A news analysis by Bill Davis, senior editor | A safety net intended to provide a sense of security to tens of thousands of state employees and retirees — the state’s retirement system — continues to strike fear in state leaders in Columbia.
Back in the depths of the Great Recession, the investment fund that provides the primary fuel to the retirement system lost a staggering $1 billion in a single day. And that fund lost as much as 20 percent of its total value in a single fiscal year around 2008, according to state officials.
But has the situation gotten that much better since then?
Not according to state Sen. Kevin Bryant (R-Anderson), who as the head of a retirement system subcommittee held a series of hearings this year looking into the sagging fund, which now weighs in at just over $28 billion.
“We’re facing an over-$20 billion unfunded liability as a state. I’m freaked out,” said Bryant. “State employees will continue to get those benefits, even if those funds continue to dry up. Then Joe Taxpayer has to pick up the tab, and that’s bad.”
Faced with an unfunded liability that has increased to what state officials say is equal to 30 years of funding, Bryant said he was “ready to roll” with more hearings starting after Labor Day.
Peggy Boykin, executive director of the state’s Public Employee Benefit Authority, said there are close to 187,000 active contributors to the system, and close to 135,000 recipients currently. Boykin is also a non-voting commissioner on the S.C. Retirement System Investment Commission.
Three streams of money fill the retirement system’s reservoir, officials said:
- First is the $28 billion investment fund overseen by state officials and a swath of investment gurus.
- Second are contributions from the state, or employers, as the fund also provides pensions to local teachers and police officers and the like.
- Third is the money that flows from the paychecks of the employees themselves.
Maxed out, senator worries
Bryant said he is desperate to hear some solutions for the looming fiscal crisis, and knows nothing is going to be easy going forward.
He said the employee contribution level is “maxed out,” so the money is going to have to come from somewhere else. “If the fund dries up, it’s got to come from General Funds,” he said.
The state has assumed that the investment fund would make an annualized return on investments of 7.5 percent, with the idea that up and down years would “smooth” themselves out over the long run. South Carolina’s assumed rate of return is below the national average for pensions, which is 7.66 percent.
But state records show that the massive investment fund only earned 1.6 percent last year. Stealing a line from former Senate Majority Leader Harvey Peeler (R-Cherokee), Bryant said that the talking “E*TRADE baby” from past television commercials “could have done better.”
And Boykin said that it’s not going to get much better in the coming half-decade.
She said she asked her agency’s actuaries to do some projections based on the expected rate of return for the next few years. Investment commission consultants projected a “roughly flat” economy for 2016. Based on that, and a worst-case scenario of a 4-percent investment return for the next five years, Boykin said the actuaries told her that contributions from both the employers and employees would have to increase by roughly 3 percent.
The actuaries also recommended to her agency to ask the General Assembly this year to drop the expected return on investment from 7.5 percent a quarter point to 7.25 percent. The legislature did not.
Despite the lean times, Boykin said she was optimistic that the long-term health of the fund would be solid, and that it could recover from the downturn.
But it won’t be easy to get the moribund fund to perform better quickly enough to handle all the benefits that will be paid out to the demographic bubble of the Baby Boomers.
Sky isn’t falling, director says
For the past year, Michael Hitchcock has been on what he calls his “self-flagellation tour,” apologizing and explaining why the state’s pension investment fund has fared so poorly.
In 2014, Hitchcock became the executive director of the state Retirement Systems Investment Commission.
Hitchcock insists that the “sky isn’t falling at this point,” and that he has instructed everyone in his office and agency to review and challenge every investment strategy and sacred cow.
What he’s found that the fund he oversees was positioned following the huge downturns of the Great Recession to protect against huge losses, which was a good thing considering the investment climate at the time.
But, he said, it was positioned “too conservatively” in the following years to more fully take advantage of a recovering national economy — partly because of the nature of how some of the investments didn’t allow for the state to divest quickly enough. “Basically, what they’d be paying in premiums would not be worth the deductible,” said Hitchcock, who has appeared in front of Bryant’s subcommittee.
Like Bryant, Hitchcock said employees couldn’t be expected to contribute any more because of the diminishing returns it would bring them.
“When I look and see that my 401k is doing better than us, I start asking questions, like why, and how do we do better? It’s an easy barometer,” he said.
Hitchcock said he has pushed his managers to change somewhat the positioning of the funds investment focus to the few areas of the economy projected to earn enough in the coming years to help erase some of the shortfall. But those markets, he said, include risks that will have to be carefully vetted.
In 1999, Hitchcock found, the system had an unfunded liability of close to $200 million. Without making excuses, Hitchcock said that amount has grown to billions thanks to a swath of factors.
- First of all, the state implemented the Teacher and Employee Retention Incentive (TERI) program, which first enabled just teachers to retire, come back to work, and begin to enjoy some of their retirement benefits. Then, Hitchcock said, the courts expanded the program to include all system enrollees.
- Then, both Hitchcock and Bryant agreed, the legislature made matters tougher when it increased the cost of living adjustments paid out to retirees without also setting aside money to cover the move. “Some of those moves were done with the General Assembly doing the math,” said Bryant.
- Also, the legislature shrunk the number of years of service required to be fully vested in the retirement system. And then the overall poor rate of return has been the icing on a bitter cake.
“I believe we have the right leaders in place; I have a lot of confidence in both Mike and Peggy,” said Bryant, adding that he wished others in the investment commission would “step up.”
Employee impacts
Reba Campbell, the deputy executive director of the S.C. Municipal Association, said her organization has had a former retirement system employee on staff for the past eight years, part of her job is to serve as a liaison with the SCRS.
“We hear from our member cities the same concerns any organization has that is part of the state retirement system,” said Campbell, adding that the matter is “so complicated and there are so many factors our members have no control over.”
State employees, teachers and municipal employees all are part of the fund. In the current budget, all have to pay a half percent more into the retirement fund — which costs $250 to a teacher of local government worker making $50,000. State employees, however, got a 3.25 percent raise, which means their retirement increase was covered by part of the raise.
Going forward there seems to be only a few hard roads the state can take. The fund can either perform up to snuff, or benefits will have to cut further from when they were last hacked four years ago. Or the state will have to take tax dollars out of services and agencies and redirect them into the retirement fund.
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