Rep. Tommy Stringer
Rep. Tommy Stringer
As our first meeting of the Joint Committee on Pension Systems Review drifted into the fourth hour, I watched several eyelids in the audience begin to droop. Given the complexity of the subject matter, I was surprised that they were alert for that long.
The audience shouldn’t be held responsible for their somnolence. Having worked in the pension compliance business since I was a graduate student at Clemson, I can attest that discussing the finer points of pension funding would put even Argus to sleep.
Remember Argus? Not Argus Filch from Harry Potter lore but Argus the giant from Greek mythology. He had 100 eyes that never slept and was made to watch over a sacred cow. And no, he wasn’t a Clemson graduate. And don’t confuse him with Hypnos, who personified sleep or Magneto who . . . well, he wasn’t a Greek god; he was an X-Men nemesis. Anyway, each generation has its superheroes. The ancient Greeks and the Millennials have theirs. My generation had Ric Flair and Dusty Rhodes but I don’t see either one hanging around to explain the need for our review committee or the severity of South Carolina’s pension funding problem. So, I will try.
The 2008 market crash accelerated funding shortfalls in governmental pension plans nationwide including the five plans that make up South Carolina Retirement Systems (SCRS). Before the crash, unfunded liabilities of governmental pension plans were off the political radar. After the crash and ensuing recession, unfunded liabilities grew exponentially.
In response, the Governmental Accounting Standards Board adopted new pension reporting standards in 2012 that require state and local governments to report their total pension liability, the fair value of plan assets available to pay pension benefits and their net pension liability. This may seem rudimentary to anyone who has balanced a bank statement, but it takes a crisis to bring clarity to governmental accounting.
The new standards highlighted a serious downward trend in South Carolina’s pension liability. According to SCRS Comprehensive Annual Financial Report for June 30, 2015, we have promised $50.7 billion in retirement benefits to over 550,000 government employees who participate in those plans. We had $29.3 billion in assets on hand. Which means our net pension liability was $21.4 billion.
More simply stated, our system at that time was 57.85% funded. As a reference point, the system was 88.5% funded in 1997. We have experienced a 30% funding decline over the last twenty years. The 2016 report is due before the end of this year but don’t expect much improvement.
Before anyone panics and jumps off of the Statehouse Dome, rest assured that we don’t owe all of the money at once. We have a window of opportunity afforded by the creation of the Joint Committee to stop the downward spiral. We can restore financial soundness to the system if we avoid a few political pitfalls.
State pension plans are political sacred cows and having attended the 2012 pension reform meetings, I recall several Argus-like groups ever watchful that their accrued benefits, contribution rates and cost of living adjustments were protected. They were prudent to do so. Pension benefits are just one part of a governmental employee’s compensation package and accrued benefits are a promise to pay that must be protected. Future contribution rates and cost of living adjustments are not as sacred.
State pension plans are the victims of political schizophrenia. Many variables make up the pension funding formula and each has contributed to our current problem in some way. However, two variables are fundamental to ensuring the long-term self-sufficiency of a pension plan: an annually increasing payroll and an expanding workforce. Here’s where the break with reality occurs. These two variables conflict with political promises to limit government growth and reduce spending.
How then does a small government majority party work with a big government minority party to restore the financial foundation of the plan? Hopefully, with the objectivity that this problem demands and leave the political posturing aside.
We should start with a frank discussion about the future of the plans within SCRS. Are pension plans, which were 19th century creations, still appropriate retirement vehicles for our 21st century mobile workforce? To achieve a self-sufficient plan in the long term, are we willing to expand our governmental workforce or pay them more?
After those questions has been answered, the committee members will need some backbone to issue a report back to the General Assembly that contains a viable solution. The solution will require a hard-bargained compromise on future employee benefits, a long-term strategy that controls every variable of the funding formula, the political will to execute the strategy and the institutional discipline to monitor the strategy over a prolonged period – maybe as long as twenty years.
Political will? Compromise? Institutional discipline? Long-term strategy? Do these virtues still exist in the General Assembly? They must simply because the debt is not some ancient Greek myth. Make no mistake. The dollars owed are as real as the South Carolinians to whom they belong.