S.C.’s massive debt load partly based on misleading state finance report

March 15, 2019

Investigative Reports

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By RICK BRUNDRETT

When it comes to debt, the state of South Carolina is swimming in billions of it.

Yet an important report on the state’s finances, issued by Comptroller General Richard Eckstrom – the state’s chief accountant – and considered a key document by credit rating agencies in evaluating state debt, according to an expert, paints a misleading picture of South Carolina’s government structure and authority over state agencies, a review by The Nerve found.

A description of state government and a related organizational chart in the fiscal 2018 Comprehensive Annual Financial Report (CAFR) do not accurately reflect the structure of many state agencies or the Legislature’s control over the other two branches of government.

And it’s more than just a semantics exercise: One of the nation’s main credit-rating agencies, New York-based Moody’s Investors Service, weights “governance” as 20 percent of a state’s overall credit rating, according to documents provided by the agency to The Nerve.

In other words, how a state is governed, including who ultimately controls its agencies, matters to credit raters, who consider it in their overall rating of a state’s credit worthiness. Credit ratings are used by investors to determine whether to buy particular bonds and set interest rates, which can affect South Carolinians’ wallets, for example, when state general obligation bonds are sold that have to be repaid by taxpayers.

The most recently available rating by Moody’s for South Carolina, according to S.C. treasurer’s fiscal 2018 state debt report, is “Aaa,” the agency’s top rating.

“The credit rating agencies come in, and they do look at the CAFR,” said Emily Brock, director of the Chicago-based Government Finance Officers Association’s Federal Liaison Center, when contacted recently by The Nerve. “It is not 100 percent numbers. There are a lot of components.”

“The credit rating agency is going to go in,” Brock added, “and will say, ‘How does the Legislature act? What is the activity of the Legislature? How does government treat the fiscal legislation?’ I think they look at the overall management of the entity. It does contribute to the credit score.”

In an interview this week with The Nerve, Eddie Gunn, Eckstrom’s chief of staff since 2013, acknowledged the S.C. General Assembly’s historical dominance over the executive and judicial branches.

“I know that’s the case,” said Gunn, who was deputy chief of staff from 2002-05 under then-Gov. Mark Sanford and chief of staff with the former state Budget and Control Board from 2006-2011, adding, “It’s not as much as it was, and any changes, of course, have been authorized by them (lawmakers).”

“In most states, you’ll find that the Legislature is at least as strong, if not stronger, than the executive (branch),” he said later in the interview.

But Gunn waffled when asked several times why the government organization chart in the CAFR issued by Eckstrom didn’t reflect the legislative control of a number of state agencies that the chart listed under the governor.

“I think a lot of that stuff is a matter of interpretation as to who is looking at it and why they are looking at it,” he said, adding later, “I can’t really tell just from looking at a chart as to who is wielding the power.”

The Nerve last week and this requested to speak directly with Eckstrom, a certified public accountant who was first elected in 2002, but Gunn on Monday said he was not available.

CAFR omissions, mistakes

In South Carolina, the 170-member General Assembly exerts significant control over the other two branches of government. Lawmakers, for example, elect family, circuit and appellate court judges, including the Supreme Court and its chief justice. South Carolina and Virginia are the only states where their legislatures play a primary role in selecting judges.

Under S.C. law, a committee called the Judicial Merit Selection Commission (JMSC) and appointed by three legislative leaders, screens all judges except probate, magistrate and municipal judges. County senatorial delegations control the nomination of magistrates.

The one-page organizational chart, which is among the first documents in the 302-page, fiscal 2018 CAFR, shows the executive and legislative branches directly elected by voters, though the judicial branch has no lines of accountability. The CAFR mentions that lawmakers elect “certain members of the judicial branch, including the Supreme Court,” but it doesn’t give specifics and leaves out the JMSC.

The Legislature also has considerable influence over the executive branch – not just through the power of the purse but also through a plethora of boards, commissions and committees that govern powerful state agencies, including the state Board of Education, Department of Transportation, State Infrastructure Bank, public colleges and universities, and the utility regulation system.

