Updated Feb. 9
The state retirement system is almost beyond repair, with its approximately $24 billion deficit, according to state Treasurer Curtis Loftis.
“If we don’t fix it this year, I don’t believe it can be fixed,” he said to members of the Lexington County Republican Party on Monday. “Your kids and your grandkids are going to be paying the debt.”
Retirement debt fix
A joint Statehouse committee on Wednesday approved a bill to narrow the gap.
The House and Senate introduced companion bills Thursday based on the plan.
Loftis called the plan “worthless.”
The bill reduces the pension plan’s assumed rate of return from 7.5 percent to 7.25 percent.
The system has earned a 4.66 percent rate of return over the past 10 years. Several national pension experts have testified before the committee that the rate should be set between three and five percent.
The deficit is actually as high as $50 billion, they say.
For all the frenzy over finding a permanent funding stream for roads, Loftis thinks that isn’t the most urgent problem in the state.
“[The retirement system deficit] is the thing that is going to derail South Carolina,” he said.
“This is the state’s biggest problem by far,” said Lt. Gov. Kevin Bryant. “I would say double the problem of our roads.”
The former senator, R-Anderson, previously co-chaired the committee.
Under the new recommendations, the Public Employee Benefit Authority projects the unfunded liability to increase slightly for the next five years, as returns hover around four percent.
Investment losses will account for the uptick, but the agency expects returns to average seven percent thereafter. They project the deficit will diminish to zero by 2041, barring further investment underperformance.
A contentious relationship
The joint committee also agreed to bar the state treasurer from membership on the commission. Instead, the treasurer would have an appointment to the commission.
Loftis has shared at times a contentious relationship with legislative leaders and retirement system officials.
The bill makes the Public Employee Benefit Authority the custodian of the retirement system’s assets. The investment commission would choose the custodial bank.
The Treasurer currently performs those tasks and holds a seat on the commission.
Rep. Jeff Bradley, R-Hilton Head Island, worried the new governance structure would strip the treasurer’s capacity to be involved in the commission.
Loftis, who was in the audience during that January hearing, nodded his head vigorously in agreement. He left the meeting early.
Loftis had received a tip that his position on the commission was in trouble. He wanted the joint committee to look him in the eye when they fired him. “I’m in hot, hot water,” he said.
Loftis said he lacks the support needed in the Legislature to push for meaningful reforms that will cut the deficit, as Republican leaders purpose first to find a permanent funding stream for roads in 2017.
Senate President Pro Tempore Hugh Leatherman, R-Florence, and House Speaker Jay Lucas, R-Hartsville, released a joint statement Thursday praising the legislation.
“The legislative steps this Committee has taken will help improve the fiscal integrity of our retirement system in a sensible and measured way,” Leatherman said. “I applaud their work and I’m confident we’ll reach a consensus that will improve the long-term health of our pension system.”
“The dismal state of our retirement system is not a problem that only threatens the financial security of the over 550,000 beneficiaries,” Lucas said. “If left unaddressed, all South Carolina taxpayers will be forced to foot the bill to keep the system afloat. I am very pleased with the significant and necessary reforms the joint House and Senate Committee agreed upon and look forward to advancing this legislation in the House ahead of our budget to account for a fix as soon as possible.”
Loftis began harping on the state of the retirement system shortly after taking office in 2011. Back then, the system paid among the highest fees in the nation, but yielded among the lowest returns.
Today, South Carolina’s retirement system ranks in the middle, Loftis said.
“I give him credit for bringing many of these issues to light,” said Sen. Vincent Sheheen, D-Camden. Sheheen co-chairs the committee.
But lawmakers recognize the bill’s changes don’t represent a permanent fix. “We are probably going to wind up with a different system than we have now,” said. Rep. Gilda Cobb-Hunter, D-Orangeburg.
That system will likely apply to new hires going forward, she said.
Reforming the retirement system, by the numbers
- 8.66 %–the current employee contribution rate.
- 11.56 %–the current employer contribution rate.
- 13.56 %–the proposed employer contribution rate, set to take effect in July under the bill. Employee contribution rates would rise to 9 %.
Each .5 percentage point increase would bring approximately $50 million into the plan.
- 18 %–lawmakers plan to phase in higher employer contribution rates over the next several years until the rate reaches 18 percent. Employee contribution rates would be capped at 9.75 percent under the proposed legislation.
- $28 billion—the assets in the pension fund.
- $850 million—the annual revenue resulting from the increased contributions after six years.
- 30 years—the current repayment schedule on the debt. The legislation reduces the repayment schedule to 20 years, but phases the reduction in over 10 years to account for market volatility.
Currently, the schedule is open, meaning officials can reschedule the debt repayment annually. The bill aims for a closed repayment schedule by 2027. If the assumptions are met, the debt will be paid by 2041.
“A closed amortization schedule is most likely to achieve the constitutionally required actuarial soundness and thus meets the express legislative goal of using “the most reliable and efficient means of addressing long term sustainability issues” of the retirement systems.”