Free Times details state's pension reform dilemma

The cover story in this week's edition of the Free Times of Columbia digs deep into the mess that's been stirred up around our state retirement system and the punitive measures being considered by lawmakers to right the ship.

The entire matter can be boiled down to a simple fact which leads to a simple solution.

Simple fact: During the past 12 or so years, thanks to deep and damaging budget cuts to public services, we've drastically cut the number of state employees who contribute to the largest account of the state retirement system.

Simple solution: Rebuild public services and the ranks of public employees, to ensure that sufficient numbers of employees are contributing to the system.

See the simplicity?

But because this is South Carolina, the simple fact is ignored and the simple solution will never be considered. Thus, we're left with a morass of allegations and recriminations from the grand tradition of "I know you are but what am I?" and lawmakers looking for even more ways to cut public employment, cut retirement benefits for those still working, and eliminate opportunity for people who might work for the state in the future.

It's a privatizer's dream -- which means that for some lawmakers who have long antagonized the retirement system, it's a dream come true.

The Free Times opens its coverage with the political drama, the finger-pointing and accusations of wrong-doing to score political points. Then it gets to the problem at hand.

But the fundamental force driving the debate is something much more powerful and longstanding than political tit-for-tat: It’s demographics.

In 1999, there were more than three state workers for every retiree. Now, there are less than two. (The ratio has changed from 3.16 workers for every retiree to 1.71.) Part of the changed ratio comes from cutbacks in state government; part of it comes from people living longer.

Either way, the math is clear: It says that in order to keep the state pension system viable, South Carolina needs to pay out less to retirees, bring in more from employee or employer contributions, make more money on its investments — or some combination of all three.

“Certainly the demographics of where we are is having an impact,” says Sen. Thomas Alexander, a Republican from Oconee who sits on the Senate Finance Committee and co-chairs a subcommittee looking into retirement issues. “It’s not a bad thing that people are living longer, but the system has to be reflective of the trends so we are viable for the long term,” he adds.

The official numbers go like this: On June 30, the value of the South Carolina Retirement System Fund stood at $25.4 billion. In fiscal year 2011, the fund paid out almost $897 million to retirees. Meanwhile, its unfunded liability — the amount of shortfall in the system over a 30-year period if nothing is done to stabilize it — is $13.4 billion. That’s up from just $177,000 in 1999, according to a 2010 story in The State.

Officials characterize the situation as a serious challenge, but one that can be managed with just a few tweaks to the system.

Starting with the simple solution I identified: Re-open public employment, restore the thousands of jobs cut during the Sanford administration, and bring a wave of new public servants into the fold.

Or maybe not.

No, of course not. Logic and rational decision-making has never been our state's strongest suit.

As of Jan. 12, the value of the state’s pension fund had dropped to $24.3 billion, according to a weekly portfolio summary put together by the Investment Commission. The decline came at a time when the Dow Jones index was virtually unchanged — it closed at 12,414 on June 30 and 12,471 on Jan. 12 — underlining Treasurer Loftis’ concerns about the fund’s performance and investment philosophy.

As for the other side of the ledger, some experts think the estimate of $13.4 billion in unfunded liabilities is unrealistically low.

A 2011 study by researchers at the University of Rochester and the Kellogg School of Management found that even taking into account economic growth, contributions by local and state governments to pension systems would have to increase by a factor of 2.5 for pension systems to be fully funded. In terms of yearly contributions, the study, “The Revenue Demands of Public Employee Pension Promises,” estimates that South Carolina would have to increase its yearly contributions from $1.5 billion to $3.6 billion for its pension system to be fully funded — an increase of $1,186 per household per year for each of the roughly 1.7 million households in the state.

One of the researchers on the study, Joshua Rauh, says South Carolina’s shortfall could be as high as $53.5 billion, according to the Post & Courier.

A Pew Center report also finds South Carolina in a challenging situation. In its 2010 report “The Trillion Dollar Gap,” it found that South Carolina’s liabilities are funded at 70 percent. The center divided states into three categories: solid performer, needs improvement and serious concerns.

South Carolina was one of 19 states listed in the category of serious concerns.

Since then, the percentage of the state’s pension liabilities that are funded has dropped to about 66 percent. By comparison, in the late ‘90s the state pension fund was nearly fully funded, hovering around 98 or 99 percent.

Notice that no one mentions the thousands of job cuts, or the benefits that would accrue to the system if those jobs were restored in the budget.

