Budget and Control Board Seeks Second Opinion on Retirement Gap

When people know they have a medical problem, but are not convinced it has been diagnosed correctly, they often will seek a second opinion on it.

This is fairly common practice, as well, in the nexus of government and politics, especially when it comes to hot potato issues.

Exhibit A: the politically sensitive, enormously expensive state retirement system.

The S.C. Budget and Control Board, whose five members act as trustees of the retirement system, knows that the state pension plan has a problem – a mounting, multibillion-dollar problem: It’s underfunded.

However, there is disagreement and uncertainly about how much the shortage totals, so the Budget and Control Board is seeking a second opinion on the matter.

This is a huge issue – not only for more than 500,000 current or future state and local government retirees, but also for South Carolina taxpayers.

For retirees, it could mean that their benefits eventually are reduced, or they could be made to pay more toward their pensions – or both.

South Carolina’s state and local public employees are not unionized, so any such changes would not seem likely to spark a battle over collective bargaining rights as has happened in some Midwestern states.

Nevertheless, tweaking benefits or employee contributions likely would still be hot-iron actions. The idea is being discussed in state government circles, but most lawmakers are not exactly rushing to endorse it.

Just last week, for example, Republican Sen. Greg Ryberg of Aiken proposed requiring employees in the state health plan to pitch in a few dollars more per month for their insurance. Senators voted down the proposal.

Still, at least one important observer says the state’s public-sector workers would buy in to changes to the retirement system if they were involved in the process.

“If they knew what was going on with their system, they’d want changes made,” says state Treasurer Curtis Loftis, a member of the Budget and Control Board by virtue of his office.

For South Carolina taxpayers, meanwhile, the toll of the system’s underfunding already is coming due by way of increasing bills in the tens-of-millions-of-dollars range.

Given these realities, while suggested solutions vary, all eyes agree on this much: Something’s got to give.

The current value of the retirement system’s investment portfolio ranges between $25 billion and $26 billion, according to state officials and the latest yearly evaluation of the system’s assets and liabilities, called an actuarial.

Those investments and any returns they net, combined with contributions to the system from current workers and an annual cash infusion from the state, pay retiree benefits.

But every year, the retirement system pays out more dollars than it takes in, widening a multibillion-dollar gap between how much money the system has on hand and now much has been promised to future retirees.

In business terms, think of this as operating with a negative cash flow.

That’s how Robert Borden, who oversees the entity that manages the retirement system’s assets, recently described the situation to a state budget-writing panel of the General Assembly.

“And by that I mean the contributions that are being made by the employees and the taxpayers are less than the amount of benefit payments that go out every year,” said Borden, CEO and chief investment officer of the S.C. Retirement System Investment Commission.

Those deficit dollars are called unfunded liabilities.

Between 2008-09 and last fiscal year, that shortfall grew from about $11.9 billion to more than $13.3 billion, an increase of $1.4 billion, or 11.7 percent, according to the actuarial. The Cavanaugh Macdonald Consulting firm prepared the review.

Federal and other guidelines call for the payoff period for the unfunded liabilities to stretch no longer than 30 years.

The $1.4 billion jump lengthened it to 37.6 years, the actuarial says.

To get it back down to 30 years, the state (read: the taxpaying public) has to kick in almost $89 million more than the previous year’s allocation.

That means less money available for teachers, troopers, roads and bridges and you name it.

Loftis says this will be the sixth consecutive year that the taxpayers’ share of retirement system costs has increased.

But, could it be that the news isn’t quite so bad? You know, that the unfunded liability isn’t quite so large?

Perhaps that is what the Budget and Control Board is hoping for in seeking a second opinion.

The BCB is soliciting bids for another actuarial evaluation of the retirement system. A request for proposals for the project was sent to 11 firms across the country and their responses are due by Monday, according to Loftis spokesman Brian DeRoy.

“Nobody knows (at this point) how much it’s costing,” Loftis says of the second actuarial, adding that it is expected to be completed by the fall.

To be sure, it won’t be back-of-an-envelope cheap.

Yet even as the Budget and Control Board pursues another actuarial, one highly respected outside source already has weighed in on the state retirement system, and it was hardly a Pollyannaish assessment.

It comes from the Pew Center on the States, a nonprofit, nonpartisan public policy research organization based in Washington, D.C.

“South Carolina’s management of its long-term pension liability is cause for serious concern and the state needs to improve how it handles its retiree health care and other benefit obligations,” the Pew Center said in a February 2010 report on state pension plans titled “The Trillion Dollar Gap.”

“It (South Carolina) has funded only 70 percent of its pension bill – below the 80 percent benchmark that the U.S. Government Accountability Office says is preferred by experts – and is facing an unfunded pension liability of $12.1 billion.”

In April, Pew released a follow-up study, “The Widening Gap,” which showed that the state’s funding level remained at about 70 percent.

Historically speaking, the original report said, “The state’s funding level has been declining since 1999, when 98 percent of the bill was covered.”

Indeed, rather than arresting the decline, the Legislature has accelerated it since then by shortening, from 30 to 28, the number of work years required for full retirement and by implementing the Teacher and Employee Retention Incentive program.

Known as TERI, it is a costly option for certain employees to retire and begin drawing benefits but continue working, generally for up to five years.

Again from the Pew Center report:

“To a significant degree, the $1 trillion gap reflects states’ own policy choices and lack of discipline: failing to make annual payments for pension systems at the levels recommended by their own actuaries; expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and providing retiree health care without adequately funding it.”

The report goes on to address the consequences of such management failures.

“In states with severely underfunded public sector retirement benefit systems,” it says, “policy makers often have ignored problems in the past. Today’s decision-makers and taxpayers are left with the legacy of that approach: high annual costs that come with significant unfunded liabilities, lower bond ratings, less money available for services, higher taxes and the specter of worsening problems in the future.”

The report then speaks to the impact on the rest of state government:

“Although investment income and employee contributions help cover some of the costs, money to pay for public sector retirement benefits also comes from the same revenues that fund education, public safety and other critical needs – and the current fiscal crisis is putting a tight squeeze on those resources.”

For his part, Loftis says South Carolina should go back to a 30-year retirement standard, scrap the TERI program and consider moving to a defined-contribution, or 401(k)-style, plan.

Currently the state has a defined-benefit system, in which benefits are preset according to calculations.

In the General Assembly, a Senate Finance subcommittee is working to come up with recommendations to shore up the retirement system. Legislators could act on whatever the group produces in the next legislative session.

If history is any guide, though, lawmakers instead will let the situation keep rolling down hill until it blows up.

Sen. Ryberg, who is co-chairing the legislative subcommittee on the retirement system, warned of that very scenario when Borden spoke to the legislative budget-writing panel. Ryberg is a member that one, too.

“I think that if we don’t become real with this situation, OK, the problems that we had at the Employment Security Commission that we’re still kicking around on a daily basis are absolutely miniscule compared to the problems we have here,” the senator said.

If so, that’s a scary prospect. The ESC mismanaged the state’s unemployment insurance system into nearly $1 billion in debt to the federal government before the agency was overhauled and renamed the Department of Employment and Workforce last year.

Said Ryberg in concluding his appraisal of the retirement system, “The problem that we have here is on the level of catastrophic.”

Reach Ward at (803) 254-4411 or eric@thenerve.org.

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