South Carolina Treasurer Loftis Sees Continued Pension Problems Despite Bailout Attempt
Tuesday, May 2nd, 2017
Having complained for years about the management of South Carolina’s public employee pension plans, it’s not surprising state Treasurer Curtis Loftis had mixed emotions about the bailout bill recently signed into law by Gov. Henry McMaster.
“The plan certainly needed money,” Loftis told South Carolina CEO during an interview at his office on the Capitol complex grounds. But, he added, “it’s not a tax to bail out the pensions, it’s a tax to bail out the gross mismanagement of the system.”
In addition, Loftis said changing the retirement plan for public-sector employees from a pension to a 401(k)-style arrangement – something many elected officials, including McMaster, have suggested – would hurt rural communities.
The pension programs, which include not only state government workers but also some local workers receiving public-sector paychecks, such as teachers, hospital workers and police officers, have an unfunded liability estimated by various sources at more than $20 billion. Loftis pegged it at $24.3 billion and rising. Simply put, there currently isn’t enough money in the pensions to cover the retirement obligations for everyone in the system.
“Today, active, inactive and retired members of the S.C. Retirement System and Police Officers Retirement System make up 11.5 percent of the state’s population,” McMaster said in a statement following his April 25 bill signing.
Beginning July 1, covered workers will have more of their paychecks going to fund the pension – 9 percent instead of the current 8.7 percent. Employers will also contribute more each year: 13.56 percent in 2017-18 (up from 11.56 percent), rising to 18.56 percent in 2022-23. The General Assembly will provide funding in this year’s budget to help cover the first-year hike.
The reasons behind the pension deficit are many. Factors emphasized by Loftis are the plans’ poor return on investment, as well as high fees and bonuses paid to those managing the funds.
“They squandered tens of billions of dollars,” he said.
Loftis includes the General Assembly as part of the “they.”
“They can’t legislate these types of programs. It just doesn’t work,” he said. “We find that out in road-building. We find that out in pension plans.”
The criticism appears to have led to fallout for Loftis. The bailout bill removed the treasurer’s office as custodian of the pension’s assets. That responsibility shifts to the Public Employee Benefit Authority.
“It takes away any meaningful oversight and I think that’s just wrong,” Loftis said.
Loftis, McMaster and some members of the General Assembly are in agreement that the bailout is only a starting point in fixing the pension problem. There is not consensus on where to go next, however.
McMaster is among those who would like to see the retirement plans change from a “defined benefit,” which describes a typical pension, to a “defined contribution” arrangement, similar to the 401(k) plans used in private industry.
“Defined benefit pension plans are now virtually extinct in corporate America,” McMaster said in his statement. “This is because they are unsustainable, expensive and require constant infusions of capital to remain afloat.”
“I understand the conservative argument for doing away with defined benefit programs, but people don’t realize our expense is not the defined benefit program,” he said. “Our expense is the gross mismanagement. That’s what we’re paying for.”
In addition, he said pensions are a crucial incentive in attracting workers to low-paying, public sector jobs.
“How are you going to have teachers and policemen and firemen in the poor counties in this state?” Loftis asked. “Who’s going to be a policeman in Allendale, in Barnwell, in Bamberg, when you go in making $22,000-$23,000 per year and they give you 3 percent as a retirement (contribution) and you have to work until you’re 65, 68 years old? Nobody’s going to do that job – or nobody that you’d want to do that job.”
Since the bailout impacts local governments as well as state employees, cities and school boards have already expressed concerns about how to pay for the increased pension contributions they’ll now be forced to make. Loftis foresees a problem there as well.
“Three, four, five years out, I think what you’re going to have is lower services and higher taxes,” Loftis said. “And that’s not good for anybody.”
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