South Carolina taxpayers should expect the amount of money they pump into the state pension system to increase in the coming years as the program struggles to close a widening $13 billion shortfall.
At the same time, the state might be forced to shift resources from areas such as education and transportation to the retirement system to help close that gap, pension experts said.
It's South Carolina's retirees. Not the ones who retired from Lockheed Martin up north and built monstrosities overlooking their sailboats on the bay, not the ones who think Cracker Barrels are so quaint and rustic, not the ones who can't eat grits.
I mean the ones who spent their careers in the public service of South Carolina and its municipalities -- the teachers, the emergency response personnel, the city maintenance guys, the lunch ladies, the bus drivers, the civil service workers and magistrate's secretarial pool, the town clerks, the police dispatchers, the state parks interpreters, the firefighters, the folks at the water department, the prison guards, the folks who salted the roads before an ice storm and who cut and carried away the fallen trees afterward.
They're all the bad guys.
They're greedy, and they're stealing from the rest of us to pad their twilight years with luxury.
Maybe not so fast, crime fighters. Let's review a little history.
Back in the day -- let's take the mid-twentieth century for starters -- public employees didn't earn much money. They were low on the economic totem pole. A public service job was good for only one thing: employment. So long as you did your job, kept your head down, didn't break any expensive public property and were johnny-on-the-spot when an emergency broke loose, you kept your job for a solid 30, often longer.
Then came the economic boom times of the 1950s and 60s, when citizens' expectations of government grew, so the state added workers to meet those expectations. You wanted to have enough law enforcement to prevent any stir. You needed enough firefighters to protect the new city neighborhoods and suburban developments. You wanted enough public health workers to answer the questions when the baby was colicky, and enough teachers to keep up with the bulging elementary school enrollments. Et cetera, et cetera.
But excited new public employees weren't excited by the permanently low wages, so our elected leaders offered a grand bargain: Take these public service jobs at low pay, said our leaders, and we'll do two things: We'll invest in health insurance and retirement plans for you, and we'll increase your wages when we can.
Public workers took the grand bargain. After all, they too had children who needed a doctor visit once in a while, and they too dreamed of retiring while they still had some life to live, just like the swells.
That worked a while. Life was good, relatively speaking. Raises didn't come often, and when they came, they were meager. Still, you had the promise of employment, a guaranteed paycheck.
Soon enough, however, it was crystal clear that workers in the private sector, who might be doing the same or similar work, with the same or similar education and experience, were getting along a bit better. Public employees, to the extent that they organized themselves at all, asked for better pay.
Their elected leaders were pressed from both their public employees, with their low wages, and their private-sector pals, who suppressed their own employees' wages to just a shade above public employment. If you raise public employees' wages, said the private-sector leaders to their elected pals, then we'll have to raise ours, and that's gonna cut into our affection for your candidacies.
So our elected leaders came back to their public employees with a grander bargain: We can't afford to raise your wages, they said -- we don't have that kind of money -- but what we can do is to improve your health insurance plan a little bit each year, and to invest more in your retirement accounts each year, so that when you retire, you'll have security and can live just like the swells. You can take your family for weekends on the lake, babysit your grandchildren, and shop for the tykes at Christmas and Easter just as well as the fat cats at the country club.
And it was a great bargain. Thanks to promising markets stretching to the horizon, a little more investment in those days would yield a reasonable reward when retirement day came. Public employees understood the concepts of simple interest and smart investments. And they accepted the deal.
Year after year, through the 1970s, the 1980s, and into the 1990s, public employees accepted artificially low wages in exchange for the promise of good health care and retirement security. They saw others fly by them on the ladder of upward mobility, and they kept working. They scrimped, saved and clipped coupons to tend their own families, as the families in the newer neighborhoods seemed to get ahead without trying so hard. Still, our public employees kept working.
And some reached their goal: The full 30, the alleged gold watch, and the little camper at the lake. They collected their retirement check and it kept them ahead of bill collectors. The lucky ones paid off their mortgage at just the right time, so theirs was theirs.
Those who'd come after them kept working, seeing the first waves of those old promises paying off. So it seemed it would for them, too, and for those who'd come along even later.
But a day came in the 1990s when the tide turned. Those old-guard electeds who'd cut the first grand bargains were fading out, and the next guard behind them didn't share their old sense of commitment. Through the 1980s and early 1990s, when lawmakers wanted to pass tax cuts, they still found the money to honor their commitments to their longsuffering public employees. Now, it seemed, there wasn't enough money to do both. Lawmakers chose tax cuts, and they began wearing away at the old grand bargain.
