OCT. 14, 2011 -- Members of a select Senate Finance subcommittee have been holding public hearings across the state in an attempt to find out what they could do to improve the state’s massive pension system.
Critics in the legislature, mostly Republicans, have contended the current system is burdened with as much as a $17 billion unfunded, or underfunded, mandate.
Supporters in the legislature, mostly Democrats, claim the current system only needs “tweaks,” and that Republicans are playing politics with valued employees retirements.
Earlier this year, Sen. Hugh Leatherman (R-Florence), chairman of the Senate Finance Committee, charged this special subcommittee the “difficult” job of a “top to bottom” review of the entire system. Gov. Nikki Haley made reforming the retirement system a major plank in her political agenda and has called for an overhaul.
Currently, the state’s retirement system is worth about $27 billion and gaining. But over the past few years, thanks to the national and international recessions, the value of its retirement fund has been on a scary rollercoaster ride.
Three years ago this month, the fund dropped $2 billion in a single day, as first reported in Statehouse Report. The fund would crumble from a high of $27 billion valuation, to hit $19 billion that year.
In the intervening three years with the stock market critically wounded and rebounding slowly, the retirement fund, according to its lead manager, has recovered the loss and is once again worth $27 billion.
There are three major areas of disagreement, most of which date back to when then-Gov. Mark Sanford tilted at the system, especially upset about the funds expected rate of return.
The first issue is whether the fund should be expected to return 8 percent on investment. The state had until recent years held its expected return at 7.5 percent. But following leads by other states, South Carolina jumped its expectation to 8 percent right before the market crashed.
That half-percent, spread out over 30 years, could make an enormous difference and could reduce the so-called underfunding to relative pennies. In other words, if the state chooses the more liberal 8 percent projected rate of return, the extra half percent likely would cut the so-called underfunding of the fund significantly -- perhaps from billions to millions.
The second issue is how long an employee should have to work before being fully vested in the retirement system. That number was dropped years ago to 28 years from 30 years. Like the half-percent, this subtle shift in actuarial assumptions can have a butterfly effect down the road.
And the third major point of discussion has been, like it was in the Sanford years, whether the retirement system should continue to be a “defined benefits” plan, where enrollees would get a definite pension, or if it should be a “defined contributions” plan, where the amount received could largely depend on the job the enrollee did investing their own retirement funds.
Sen. Phil Leventis (D-Sumter), a member of the subcommittee, said this week that lawmakers couldn’t ignore the state’s pension issues “because people are living longer and entering the system and receiving benefits earlier than ever before.”
But Leventis harshly criticized the Republican position, saying that the only people who would benefit from major changes to the retirement system would be “rich investment fund managers.” Why? Because they’d potentially make large increased fees and commissions.
None of the three Republican subcommittee members responded for comment for this story, despite several days of phone calls, emails and texting.
Leventis said 70 percent of the benefits doled out in retirement checks come from the interest accrued on the amounts paid in by employees and employers over the years. He said he worried that a defined contributions plan could create big winners and losers among state workers based on their degrees of economic and investing savvy.
Leventis also accused the Haley administration this week of “shopping” for a new actuarial firm to assess the risks and long-term health of the fund. He further claimed the new actuarial firm picked by the governor used the cataclysmic years of 2008-’09 to make its retirement benefit projections, but failed to include better returns realized since then.
“So far, this year in 2011, we are seeing an 18.1-percent return on investment, but that’s not being figured in,” said Leventis. “It’s not just disingenuous. It’s almost unethical.”
Haley does not agree with the senator’s assessment.
"Senator Leventis is wrong,” said Haley spokesman Rob Godfrey told Statehouse Report today in an email reply. “Governor Haley has made it very clear -- by pushing for a new director and actuary -- that she is taking the retirement situation very seriously, and we encourage all legislators to do the same.
“In terms of time served until vested, our team is still crunching numbers and will work with legislative leaders going forward to make sure we never end up in this position again."
Crystal ball: Earlier this year, we gazed into our crystal ball and said that retirement and state health care would come into the political crosshairs, borrowing from the national attack on “entitlements.” And they have. There’s one area of common ground in the debate: those currently enrolled in the system will have their benefits protected. But going forward may be a different situation, with increased contributions expected from the state and future enrollees. Will that change come next year? Well, 2012 is an election year, and the state’s retirement system directly affects nearly 500,000 South Carolinians, according to Leventis. And that’s a lot of voters.
Bill Davis is editor of Statehouse Report. He can be reached at: email@example.com.