SOUTH CAROLINA’S PENSION PREDICAMENT Fact Sheet March 2017
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THE ISSUE
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We’re not the only state facing a public employee pension problem, but we’re among the worst. According to a 2016 analysis by the Pew Charitable Trusts, South Carolina ranks 43 on state pension fiscal health.
retirees, beneficiaries and inactive employees entitled to benefits
active contributing state employees
1.46
retired or eligible for each contributing current employee - 2015 data
PENSION PLAN INCOME SOURCES: • Investment returns • Employee contributions • Employer contributions
South Carolina’s state-managed pension fund for state employees is facing a roughly $20 to $24 billion hole, depending on the estimate used. That means the fund has less than 60 percent of the assets needed to pay promised benefits. This is a crisis level liability on the state’s books.
HOW WE GOT HERE There are a host of reasons why we are in this crisis, but two of the major issues are: unfunded benefit increases and faulty assumptions. According to Pew, changes to the program between 2000 and 2015 contributed to roughly $7 billion of the hole. Meanwhile, the fund’s investment portfolio has not produced returns at expected levels. The funds’ 10 year average rate of return from 2005-2015 was 5.1 percent. That’s roughly at the median of other state employee pension funds, but falls short of the projected budgeted 7.5 percent return rate. You can blame portfolio management, poor market timing or overzealous expectations and you’d be right. Failure to contribute to the fund was not a significant factor in the gap. Over the past decade South Carolina has made 100 percent of its annual required contribution (ARC). Of course, the ARC calculation was based on the plan’s own assumptions. Research by the Pew Charitable Trusts indicates that demographic actuarial assumptions contributed very little to the overall liability.
PROPOSED SOLUTION A joint legislative committee was formed last year to devise a solution to sure up the fund. The proposal they’ve presented makes several key recommendations including:
FIVE PENSION PLANS UNDER MANAGEMENT: • S.C. Retirement System - serving teachers and state / local government employees • Police Officers Retirement System - serving police and firefighters
• Lowers rate of return expectation from 7.5% to 7.25% (with an expectation of further reduction to 7% by FY20) • Increases employer contribution by 8% over 6 years (2% in FY17, then 1% annually through FY23) • Modestly increases and caps employee contribution (from 8.66% to 9% for State Employees/Teachers, from 9.24% to 9.75% for Police/Fire)
• The General Assembly Retirement System
It’s worth noting that employee contribution levels are already significantly above the 5.98 percent national median. The proposed future employer contribution (19.56 percent for State Employees/Teachers, 22.24 percent for Police/Fire) will be nearly double the national median of 11.51 percent.
• The Judges and Solicitors Retirement System
The proposal recently passed also recommends significant governance changes to the South Carolina Retirement System Investment Commission (RSIC), a seven-member commission responsible for investing and managing all pension fund assets, and the Public Employee Benefit Authority (PEBA), an agency that administers retirement and benefits plans for nearly 549,000 current and former state employees.
(closed to newly-elected after 2012)
• The National Guard Supplemental Retirement Plan
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Ian D. Scott at 843.805.3089 or iscott@charlestonchamber.org
BUSINESS IMPACT $21 billion is serious money. Filling that hole will have a multifaceted impact on private sector employers statewide. • Property tax increase. Because state employers (including school districts) will have to pay significantly more into the pension program, they’ll look for ways to increase revenues. Expect a property tax increase request from already cash strapped school districts. Property tax is about the only option they have to raise revenues and thanks to Act 288, residential property is exempt from property tax to generate operating revenues for local school districts, so any increase in property tax is a direct hit on business. • Decreased Services. State and local agencies will quickly feel the pain of steeper pension contributions on their budgets. That pain will likely trickle down as they decide to delay new hires or trim hours. Every interaction with state and local administrators could take a little longer and eat in to productivity. Class sizes could also grow while teacher support shrinks. • Potentially Deferred Investment. The state will have to budget for higher pension contribution rates for all its employees, and while general fund dollars are not currently slated to sure up the pension fund, that possibility is still alive. Regardless, that means fewer state tax dollars for important initiatives like infrastructure investment.
ALTERNATIVES Unfortunately there aren’t many. The current pension liability results from promises made by the state to more than half a million employees over several decades. Renegotiating old deals would be nearly impossible and unlikely to survive a legal challenge. Reneging on commitments would likely cripple the state’s future borrowing power and current Bond rating. We didn’t arrive at this problem fast and there is no quick (or cheap) fix.
CHAMBER PERSPECTIVE It’s admirable that legislative leadership has acknowledged the state’s pension liability problem and is working on a fix. The proposed solution approved by both House and Senate is an important step to stop the bleeding. But let’s be clear, this is a no-win situation. State workers pay more, state taxpayers get less. Lawmakers should continue the focus on pension reform to make sure South Carolina is never in this position again. We see an opportunity to build on the legislature’s 2012 pension reforms and shut the door on an unsustainable retirement model. To accomplish that, we might look at reforms in peer states such as Oklahoma’s Defined Contribution Plan adopted in 2014, Kentucky’s Cash Balance Plan adopted in 2013 or Tennessee’s Hybrid Plan adopted in 2013. Each of these states closed the door on traditional defined benefits and gave new state employees the opportunity to enjoy market upside opportunities while sharing in some of the risk.
Source Data • http://www.scstatehouse.gov/CommitteeInfo/Joint%20Committee%20On%20Pension%20Systems%20Review/102516Meeting/Pew-Joint%20Committee%20Presentation.pdf • http://scstatehouse.gov/CommitteeInfo/Joint%20Committee%20On%20Pension%20Systems%20Review/083016Meeting/PEBA-Joint%20subcommittee_August%2030%202016_Draft%207.pdf • http://www.postandcourier.com/news/south-carolina-s-pension-reform-plan-would-be-devastating-to/article_54535a12-f3c9-11e6-8f5e-bfaca47a7b60.html • http://www.wsoctv.com/news/south-carolina/a-look-at-the-legislatures-last-pension-reform-law/436955454 • http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2013/09/27/kentuckys-successful-public-pension-reform • http://scstatehouse.gov/CommitteeInfo/Joint%20Committee%20On%20Pension%20Systems%20Review/102516Meeting/NCSL-October%202016%20Presentation-%20Pension%20Reform%20Legislation.pdf
www.charlestonchamber.net
Ian D. Scott at 843.805.3089 or iscott@charlestonchamber.org