One year, it was not enough money to fund a cost-of-living adjustment for retirees. Another, it was not enough money to continue one particular feature of the state health plan. Another year, maybe it was both. Later, maybe public employees would have to accept an increase in co-payments for doctor visits, or a higher prescription drug rate, or another increase in the out-of-pocket maximum.
Lawmakers cut taxes some more and approved sweetheart deals to exempt corporate giants from paying income tax. Well, that meant they couldn't afford another tick upward in the employer contribution to the state retirement system, so they raised employee contributions.
To employees in their second and third decades of service, still shy of retirement and now with one or two sons or daughters in college, these were bitter pills to swallow. Promises had been made. Wages paid to them had been kept low purposefully, with the guarantee of better benefits to come.
Unfortunately, as we all discover in our interactions with our legislature, what is written can be unwritten, what is done can be undone, and what is promised is never really promised.
Public employees who have remained in public service through the past decade have learned this lesson again with each monthly. Not only has the tide turned decidedly out, but our public employees and retirees find themselves blamed for the alleged instability of the state retirement system, and more generally for the sorry state of our budget priorities. Wages are still pathetic. State health care provisions -- what is left of them -- are so cost-prohibitive that workers are loathe to use them, but for emergencies. And pension security? The only people assured of pension security are the white-collars collecting fees for every stock trade in the foreign and domestic markets. Lawmakers champ at the bit to rewrite state retirement rules -- "reforms," they call it -- and they betray no lack of malignant creativity.
So, what pension security?
Now comes the media, wrapping up matters in the tidiest narrative: Greedy public employees, goes the tale, have leveraged their weight to bilk the state for years, pumping up their fat retirement benefits at the expense of necessities -- education, transportation -- and mortgaging their children's and grandchildren's futures for their own comfort and joy. Cue the scary music.
State lawmakers in recent months have discussed reforms, but those efforts might not be enough to fix the crisis, the experts said.
State and local governments contribute a percentage of public employees' wages to the South Carolina Retirement Systems' trust. That rate has ballooned over the last seven years as state officials enacted four increases in an effort to shrink the pension debt.
In 2005 public employers contributed 7.7 percent of wages for most pensioners; they now contribute 10.6 percent. Over that time, the Legislature raised employee contributions a half-percent to 6.5.
They ripped us off, cry the media.
To hit high return rates, South Carolina's Investment Commission in 2008 approved making riskier investments that can have big payoffs. But those big risks can come at a cost. After the stock market crashed that year, the state took a $7.6 billion loss. It has recovered somewhat since then but remains below pre-recession levels.
Other issues have amplified the retirement system's funding crisis over the past decade:
The Legislature passed measures that pumped up employees' benefits.
Baby Boomers began to retire and draw down pension reserves.
State data shows retirees are living longer than ever.
This all means that the system is paying out more money but taking in fewer contributions.
Look again at the issues that have "amplified" the "crisis."
First, lawmakers passed measures that "pumped up employees' benefits," we're told without any historical context.
Second, Baby Boomers are retiring; and, notice that instead of "collecting their earned benefits," they are "draw[ing] down pension reserves." As if they're thieves. As if they haven't delivered their years of service and earned their legitimate pension benefits.
Third, and worst of all: "State data shows retirees are living longer than ever."
What should be the alternative? That they should respectfully forego their benefits, go home to their Barcaloungers in the dark, and will themselves to die, so as to reduce the economic burden left for the rest?
What a callous and hard-hearted soul who contrived these talking points, these themes, these excuses for legislative treachery and neglect.
This is no hyperbolic reaction to the narrative offered by the Post and Courier of Charleston. Look at its next lines:
Taxpayers make up the difference for what investment income doesn't cover, pension analysts said.
"If the risks don't pay off, you're going to be in trouble," Biggs said. "The person getting screwed is going to be the taxpayer."
Innocent taxpayers, screwed by conniving, elderly town clerks and librarians who had the temerity to live past the actuarial projections for their life expectancies. It's their fault that the state retirement system is under water. Lawmakers who could have honored their commitments and appropriated millions more dollars during the past 15 years bear no responsibility for the state of things, no. Those old tax cuts upon tax cuts were necessary, right and proper. Political favors demand repayment. So those old commitments to invest in the system were dead weight; they had to go.
Pension experts including David Draine, a senior research associate at Pew Center on the States, said South Carolina should be worried. Some states over the past decade have "failed to operate their retirement funds in a financially responsible manner."
"South Carolina is one of them," he said.
Retired public nurses, living now in assisted living facilities -- it's them to blame, folks. They bled you dry and kept coming back for more.
South Carolina's pension fund has a reported $25.4 billion in assets, according to the July 2011 Comprehensive Annual Financial Report. It also has $38.8 billion in liabilities, the amount of pension money it will owe about 500,000 public workers, retirees and their beneficiaries in the system.
