Sunday, Jan. 30, 2005
State retirement system isn't broke, but fixes may be needed
SC Statehouse Report
30, 2005 - - Many state employees and retirees may have choked
on their morning coffee when they read about a $420 million
error recently uncovered at the state retirement system.
Relax. A big pot of money isn't missing. The error occurred
in financial forecasting. It's not about the accounting of
money in any state account. Here's what happened:
The state has about $24 billion in its retirement system
for employees. Not only does it earn interest, but current
employees and the state pay a fixed percentage into the account
But to ensure the long-term viability of the system, the
state office that manages the retirement system (unassumingly
called S.C. Retirement Systems), does long-term forecasts
to figure out whether there will be enough money over time
to continue to pay benefits.
These long-term forecasts are done by actuaries, not accountants.
They're the guys you might see portrayed in movies as the
sallow people who consider all sorts of statistics to determine
how long people will live so they can forecast how long they'll
have to pay benefits. With 300,000 people in the system, there
are a lot of equations, assumptions and calculations.
Until recently, the state's actuaries forecasted a long-term
liability of 27 years, which meant if everybody's claims had
to be paid out in one big lump sum (which doesn't happen because
everybody doesn't die on one day), then it would take 27 years
to pay off the debt incurred to fund the lump sum.
But recently, a new team of actuaries found a former team
made a couple of assumptions with which they didn't agree.
In turn, that changed the long-term forecast and the unfunded
liability. The difference -- $420 million. And here's what
it meant to the payback period - it extended it from 27 years
to 28 years.
"No one has lost $420 million," said Peggy Boykin,
who runs S.C. Retirement Systems.
Where all of this financial talk gets tricky and more confusing
is when you throw in the long-term costs of cost-of-living
adjustments, or COLAs, for retirees.
WORLD: Way for the Secretary of State to relax
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Under the current system, COLAs are funded by the General
Assembly. When forecasters make their calculations about long-term
unfunded retirement liabilities, they don't assume COLAs will
be added. But when they are, COLAs increase the unfunded liability
of the retirement system. That makes sense. If you increase
a benefit but the same amount of money essentially is coming
in from current employees, there will be more liability down
The public policy problem now is that state law, based on
Internal Revenue Service standards, sets the unfunded liability
limit at 30 years to keep the system sturdy. With the state
now approaching that firewall, there's not enough wiggle room
to give a 3.4 percent COLA this year because it would raise
the liability to 32 years, which the state can't do. The law
also doesn't allow the state to give a partial COLA.
Bottom line: The state will have to give serious consideration
to making changes to the state retirement system to provide
"The option of doing nothing is not a viable option,"
said State Sen. Thomas Alexander, an Oconee County Republican
who is chairing a special Senate Finance subcommittee that
this week started looking at the retirement system. "Our
goal is to maintain the soundness and viability of the retirement
system for retirees and current employees who will become
Among the options they may consider in coming weeks are altering
a popular program that allows employees to retire, but keep
working at their current salary levels; increasing the amount
the state pays for employee retirement (which would reduce
the liability); returning the state to requiring 30 years
of service for retirement instead of 28 as changed a few years
ago; or reducing benefits.
One thing is for sure: the system isn't broke, but fixes
and changes loom on the horizon.
CORRECTION: In last week's column,
we suggested the State Board of Education was opposed to
a plan to create a statewide charter school district. It,
in fact, hasn't taken a position, according to a board member.
The State Department of Education, however, testified against
the plan in a legislative hearing. We regret the error.
130: The Secretary of State relaxing
A new cartoon from Bill McLemore
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SOUTH CAROLINA SCORECARD
Here's a "thumbs up" and "thumbs down" related to various
political events from the past week:
Richardson. Congrats to Beaufort County Republican
Sen. Scott Richardson for endorsing a small tax hike to pay
for road improvements.
License plates. It's good to hear that the U.S. Supreme
Court refused to hear a case that a lower court ruled South
Carolina's "Choose Life" license plates to be unconstitutional.
But it's disheartening to hear Sen. Mike Fair propose a "Choose
Death" plate or Rep. John Graham Altman propose a "Choose
Abortion" plate so the state can allow to offer the Life
Deadbeat dads. Dads who don't pay child support should
be ashamed of themselves, but for the state to spend $25 million
to find them seems like a misplaced priority. How about if
the money went directly to the children who have been hurt
by deadbeat dads?
Sanford. Thumbs down to the governor for using the
bully pulpit of the State of the State to keep pushing two
lame-brained ideas -- an income tax reduction plan that would
hurt the state's long-term economic stability and a school
voucher program which would undercut public education.
New Senate rules. In the first showdown on new rules
adopted by the Senate, the chamber voted on a seat belt issue
to pass over the rules. What's the point, then, of the change?
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