Public schools are no budget priority in South Carolina

I appreciate reading Bill Davis's columns in Statehouse Report, as they're usually quite cogent and pertinent analyses of the state's unncessary misfortunes. His item in the August 5 edition was no different, titled "State avoids fully funding education."

Comprehensive and sensible public education reform could benefit, or be the victim of, competing political agendas in the days ahead.

South Carolina has always struggled with the confluence of education and money, from the time of slavery until modern times. And the 2011-12 school year will be no different based on trends.

In hopes of better competing with regional, national, and international school systems, South Carolina’s legislature in 1977 passed a series of funding bills to funnel money into schools and maintain funding on a per-pupil basis, also known as base student funding.

How has that gone over the past 10 years? Does the word “rollercoaster” ring a bell? Despite claims by legislators that education was cut last and “held harmless” in recent years, the hard numbers tell a different story.

State law requires the General Assembly to fund school districts at roughly $2,700 per-student for the current school and fiscal year, according to state officials. But, the legislature, making use of special one-year temporary laws called provisos, has routinely skirted funding the full amount.

How far off? The actual per-pupil amount this year is $1,880, according to the state Department of Education, with even less in recurring funding. In other words, the base student allocation is roughly one-third off.

As a diligent journalist, Davis was bound to give Su-Pretendent Mick Zais's spinmeister, Jay Ragley, time and space to rationalize the deep cuts.

Though diligent, I am not similarly bound; I will offer my own interpretation of Ragley's answer, in my own words: In South Carolina, under the present leadership at the state and legislative level, adequate funding for public education is not high on anyone's priority list.

Flexibility, flexibility, flexibility; say it enough times and it loses meaning.

And, what a law says is subject to interpretation: You say you don't have enough money to do the job, I say you do. That's life. Deal with it.

Currently, the per-pupil funding is on par with actual dollar amounts from the 1998-99 budget. And the total amount of education funding from the state’s General Fund, which doesn’t include federal pass-through dollars, dropped to $1.8 billion last year in 2010-11. That represented a nearly $300-million cut from the previous year, and is on par with state appropriations from 10 years ago -- before the dot-com bubble burst was completely felt.

Davis included some views from educators themselves on the matter, Scott Price of the South Carolina School Boards Association and Jackie Hicks, president of The South Carolina Education Association.

Price, who is paid to advocate on behalf public education, said he saw the paucity and the up-and-down nature of per-pupil funding as a bellwether of other state priorities.

“If we’re a decade behind in school funding, then we better take a look at the conditions of our state roads, and the number of law enforcement officers we have patrolling them.”

This was far from the first year that Jackie B. Hicks, president of the S.C. Education Association, became frustrated with legislators for skirting the law they passed to set per-pupil spending. She said the legislature ought to follow its own legislation or write a new law to solve the ongoing problems.

“In our state, leadership has not done a good job of putting public education first,” Hicks said. “Provisos have depleted everything,” which, she said, was especially damaging in a state with such a high ratio of children depending on school-based free and reduced price lunch and breakfast programs.

Offering a view into his "crystal ball," Davis concluded, "Failure to act on the voluminous Taxation Realignment Commission final report this year showed how little interest the General Assembly has in affecting major taxation changes. And with next year being an election year and the dominant perception being that an exemption removed is a new tax created, there may be no simple answer to improving state school funding issues."

Which is how many educators are reminded every day that we live in South Carolina.

Will state employees have retirement security or not?

Bill Davis, editor of the Statehouse Report, published an item on the state's retirement plan more than a week ago, and I'm curious about how his analysis squares with that of Sam Griswold, whose judgment on retirement system questions is impeccable. Griswold wrote, here, about the competing legislation to make changes to the retirement system, especially for new state employees' benefits, and the significant change that Governor Nikki Haley made that week to the SCRS leadership: the removal of longtime director Peggy Boykin.

Facts don't seem to count for much here -- it's the ideological principle of the thing that seems to be driving this.