Why not? Because our lawmakers have engaged in a slash-and-burn policy when addressing public services, and it's likely that the state or its decimated agencies have already let contracts to private entities to provide what were formerly public services. The beauty of that system, of course, is that public money moves into the private sector through a closed spoils system -- it's not what you do, it's who you know! -- and public employees are wiped off the public employment rolls, meaning the state's obligation for health care and retirement benefits is reduced, too.

But South Carolina is now bearing witness to the fallout from that slash-and-burn policy, and decision-makers are scrambling to figure out ways to legally cut retirement benefits for those still on the job, while charging them more for the lesser benefits.

Charles Logan is a retiree who was a deputy director at the S.C. Land Resources Commission and later a section chief at the S.C. Department of Natural Resources.

During his long tenure as a state worker, Logan witnessed or participated in lots of meetings before legislators “begging for money” for his agency, he says.

“I saw so many of them just had a complete disregard for state employees,” he says. “They looked at state employees as almost peasants — or servants almost. A lot of them were not just egomaniacs but also weren’t knowledgeable about programs.”

He takes aim directly at the Legislature for mishandling the state’s pension fund — specifically, the TERI program and 28-year retirement.

“I find it disgusting that South Carolina’s politicians act like they’re rescuing the solvency of the S.C. Retirement Fund when their actions have caused the severe decline in the retirement fund,” he wrote in a recent letter to Free Times.

“When they passed the TERI plan, it was originally intended just for teachers, but they also used it for favoritism and political payback that they could give to people — their cronies that they wanted to dole it out to,” Logan says in a follow-up interview. “But then there was a lawsuit [in 2005] saying that it was unfair to just pick out a specific part of the public employees, so it had to be applied to every public employee. At that point, they should have canned the program — it just sucks money out of the retirement system.”

Sen. Alexander emphasizes, however, that both the TERI program and the 28-year retirement were done for public employees and retirees, and that they were implemented at a time when the pension fund was close to fully funded.

Logan doesn’t deny that the programs were beneficial to state workers; he just takes issue with the Legislature launching programs without paying for them. He says he’s collected more than a decade’s worth of articles, editorials and letters to the editor from throughout the state, all urging the Legislature to be more prudent in its management of the state pension fund.

“It’s obvious what they are going to come up with,” Logan says. “They are going to act like they are the saviors keeping [the pension fund] from going under when they caused the problems to begin with. And they will do it on the backs of the public employees: They will raise the contributions and they will cut the cost-of-living adjustments — yet they will not touch their own retirement system.”

“I don’t have any confidence in them,” he says. “How can you have confidence in the General Assembly?”

Hard to argue with the facts.

It's an object lesson to those willing to learn: When you make political decisions for short-term gain, you do long-term harm.

So, in the absence of doing what's smart and what's right, what solutions are being discussed?

Apparently, paid actuarial consultants have proposed converting our retirement system from defined benefit -- in which everyone knows what benefit they'll receive when they retire -- to a defined contribution system, in which the state and its employees contribute to a retirement account, but no benefit is guaranteed; a retiree's benefits are then subject to the whims of the stock market -- benefits might get better when the market does well, benefits might bottom out when the market falls off. Under such a system, the only ones who benefit are the investment bankers; they get paid whether the market grows or crashes.

As much doubt as some retirees might have in the Legislature, it could be worse. Speaking at a Jan. 5 legislative workshop for the media, GOP Rep. James Merrill of Charleston said legislators are determined to keep the pension checks coming — and not, as actuaries have advised, to move from a defined-benefit to a defined-contribution system.

If legislators did move to a defined-contribution system, state employees would get a taste of life in the private sector — no guaranteed pension whatsoever, just a small yearly contribution to an IRA or 401K.

In order to keep the pension system afloat, however, there will need to be changes — big ones. Those changes might include reducing cost-of-living adjustments, raising the retirement age or changing the number of years it takes for an employee to be fully vested in the system.

“Everything will be on the table,” Alexander said at the Jan. 5 legislative workshop.

Easy choices will not make a dent, Democratic Rep. Gilda Cobb-Hunter said at the event. Plus, she added, she’s interested in solving the problem once and for all.

“I am not interested in kicking the can down the road,” she said.

Meanwhile, the demographic wave continues to create pressure on all sides — employees, retirees, legislators, fund managers and taxpayers — toward a solution that likely no one will be happy with, and that might have to be revisited over and over in the coming years.

Much as retirees — and everyone else — might wish it were otherwise, there are no guarantees.