Companion bills to reduce the state pension’s $20 billion pension debt have sailed through the budget committees of the House and Senate during the past two weeks.
But the legislation may not be enough to stanch the bleeding.
At least, not according to national pension experts and the state Legislative Audit Council, which has indicated the rate should be between three percent and five percent—in line with current practices by corporations, credit ratings agencies and economists.
A lower rate of return would reflect a much higher unfunded liability of up to $50 billion—a seemingly insurmountable debt and, I suspect, a likely reason lawmakers are more apt to take the recommendation by investment system-hired actuaries to lower the rate from 7.5 percent to 7.25 percent.
Actuaries project an approximately 50 percent likelihood the plan will yield at least a 7.25 percent return over the next 20 years.
Gains have been anemic over the past 10 years, yielding a 4.66 percent rate of return, on average. The pension gained a 7.6 percent return last year, according to the Investment Commission.
The Public Employee Benefit Authority expects returns to hover around four percent over the next five years, as the unfunded liability increases slightly, and to meet the assumed rate of return thereafter.
The agency—which oversees benefits under the state’s five retirement plans, including the South Carolina Retirement System for state agencies, school districts, and some local governments—expects the deficit to be reduced to zero by 2041 if assumptions are met.
That’s a big if, depending on who you ask.
A failsafe is available if the plan doesn’t meet assumptions. The Investment Commission would review the rate of return every four years and adjust it as needed.
But that gives the unfunded liability four years to grow if returns lag. The unfunded liability was $17 billion just three years ago, when a special Senate committee met to resolve conflicts at the Investment Commission.
That wasn’t the first time lawmakers tried resolving problems in the retirement system.
The General Assembly in 2012 began phasing out a program that let some state employees collect retirement while they were working for the state.
Still the debt grew.
Part of lawmakers’ solution to the current liability is to give the leadership more authority over the agency that oversees investments.
The bills give the House speaker and Senate president pro tempore one appointment each to the Investment Commission. Already, the chairmen of the Senate Finance and House Ways and Means committees have one appointment each.
Lawmakers like to articulate how severe the debt is in terms of families affected by the state pension plan—three out of 10.
But the scope is much broader, potentially leaving the taxpayer to bail out retirees from state agencies and local governments if lawmakers don’t solve the problem for good—and fast.