Higher Retirement Tab Costs Taxpayers, Not Employees

August 10, 2011

Investigative Reports

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The NerveA familiar elephant was in the room when the S.C. Budget and Control Board met Tuesday morning in Columbia.

Indeed, the elephant is present at many Budget and Control Board meetings.

It hangs around the State House, too, when the General Assembly is in session.

Look for that to be the case again in 2012, and for the metaphorical truth behind the idiom to ring even louder in an election year when every seat in the Legislature will be on the ballot.

But, what is this usually present but often ignored elephant in the room?

Answer: the state retirement system – specifically, its growing costs and an ever-widening gap between those expenses and the retirement system’s capacity to cover them, or what’s known as an unfunded liability.

To be sure, this is not the stuff of political pro wrestling and State House kabuki theater that garner so much attention from other media.

No, this is the serious stuff of taxpayer millions – billions, actually.

The magnitude of the situation lurked in the background of action the Budget and Control Board took on a related matter during its meeting Tuesday.

In a unanimous vote, the five-member board agreed to require state employees to pay 4.5 percent more in their monthly premiums for medical insurance under the state health plan.

The board similarly approved a 4.5 percent premium increase for agencies and other state employers.

The reason for the increases, which take effect Jan. 1: growing health care costs, according to documents contained in an agenda packet for the meeting.

The higher premium costs for employers will, in effect, come out of state taxpayers’ pockets. The current state budget “provides for a 4.5 percent increase in the aggregate employer contribution rate,” the agenda documents say.

Before approving the increases, the board members – Gov. Nikki Haley, Treasurer Curtis Loftis, Comptroller General Richard Eckstrom, Senate Finance Chairman Hugh Leatherman and House Ways and Means Chairman Brian White – discussed the matter for several minutes.

Eckstrom argued for a smaller hike of 3.5 percent for employees and taxpayers. He said the larger increase was not necessary to maintain sufficient funding for the state health plan, and Loftis agreed with him.

But the other three board members rejected that contention.

“I guess necessary and unnecessary is in the eye of the beholder,” Leatherman said.

During the back and forth, Loftis and White alluded to the financing challenge facing the state retirement system. Loftis said there will be a “big conversation” about it next year; White said the Legislature “will be looking” at the issue in 2012.

But, while both of those things might happen, it’s safe to say that it would be shocking to see lawmakers embrace meaningful reform of the retirement system next year.

If, for example, the best indication of how people will behave in the future is how they have behaved in the past, consider that legislators have put off changes to the retirement system for several years running.

In addition, state employees and retirees are some of the most politically active groups in South Carolina government, and every lawmaker must face voters in the November 2012 elections.

Putting it mildly, Loftis told The Nerve for a June 21 story, “It’s a politically sensitive year.”

How to get the retirement system on sounder financial footing is such a volatile issue that the Budget and Control Board, whose members act as trustees of the system, has failed to even talk about it in the past few months – not once but twice.

Under state law, only the Legislature can change the amounts that state employees are required to contribute toward their pension benefits.

“It doesn’t want to do that because employees scream,” Eckstrom said recently in a lengthy sit-down interview with The Nerve about the retirement system.

However, the Budget and Control Board unilaterally can increase employer, which is to say taxpayer, contributions. And that’s precisely what has happened for the past several years as the funding gap in the retirement system has grown.

That unfunded liability totaled about $13.3 billion per the end of the 2010 fiscal year, according to the latest annual evaluation of the system’s investment assets and pending liabilities.

The Cavanaugh Macdonald Consulting firm performed the actuarial review.

Several factors have been driving up the unfunded liability. The drivers include investment returns that have fallen short of projections, and changes by the Legislature that have increased the financial strain on the system.

One of those moves was reducing, from 30 to 28, the number of work years required to receive full retirement benefits, which Eckstrom described as a “boneheaded thing to do.”

In any case, as the funding gap grows, governmental accounting standards require the state to pump more money into the retirement system to keep its solvency at a certain level.

Other than greater investment returns, there are only two places to go for those dollars: either the state’s coffers, or state employees’ pockets.

For the past several years it’s been the former, as the Budget and Control Board has steadily increased the state’s mandatory contribution rate.

That has two practical effects.

First, it reduces the amount of funding available for important services like public education and highway safety as state agencies see their annual required contribution to the retirement system go up and up and up.

Second, it shields the General Assembly from having to confront the political challenge of reforming the retirement system. “And the Budget and Control Board insulates it from that direct line of accountability,” Eckstrom says.

The most recent assessment of the system’s funding level says the state’s contribution rate needs to increase again at the start of the next fiscal year.

In a May board meeting, Eckstrom proposed that the board ask the Legislature to consider requiring employees to shoulder some of that increase rather than just taking it all out of the state treasury.

The board did not take up his proposal for discussion.

At the next board meeting in June, Loftis moved to have the board authorize the increased state contribution rate beginning in 2012-13 as called for in the Cavanaugh Macdonald report.

The board likewise opted not to talk about that idea, either.

Meanwhile, the Budget and Control Board is awaiting a second actuarial review of the retirement system. It is due by the end of the month. The board is paying another consulting firm – Gabriel, Roeder, Smith and Co. – $250,000, plus $285 per hour for any extra work, to conduct the second-opinion study.

The board had not received it as of Tuesday, according to board spokeswoman Lindsey Kremlick.

Eckstrom says he pushed for an extra set of eyes to look at the retirement system because he suspects that its funding situation could be worse than the Cavanaugh Macdonald report indicates. “That’s my fear,” he says.

On a broader level, the comptroller general says the retirement system is a good example of inherent problems in the Budget and Control Board’s mixed composition of executive and legislative authority.

“But that’s what we’re faced with,” Eckstrom says. “Will the General Assembly take action next year? I don’t know.”

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