Some say our retirement system has an unmanageable unfunded liability. We, like many systems across the nation, do have a significant unfunded liability. Some modest adjustments in contributions and benefits may be necessary to deal with that unfunded liability. But our system is actuarially sound and there is no crisis. We have time to deal with any changes that need to be made and they should be made in a deliberate manner with professional assistance. The system is not broken so we need to be careful when we try to "fix" it. Unfortunately there does NOT seem to be the inclination to want to solve the problem in this manner.

In Davis's words, however, the state is "struggling" with its retirement program.

The crux of the matter seems to be this issue of "unfunded liability." As I understand it, analysts or actuarials calculate that IF every single state employee currently on the job retired today, all at once, the state would be "liable" for the dollar amount necessary to pay out all of their collective retirement benefits on the spot.

Of course, that doesn't happen. Not even employees who are eligible to retire do so on the very date of their eligibility, much less those who have been in state employment only a few years. So the premise is absurd. But let's play it out that way. Let's assume that every single state employee working today retired today. What would happen?

If that occurred, then the "unfunded liability" that lawmakers moan about would impact us. The retirement system is apparently very well situated to meet present needs, even the needs that will arise for many years to come, but it every state employee retired today, it likely wouldn't be able to meet its benefit obligations, and that is apparently what the "unfunded liability" means. Because the state legislature has made promises -- meager, pale, stingy ones, but promises nonetheless -- to its public workforce, the state legislature would have to make up the difference quickly. And that would probably require cutting the budget or raising taxes.

It's that last part -- raising taxes -- that provides the legislature's most conservative members their hook. Using this absurd premise, they wave the "raising taxes" flag to call out their troops, and the troops come a-running. We have to avoid raising taxes to meet this outrageous demand by -- cue the scary music -- retiring state employees, so we have to act now, and cut-cut-CUT! their benefits while we have time.

One way to push state employees out into the cold and get them off the state's retirement rolls is to make them enroll in a 401-K account. And that's where Bill Davis of the Statehouse Report picks up the trail, writing,

Will they or won’t they? That is the question.

Will future state employees continue to get state pensions or will legislators, as bills in the legislature propose, keep new employees from joining the state pension plan and force them into 401K-like savings plans?

State Sen. Chip Campsen (R-Charleston), the primary author of the Senate version of the retirement plan bill, said state government needed to follow the private sector’s lead in handling its pension obligations. How? By segueing from defined benefits plans, or pensions, to defined contributions plans that are controlled by employees and seeded with government contributions.

What's the difference?

The difference in a defined benefit and a defined contribution is the difference between paying off the mortgage and living securely through your retirement, OR losing the house before paying it off, and having to work another 10 or 20 years past your retirement age because your retirement check doesn't cover the groceries.

A defined benefit means that the state guarantees what it promised: You work all those years, and we guarantee that you'll collect the retirement benefit you were promised from day one.

A defined contribution means that the state will kick in a little bit to your 401-K, but when the market tanks again and your 401-K loses forty percent of its value, you're on your own: The state owes you nothing.

Lest we forget, every time there's an economic recession and the market drops, the value in our 401-K account drops too. It happened during the stagflation recession of the 1970s, the Reagan recession of the early 1980s, the Bush I recession of 1991, and Bush II recession of the early 2000s, and when the real estate bubble burst two years ago: Market values dropped, and everyone with 401-K accounts saw a sudden drop in their account values. Translation: If your retirement security is tied up in the stock market, you don't have any retirement security.

But state employees and retirees whose retirement security rests in the South Carolina Retirement System saw no damage whatsoever. What has been promised to them will be delivered to them, because we as a state have guaranteed that to one another. It is the contract we make with our state employees in recognition of the piteous salaries we pay them over the course of a working life.

And this situation provides us perhaps the best illustration of our lawmakers' callousness toward the very workers who clean our buildings and highway roadsides, who provide public services and do them at odd hours of the day and night. When snow falls in the Upstate and shuts down our roads, who gets up at 3 a.m. to clear them? That's who we're talking about.

Davis continues:

Gov. Nikki Haley says something has to be done, claiming the state’s retirement system is burdened with $13 billion in unfunded liabilities. Critics say the number is vastly overstated. But what Haley wants done is unclear as she has yet to spell out specifics in her administration’s plan.

