Four BCB Members Reject Retirement System Proposal

June 21, 2011

Investigative Reports

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The NerveWe don’t want to talk about it.

That’s the unspoken response S.C. Treasurer Curtis Loftis received last week from his four colleagues on the state Budget and Control Board when he asked them to consider a proposal he had put together to help shore up the state retirement system’s finances.

Loftis pitched his plan during a June 14 meeting of the Budget and Control Board in an office building on the State House grounds. And when he did, it was like all of the oxygen in the room was sucked out of it.

The treasurer moved for the board to take up his proposal for discussion. Despite being packed to the gills, the room fell eerily quiet, none of the other board members uttered a peep, and Loftis’ motion quickly died for lack of a second.

“If a tree falls in the woods, would they hear it?” Loftis said in a follow-up interview with The Nerve.

State law assigns the weighty responsibility to the Budget and Control Board members of acting as trustees of the retirement system. The five members are: Gov. Nikki Haley (chairwoman), Loftis, Comptroller General Richard Eckstrom and the chairmen of the budget-writing House Ways and Means and Senate Finance committees.

“I was saddened that I couldn’t get a second, but not surprised,” Loftis said when asked how he felt about the other board members opting to not even talk about his proposal.

He detailed it in a 31-page packet presented to each board member.

The long and short of Loftis’ idea? He thinks the board should follow a recommendation, based on the latest annual review of the retirement system’s funding levels, to increase the state’s yearly contribution to the system by $89 million beginning with the 2012-13 fiscal year.

“It’s a delayed implementation,” Loftis says of the extra cash needed to keep the system on sounder financial footing.

Cavanaugh Macdonald Consulting, which has offices in South Carolina and three other states, performed the analysis. It is called an actuarial, in this case for the 2009-10 fiscal year.

The firm’s review says the state needs to increase its annual contribution in order to maintain a 30-year payoff period for the retirement system’s unfunded liabilities. Those are benefits that have been promised but for which the system does not presently have assets to cover.

“The unfunded actuarial liability increased from $11.97 billion to $13.37 billion,” says the consulting firm’s review for last fiscal year. “The resulting amortization (payoff) period increased to 37.6 years.”

Writes Loftis in a letter to his fellow Budget and Control Board (BCB) members:

“The Governmental Accounting Standards Board (GASB) prescribes a maximum … 30 year amortization period for unfunded pension liabilities. The State has maintained compliance with this standard for years and should the Board not act on the actuarial report now, the amortization period would increase to 37.6 years.”

The letter was included in the treasurer’s packet, along with this warning:

“The national credit rating agencies are closely watching how the State manages it(s) unfunded pension liabilities. They consider any level below 80% funded as suspect and have previously directly cautioned the State that its current 68% funded ratio is low by comparison to other states and expect improvement in the state’s funded ratios.”

Continuing, Loftis said regarding one of the three main ratings outfits, “Fitch has singled out the State continuing to make its annual ARC (annual recommended contribution) as a written condition of maintaining the State’s AAA rating.”

The state jealously guards its AAA status, because any downgrading of it could hold severe consequences for taxpayers by way of higher interest rates on the state’s debt.

Also featured in the Loftis packet were copies of February evaluations of South Carolina by Fitch and the other two big ratings companies, Moody’s and Standard & Poor’s. The Moody’s assessment lists “comparatively large unfunded liabilities for retiree health and pension benefits” as a challenge for the Palmetto State.

Wayne Bell, president of the South Carolina State Retirees Association, says he attended the June 14 Budget and Control Board meeting.

“I was surprised that the treasurer was not given the opportunity to explain his position,” Bell said in a phone interview afterward. “To me it was an excellent proposal, and I wouldn’t even begin to speculate on why they didn’t accept it. But I think it’s the sensible thing to do.”

One reason the other four Budget and Control Board members did not want to take up the Loftis plan appears to be that the BCB is awaiting a second opinion on the matter – literally.

The BCB’s administrative head, Eleanor Kitzman, has moved to obtain an actuarial evaluation of the retirement system by another firm. “Director Kitzman wanted a fresh set of eyes to ascertain the unfunded liability position” of the system, Budget and Control Board spokeswoman Lindsey Kremlick said in an email.

Through a bid process, the BCB has selected Michigan-based Gabriel, Roeder, Smith & Co. to conduct the additional review, according to Kremlick. She says the company will be paid $250,000 plus $285 per hour for any extra work asked of it.

The Gabriel, Roeder, Smith & Co. opinion is due by the end of August, according to Loftis.

In the General Assembly, meanwhile, a specially created panel of the Senate Finance Committee is mulling over ways to fix the retirement system’s funding problem long term. Sen. Hugh Leatherman, R-Florence, chairs the committee. By virtue of that position, Leatherman also sits on the Budget and Control Board.

Any permanent fix to the system’s finances could involve future beneficiaries pitching in a larger share of their paychecks toward their retirement.

But, while the BCB unilaterally can increase the state’s allotments, the Legislature would have to change state law to up employees’ contributions.

And that, no doubt, is about as popular as $5-a-gallon gasoline.

Exhibit A: Last month, Sen. Greg Ryberg, R-Aiken and co-chairman of the special Senate Finance panel working on retirement system fixes, proposed requiring employees in the state health plan to pony up a few dollars more per month for their medical insurance.

A majority of senators said no way and voted down the idea.

Exhibit B: Last month, too, Eckstrom moved during a Budget and Control Board meeting for the BCB to recommend to lawmakers that they increase contributions to the retirement system prior to the start of 2012-13.

That’s the year the Cavanaugh Macdonald Consulting analysis says the state needs to start kicking in an extra $89 million.

Eckstrom suggested that the BCB’s call for greater contributions before then be based on “a structure that moves toward the goal of having employees and employers share more equally” in the pain of paying more into the retirement system.

That motion also died for lack of a second.

Loftis says he suspects that political considerations will doom any solutions in the near term.

He notes that 2012 is an election year in which every member of the General Assembly will be on the ballot, and says he can’t imagine lawmakers embracing retirement system reform at that point. “It’s a politically sensitive year,” Loftis says.

Now, where is that proverbial can we’ve been kicking down the road?

Reach Ward at (803) 254-4411 or eric@thenerve.org.