That means its so-called "unfunded liability" is about 65 percent. A Pew report from April put South Carolina near the bottom third of states nationally, ranked by funding level.
Retirement systems can operate safely without being fully funded. But experts recommend systems be at least 80 percent funded, according to the U.S. Government Accountability Office.
Keith Brainard of the National Association of State Retirement Administrators compared state pension systems to mortgages. Even if they don't have all the money up front, financially secure homeowners can afford a house if they pay for it over 20 or 30 years.
Likewise, fiscally sound retirement systems will be able to cover pensions for employees whose expected retirements are decades away.
But South Carolina's system is not financially sound, according to the Pew Center report, which said the state's long-term pension liability is "cause for serious concern."
Look not to the proposals of the powerful for the past decade and a half. Look not to the budget writers in the House and Senate for culpability. It's your old first-grade teacher who put you in this mess.
And that unfunded liability actually could be much higher than the state has reported. Economist Joshua Rauh of Northwestern University's Kellogg School of Management said in a 2010 report that states across the country, including South Carolina, drastically have underestimated their liabilities. South Carolina's pension debt is as high as $53.5 billion, he said.
"Employers don't want to hear that because they don't want to pay more, and elected officials don't want to hear it because they don't want to raise taxes," Biggs of the American Enterprise Institute said.
You see, we have no way yet to know the extent of the damage done by those old crooks who swilled black coffee to drive municipal utility trucks across ice at four in the morning, all those years ago. How could we have known that the old firefighters who saved our homes were destroying our neighborhoods by other means, all the while?
No matter. The damage they did is slowly being discovered. Never mind that lawmakers could take other steps to shore up the system, like hiring more public employees and reinstating those old commitments to strengthen and protect their retirement security. Nope; those left in the system will be charged for the bill. Increases in their employee contributions to the system are already being calculated, with the least additional harm to already damaged taxpayers.
The state expects the system to be fully funded in 30 years, contingent on "a sufficient employer contribution rate" -- that's the amount state and local taxpayers contribute -- among other assumptions.
"It could be a lower rate, or a higher rate, but until the future gets here and the actual plan results are evaluated against the previously projected results we won't know," Lindsey Kremlick, a spokeswoman for the state Retirement Systems, said in a statement.
And they won't be the only ones to suffer. All of the public services provided by these public employees will take their share of the medicine, too.
Beyond increasing contribution rates, strained governments also might be forced to shift existing resources, said Josh Barro, a fellow at the Manhattan Institute. State funds that ordinarily would have paid for road repairs and education could be diverted to the pension system in the future, said Barro, a pension expert at the conservative think tank.
That means children will suffer, and the roads that take them to and from their schools will accept their neglect.
Thankfully, no tax cuts will be rescinded; now wouldn't be the time for that. Corporate South Carolina will be appropriately protected from economic harm. After all, it wasn't corporate South Carolina's fault we're in this mess.
It's all our public employees' fault.
South Carolina's unfunded liability trailed most other states in the boom years of the late 1990s and early 2000s, when many retirement systems flourished. In 1999 the system was 98 percent funded, Draine of the Pew Center said. But at that time many systems had surpluses, he said.
Part of the problem then was that South Carolina constitutionally had been forbidden from investing in stocks until 1999. All its funds were in cash and bonds, even in the stock market's boom years.
In 2005, the state established the Investment Commission to manage and diversify the state's investment portfolio in hopes of reaping stronger returns. The state hired a chief investment officer -- Robert Borden, a $485,000-a-year employee who resigned in December -- and set up a six-member panel of political appointees to vote on investment strategies.
The group began making so-called alternative investments in hedge funds and private equity in 2008 -- the same year the stock market crashed. Such bets can deliver higher returns than more conservative investments, but they also carry higher risk.
In the years since the state only has increased the amount of money it puts in alternative investments.
The pension system's critics, including Investment Commission member Loftis, have said the state has put too much money in high-risk bets. Loftis also has said the state has paid too much in management fees, which topped $343 million last year.
Borden couldn't be reached for comment. Commission Chairman Allen Gillespie and Vice Chairman Reynolds Williams did not return requests for comment.
The investment losses were compounded by policy decisions that added to the unfunded liability. In 2000 the Legislature lowered the number of service years needed to retire from 30 to 28. Pension recipients have received annual cost-of-living raises of up to 3.5 percent all but one year since 1999.
"States that are in trouble now have kicked the can down the road and haven't set aside contributions," Draine said. "They've raised benefits without figuring out how to pay for them."
I hope we've learned our lesson.