Reached for comment Friday morning, Haley’s spokesman Rob Godfrey said the governor has said state government needed “to protect the benefits promised to current retirees. She has also said that the current unfunded liability is not sustainable, and is probably the greatest financial risk facing South Carolina.”
...
Treasurer Curtis Loftis, who has clashed with Haley publicly over Blume’s appointment, told Statehouse Report this week that the state employee retirement pension fund was $88 million underfunded just from 2010 alone.

This is a great piece of information: Which is it, $13 billion, or $88 million? Not that $88 million is beans, but it's a far cry from $13 billion -- and that's if we should buy this line of criticism in the first place. Is the sky falling? Or are our conservative Cassandras in the big house just chafing at having to pay state workers and then pay them a retirement benefit, too?

Currently, the state retirement system has roughly 450,000 members, with about 190,000 active members and 110,000 pensioners members and 150,000 members not yet eligible to receive benefits, according to the Budget and Control Board, which oversees the retirement system.

Loftis said he worried the state may be on the hook in the future if new hires were cut out of the defined benefits system. The treasurer worried that if the state didn’t continue to add new hires to the pension system, then the state eventually might have to contribute more money over time to fund any gaps in the pension system.

Why should we want new hires to be added to the pension system? It's because new hires contribute to the system, and their contributions are invested with everyone else's in the stock market. The greater our aggregated stock market investment, the greater our return, and the better able we are to pay current and future retirement benefits without adding dollars directly to the system.

Take those new hires out of the equation, and you lose the benefit of their investment. It's a Catch-22 for fiscal conservatives.

In contrast, there seems to be no conflict at all for fiscal progressives, whose argument is simple: If you want public services, pay public employees and guarantee them a retirement benefit.

The key is the guaranteed benefit. This is how Franklin Roosevelt explained Social Security to us, and how it worked before federal lawmakers turned it into their own federal savings account.

Campsen worried that the current retirement model mimicked the federal Social Security program where new contributions were being used to fund existing benefits. “If that’s what happening in the state system, then we need to stop the bleeding sooner rather than later,” he said.

But that’s not what is happening. The state retirement system is fully solvent because the state is not borrowing from the pension fund to pay other bills, as is the case with Social Security on the federal level.

Bob Borden, who oversees the retirement pension fund, has said publicly that the fund is “back in the black” and exceeding investment projections, with a total value of about $23 billion.

Borden did not return several days of calls for comment on the fund, so it is not clear what he means by saying the fund was “back in the black.” In 2008, the fund’s value was $29 billion -- $6 billion higher than it is today. The $23 billion fund now, however, has regained $3.5 billion from a $19.5 billion low point two years ago.

See that "low point" from two years ago? That's when the bottom fell out of the market thanks to the real estate and mortgage mess. In two years, the retirement system was able to bounce back. But how did the sudden drop in value affect Americans with 401-K accounts who were ready to retire when the bottom fell out? They couldn't retire, that's what happened. I can't imagine many things worse than being ready to retire after a long career, and finding that the 401-K account that was supposed to support you through the next 20 or 30 years is now so devalued that it can't support you for five years. What options do you have then, when bills are due and the best your financial advisor can do is tell you to leave the account alone and wait, wait, wait, wait until the market comes back.

That's the difference between having a defined benefit and a defined contribution.

Joe Benton, the interim executive director for the S.C. State Employees Association, disagreed with Haley’s assessment of the pension fund. He said she was playing games with the numbers – that her $13 billon number was premised on the unrealistic idea that everyone would who could retire in state government were to do so tomorrow.

Benton likened the crusade against the state’s retirement system as saber rattling, considering, he said, that the average pension recipient receives less than $20,000 a year. And Benton, a former economics teacher, worried that it might not be the safest idea to let state employees with little investment savvy manage their retirement savings.

Oh, I think that's precisely what the investment firms hope for: Wave after wave of state employees with little investment savvy bringing their retirement savings to invest in the market. This is how newly-minted young investment bankers become wealthy, powerful investment bankers -- and how South Carolina's poor get poorer and poorer, all the while.