Consider the following governing boards whose appointments are controlled primarily by legislative leaders or legislative delegations:

  • Department of Transportation Commission, which oversees the state-maintained road system and is responsible for approving spending of revenues generated under the 2017 gas-tax-hike law. Relatively little has been spent so far under that law, which raised the state gas tax 12 cents per gallon over six years and increased other vehicle taxes and fees. For years, DOT commissioners were nominated by a legislatively controlled panel; although now nominated by the governor, most of the commissioners ultimately are approved by legislative delegations from congressional districts.
  • State Transportation Infrastructure Bank (STIB), which makes loans and issues revenue bonds for major road and bridge projects. The South Carolina Policy Council, the parent organization of The Nerve, has contended the gas-tax-hike law that took effect in 2017 was written in a way to allow the state Department of Transportation to divert revenues to the STIB to pay off bond debts.
  • Joint Bond Review Committee (JBRC), which approves the issuance of general obligation bonds for large economic development projects, such as the Boeing assembly plant in North Charleston; and improvements projects at state-owned buildings.
  • S.C. Conservation Bank, a land preservation agency that has seen recent controversy.
  • State Board of Education, which approves regulations and sets education standards for public K-12 schools.
  • Education Oversight Committee, which oversees the spending of funds generated under state education laws.
  • Lottery Commission, which sets regulations for and oversees the operation of state lottery games, though lottery sales that finance college scholarships historically have done little to slow tuition hikes.
  • Ports Authority Review and Oversight Commission, which screens state Ports Authority board members.
  • Public Employee Benefit Authority (PEBA), which administers the state retirement systems, including the generous one for lawmakers.
  • Public Service Commission (PSC), which sets utility rates for investor-owned utilities, including approving, under a 2007 law quietly passed by lawmakers, nine electric rate hikes over the years for South Carolina Electric & Gas customers for the now-abandoned V.C. Summer nuclear project. SCE&G and state-owned Santee Cooper were partners in the failed $9 billion project; Santee Cooper owes more than $15 billion with interest, including V.C. Summer debt, over 40 years.
  • State Regulation of Public Utilities Review Committee (PURC), which nominates candidates to the PSC and annually reviews commissioners, effectively appoints the director of the state Office of Regulatory Staff, and screens candidates for the Santee Cooper board of directors.
  • Board of Economic Advisors (BEA), which governs the state Revenue and Fiscal Affairs Office, the main consultant to the executive and legislative branches on state revenue matters, and the agency that manages a massive health data warehouse containing personal information of South Carolinians.
  • State Agency Head Salary Commission, which sets annual salaries for state agency directors.

Most of the above 13 boards, commissions and committees are not specified in the 2018 CAFR section on state government or displayed on the related organizational chart.

The Lottery Commission, Public Employee Benefit Authority, and Revenue and Fiscal Affairs Office are shown in the chart as being under “Governor Appointed Citizens Boards” – implying that the governor has ultimate authority over those agencies – when, in fact, most of the appointments to those governing panels are controlled by the Legislature.

The state Board of Education is listed as part of the executive branch, though a footnote points out that 16 or the 17 members are elected by the legislative delegation in each the state’s 16 judicial circuits.

Deep in debt

In the end, the CAFR is important because it is used by credit rating agencies that investors rely on when deciding whether to purchase state bonds – billions of dollars of which, including interest, S.C. taxpayers are on the hook for repaying over many years.

State taxpayers, for example, owe at least $415 million with interest through 2029 on general obligation and economic development bonds, according to the fiscal 2018 state debt report issued by S.C. Treasurer Curtis Loftis. Public colleges and universities collectively have more than $735 million in state institution bond debt through 2037 that taxpayers are responsible to cover if there are any payment shortfalls.

And the legislatively controlled STIB, which over the years funneled several billion dollars to large construction projects in select counties, owes $2.2 billion through 2041 on revenue bonds, according to Loftis’ report.

Despite the huge taxpayer-backed IOUs, Loftis in his report said, “Not since 1879 has there been any default, actual or technical, on any bonded debt of the State,” noting South Carolina’s “conservative governance and financial management continue to provide high ratings” on issued general obligation bonds, with “borrowing rates continuing to remain low.”

But if any general obligation debt can’t be paid when due, the S.C. Constitution authorizes the state comptroller general and treasurer to impose and collect a statewide property tax.

Brundrett is the news editor of The Nerve (www.thenerve.org). Contact him at 803-254-4411 or rick@thenerve.org. Follow him on Twitter @RickBrundrett. Follow The Nerve on Facebook and Twitter @thenervesc.

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