For the past decade, there has been a simmering problem with the solvency of the South Carolina pension fund, but few people are aware of it. During the 2016 cycle of state House and Senate races, the issue was rarely discussed.
There are currently more than 550,000 people enrolled in the state retirement system (more than 10% of the population). There are nearly 200,000 current employees paying into the system. The state and local government agencies they work for and the school districts pay matching fund contributions into the pension system, like they do for Social Security and Medicare, only a much greater amount.
There is a seven-member board, the Retirement Systems Investment Commission (RSIC), which is tasked with making investment decisions for the pension system’s nearly $29 Billion in assets. The funds are managed and distributed to retirees by the Public Employee Benefit Authority (PEBA).
Treasurer Curtis Loftis has been a vocal critic of the pension system management almost since he took office in 2011 and has sounded the alarm about the solvency of the system. He cites that fees for investment management companies increased from $22 Million in 2005 to $468 Million in 2014 and that the pension fund’s return of investment has consistently been among the lowest in the country.
A recent ruling by the South Carolina Attorney General’s office indicated that the PEBA’s assumption of an annual 7.5% rate of return has masked the fund’s future liability and that the accounting practices being used do not comply with state law. The average annual rate of return for the fund has been about 4.5% for the past decade.
Loftis notes that the RSIC has approved risky investment decisions over the years in such vehicles as hedge funds and real estate trusts. He said, “I have opposed this inefficient and money-losing pension system at every turn, but that work has been ignored.”
Senate President Hugh Leatherman and House Speaker Jay Lucas appointed a 12-member Joint Committee on Pension Systems Review to address the pension shortfall, which is estimated to be about $25 Billion (Loftis believes that figure is low). The Joint Committee, consisting of 7 Democrats and 5 Republicans, recently made a proposal to make the system solvent.
The panel recommended removing Loftis from the RSIC and removing the custodial authority of the Treasurer’s office concerning the pension fund. It also recommended increasing the employee contribution from 8.7% to 9% of salary (and capping it at that level) and increasing the state and local government and school district contribution from 11.6% to 13.6% effective July 1, 2017 and increasing it to 18.6% by 2023.
In order to take effect, the Joint Committee recommendation must be approved by the full House and Senate and signed into law by Gov. Henry McMaster. The House Ways and Means Committee is taking up the Retirement System Funding and Administration Act (H-3726) beginning on Feb. 14.
The major cost of our local governments and school districts is personnel. By increasing the employer contribution to the pension fund significantly, that will put a tremendous strain on their budgets. The government entities may choose to lay off personnel to make up their budget shortfalls but will more likely choose to raise property taxes. The result is that anyone who owns a car, a home or any other property will be paying more to make up for the pension fund shortfall.