‘Reform’ to State Pension System Now the Law

SOUTH CAROLINA’S ‘PENSION DEFICIT DISORDER’ HASN’T BEEN SOLVED

On April 25, Gov. Henry McMaster signed a bill intended to reform South Carolina’s pension system. The bill, now a law, raises more money for the system but doesn’t so much reform the system as put more money into it and mostly leave it alone. Here are the most notable elements of the bill:

Increases employer contributions

► from 10.9 percent to 18.56 percent for the South Carolina Retirement System (SCRS) – a 70 percent increase over the next six years; and

► from 13 percent to 21.24 percent for the Police Officers Retirement System (PORS) – a 63 percent increase over the next six years.

Increases employee contributions

► from 8 percent to 9 percent (SCRS) – a 13 percent increase; and

► from 8 percent to 9.75 percent (PORS) – a 22 percent increase.

Shortens the amortization period (time frame for debts to be paid out) from thirty years to twenty years.

Lowers the statutory assumed rate of return by a quarter of a percent (from 7.5 percent to 7.25 percent) and instructs PEBA to suggest new rate every four years subject to legislative approval.

Makes PEBA custodian of system assets instead of state treasurer.

Removes state treasurer from Retirement System Investment Commission (RSIC) and replaces him with treasurer’s appointee

Prohibits RSIC from investing pension assets in entities in which commissioners or their immediate family have an interest

What does this mean for the taxpayer?

The “employer” is the state – i.e. taxpayers. The only funds state agencies have to spend are allocated to them by lawmakers from the taxpayers.

The entities in the state pension plan are not just state agencies: they are also municipalities, counties, school districts, etc. There are even some non-government entities, including non-profit advocacy groups like the Association of School Boards. Most counties and school districts, unlikely as they are to have the funds set aside to cover these mandatory increases, will almost certainly raise local taxes to cover them.

Throughout the debate, lawmakers barely discussed other ways of minimizing the system’s deficit. They hardly mentioned structural changes: for example, offering early retirements, moving lawmakers away from their special retirement system into the main state retirement system, and closing the defined-benefit program to new employees. Nor did they seriously debate shifting power over the pension system away from a few legislative leaders and toward elected officials with statewide accountability.

It’s also worth noting that the General Assembly did not dedicate a funding stream to the state’s portion of the contribution increase. They mandated the money be spent annually and duly allocated it from this year’s general fund. But there is no guarantee that the system will be similarly funded next year or the year after. (All this while lawmakers insisted that funding roads – a core government function – from the general fund is fiscally irresponsible.)

The assumed rate of return

The legislation also fails both to substantially lower the assumed rate of return and to take setting future assumed rates of return out of the hands of lawmakers. The assumed rate of return is the number around which many of the calculations for the solvency of the retirement system are based. In testimony last October, Andy Young, the audit manager for the Legislative Audit Council, observed that if the pension system used the accounting standards that are used in the private sector and assumed a rate of return of between 3 and 4 percent, the pension liability would balloon from $19 billion to more than $57 billion. Clearly, the unrealistic expected rate of return on poor investments clouds the actual problems with the pension fund.

Instead of an assumed rate of return of 7.5 percent on investments, the assumed rate of return for investments in the pension system is to be 7.25 percent going forward. From 2006 through 2016, while projecting a rate of return on investments of 7.5 percent, SCRS realized an actual return of 5.0 percent.  In 2016, the actual rate of return on investments was -3.9 percent, according to PEBA director Peggy Boykin. Continuing to assume an unrealistically high rate of return virtually guarantees that the pension system will continue to run massive deficits.

Most importantly, the assumed rate of return should be set and updated by an independent entity instead of the General Assembly. Why? Because assuming a higher rate of return on investments makes it easier to string along a dysfunctional pension system with what are in effect manufactured numbers.

Lawmakers begin meeting next week to hammer out “phase 2” of the pension reform process, which will apparently tackle structural issues of the plan itself.

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