I serve on the Senate Finance Committee subcommittee that was charged with reviewing our state retirement investment structure, devising a plan to protect retiree cost-of-living adjustments and drafting any recommendations we had for improvement.

This subcommittee, ably chaired by Sen. Tom Alexander, held numerous public meetings, heard from more than 20 witnesses and was provided and obtained on its own hundreds of pages of detailed material. In my 27 years in the General Assembly, this is one of the most focused, rigorous and thoughtful efforts with which I have ever been associated. It culminated in the introduction of Senate Bill 618.

We found that the structure for managing the systems’ assets was fragmented and served as an impediment to professional investment practices, and we found that the statutory cap on equity investments was a major deterrent to the flexibility needed to maximize return on investment.

We looked at the most successful systems according to the latest data and found that they had centralized asset investment management that was performed by a professional asset manager, and that all had equity investments as a class (both domestic and international) in the range of 60 percent to 80 percent of the total portfolio. Many of these same states have a 10-year average rate of return in excess of 10 percent while South Carolina has a 10-year average rate of return of about 7.6 percent. A study shows that for 2003 the state systems with the highest actuarial funding ratio have between 1 percent and 25 percent more money than they need to fund their actuarially projected obligations. The July 2003 ratio for the largest of South Carolina’s four systems (comprising more than 95 percent of our total portfolio) was only at 82.8 percent, or 17.2 percent less than we need to meet our projected obligations.

This fact is the single compelling reason that the system will not be able to afford future cost-of-living adjustments.

These other states have a professional investment management staff that nearly always serves in a fiduciary capacity. This is the favored template not only in a large number of states but the standard in those states with the most successful track record on investment return.

South Carolina has an excellent administrative staff that runs the day-to-day operations of the retirement systems. What this bill ensures is that we will no longer have a fragmented systemic structure and that we will have a program designed to protect the long-term stability of the system and take advantage of every available efficiency and opportunity to maximize asset appreciation. Ultimately, we believe that this will protect benefits well into the foreseeable future and put our system on track to incorporate annual automatic cost-of-living adjustments tied to an appropriate benchmark.

Asset management will be under a six-person Investment Commission created by the bill. This commission has one member appointed by each of the five members of the Budget and Control Board and one nonvoting retiree appointed by the five appointees. Critically important is the requirement that commission members have “at least 10 years financial investment experience and no person may be appointed who is a member or beneficiary of the retirement system,” except for the retiree members.

The legislation subjects the commission members to removal by the governor for “malfeasance, misfeasance, incompetency, absenteeism, conflicts of interest, misconduct, persistent neglect of duty in office, or incapacity.”

The bill adds strict and clear standards on conflicts of interest that apply to the commission members and all its employees, including family members and business associates.

My Senate district has as high a concentration of state and local employees covered by the state retirement system as any district in the state. I consider it a solemn, serious and continuing duty to safeguard the system and to do what I believe is best to protect the benefits of current and prospective retirees. Senate Bill 618 gets the job done.

Mr. Setzler represents Lexington County in the S.C. Senate.