to 7 percent, in hopes of making the pension system more fiscally conservative and reflective of more pessimistic projections on stock market investments and the like.

Hard to find an easy number

Two weeks ago, House Majority Leader Gary Simrill (R-Rock Hill) introduced increased gas tax legislation that would cost the average driver roughly $60 a year to provide the lion’s share of repairs to the state’s ailing roads system.

It was a simple number, easy to understand, and potentially to sell to tax-averse voters.

Boykin

Peggy Boykin, executive director of the S.C. Public Employee Benefit Authority, said Friday she wished there were an equally simple number that could be generated to explain to taxpayers what’s needed to “fix” the pension system’s woes.

But because of a confusing mishmash funding sources — from federal pass-through dollars for special education teachers to municipal contributions for police — it’s impossible to divine that number, according to Boykin.

“It’s not like a gas tax where you know how much more you’re paying each time you go to the pump when you know how much gas is going up,” she said.

Currently, the state pension system serves hundreds of thousands of South Carolinians who have worked for the state.  But it also serves counties and cities, depending on the classification of the jobs.

Some 35 percent of those in the pension system are state workers, more than 40 percent are teachers and the remaining, roughly speaking, are local government employees, according to PEBA.

Last year, state-contracted actuaries reviewed the pension funds and found they needed at least an additional $50 million infusion in 2016 to stay solvent, considering a 30-year amortization schedule similar to a home mortgage.

The joint committee plan would quadruple that amount in the first year alone to $200 million, topping out at an additional $600 million annually by its final year.

Complex problems on funding

The reason for the need for the additional money is equally complex. The Great Recession ate billions out of the state’s massive pension funds. That led the state to put money into loss-averse investments.  But when the market started to surge again, the state wasn’t able adapt quickly enough because of the kinds of risk-averse investments that had been made.

To add to the problem, legislators not only shortened the number of years pensioners needed to work to receive full benefits without increasing money paid in, but they also passed two cost-of-living-adjustments that increased benefits without offsetting those expenditures with equal contributions, insiders told Statehouse Report.

Additionally, the creation of the Teacher and Employee Retention Incentive Program allowed some workers to retain their jobs and pay, while at the same time receiving retirement benefits. The idea was to offset the drag on the pension system by enticing experienced teachers, cops, and the like to stay on the job. But no additional monies were added to the pension pot to offset the cost of the TERI program.

Boykin pointed out that the joint committee plan is far more aggressive than the minimum amount offered by actuaries last year in paying down the pension system’s unfunded liability, something she said should please critics of the situation, such as state Treasurer Curtis Loftis.

But it didn’t.

Critics denigrate the plan

Loftis on Wednesday issued a terse response to the plan, stating that the recommendations were “long on promises … but short on immediate funding.” He went on to say that the recommendations do not “make meaningful movement” toward curbing the increasing unfunded liability of the pension system.

Loftis

Before the recommendations were unveiled, Loftis said experts predicted to him that the actual unfunded liability was closer to $40 billion.  He said recent efforts to remove him from the investment commission, which oversees the pension funds investment portfolio, ensures that no one will be keeping an eye for pension recipients or taxpayers.

Loftis added that the full story on how bad the financial situation is with the state pension system isn’t really known because  PEBA is “choking back” relevant financial information that he has requested.

State Sen. Sean Bennett (R-Summerville), a financial planner, served on the joint committee. Bennett said that the $40 billion unfunded liability Loftis referred to, versus the reported $22 billion shortfall, was a question of math.

Bennett said if the expected rate of return was dropped to 6 percent, instead of the current 7.5 percent of the recommended 7 percent, then it could be $40 billion. “I don’t think that understanding exists throughout government,” Bennett said, declining to comment on Loftis’s conclusion.

Loftis isn’t the only one who isn’t thrilled with the plan.

Reba Campbell, deputy executive director of the Municipal Association of South Carolina, saw the recommendations as yet another “unfunded mandate” to be handed down by Columbia to cities and other localities.

Campbell

Currently, close to 35 percent of enrollees in the state’s pension systems are former and current state employees, according to PEBA’s Boykin, with the remaining 65 percent coming from county and city enrollees.

Through a cynical lens, it could be said that the recommendations could help legislators dodge the pension bullet they fired at themselves while asking smaller governments to take the hit. Campbell did relent that cities and counties have agreed to be a part of the system, and they would also receive a corresponding benefit.

Campbell said the recommendations pass on close to two-thirds of the cost of saving the pension systems to government officials who won’t get a vote and who are already hamstrung by millage caps and a shrinking Local Government Fund passed down from Columbia every budget.

And to add to that, said Campbell, a bill made it out of committee in the House that could limit how much cities could charge for business licenses, further shrinking their tax pool.

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2 Comments

  1. Wayne Bell says:

    Considering the number of competing priorities the state faces, it was surprising to me that the Joint Committee was able to act as aggressively as they did. In my opinion they should be commended for tackling this problem and working collaboratively to solve it, something Congress seems incapable of doing.

    To put more money into paying down the UAAL will require either not fixing roads, not supporting education, law enforcement, or a host of others priorities that are important. Of course one solution would be to examine and possibly eliminate some of the many tax exemptions that have been passed over the years.

    One last thing, Treasurer Loftis’ claim that the staff at PEBA is choking back relevant information is nothing less than ridiculous. The staff at PEBA are trained and credentialed professionals who serve us well.

  2. Ruth Seigler says:

    Thank you for a very written balanced, fair and seemingly unbiased article. I appreciate your journalism.

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