S.C. Retirement System must be reformed ... or else

e-mail this story discuss this issue in our forums Guest column • Edwin Leap: Peanuts gang still makes for perfect holiday gift (11/29/04) • By Paul Eckel: Redesign of health care for end-of-life realities needed (11/27/04) • Marci Andino: Recent election was a benchmark for South Carolina (11/27/04) • Tony Trout: Lame-duck council members are pushing bad proposals (11/27/04) • By Randolph D. Smoak : Great American Smokeout set stage to step up fight against tobacco (11/25/04) More details State Sen. Greg Ryberg is a Republican representing District 24 in Aiken County. He has served in the Senate since 1993, and he can be reached at STR@scsenate.org.

The system receives its funds from the contributions of employees and employers. Retiree payments reflect the multiplication of average salary over employment tenure by the number of years worked. The total value of contributions represent the system's assets and the total value of payouts reflect the liability of the system. When the future payments outstrip the future contributions, the system holds an unfunded liability.

That liability may be amortized, like a mortgage, based upon future expectations, and that number fluctuates from year to year. The system is sound, based upon government standards, if its period of amortization remains less than 30 years. Right now, the unfunded liability of the system sits at approximately $4.4 billion with an amortization period of 27 years, and it has grown every year since 1999, when amortization sat at only two years.

Two recent events caused massive growth in unfunded liability. In 2000, the General Assembly adopted both a reduction in the retirement age from 30 years of service to 28 years and the TERI plan. The former both increased the number of participants in the plan and extended the average length of payments. The latter allowed retirees to re-enter state employment and receive the benefits of the system without contributing to it. Together, these two actions added $1.81 billion in unfunded liability and 13 years to the amortization schedule.

The other main contributor to fiscal instability came in the extension of cost-of-living adjustments to retirees in 2001, 2002, 2003 and 2004. These added $980 million and 11 years respectively. Moreover, these were voluntary, not guaranteed, cost-of-living adjustments. If South Carolina were to add such a guarantee, that would add $9 billion of unfounded liability to the system and, obviously, push the amortization period into the realm of insolvency.

I have long advocated the elimination of TERI, as much for its administrative as its fiscal ramifications, and will continue to do so. However, I not only support annual COLAs for our retirees, but I also believe they should be mandatory. How then can South Carolina afford to protect its retirees, especially knowing that their numbers will increase as baby boomers enter the system?

South Carolina must reform the structure and operation of its retirement system. The South Carolina Budget and Control Board, composed of five elected officials, serves as trustee for the system. Not only does management by politicians violate federal guidelines of fiduciary responsibility, the 2001 review of our system by Independent Fiduciary Services expressed specific concern with this arrangement. Simply put, politicians should not manage the investments of state employees. No other state operates this way.

The system is also legally constrained in its investment strategy. South Carolina statute prohibits the investment of more than 40 percent of system funds in equities. In addition, while the equity investments are managed by a panel of professional money managers appointed by the Budget and Control Board, 60 percent of the money is managed by the state Treasurer without any coordination. Diversity is good. Dichotomy is senseless. South Carolina statute also prohibits any investment of system funds in international markets and many other sound mechanisms of the modern economy.

This management style results in lower returns for the system. This investment strategy, over the last 10 years, resulted in a return well below the national average. Accordingly, the radical changes in the system noted above far outstripped the ability of the performance of the system to keep up. And, anything like mandatory COLAs would ruin it.

South Carolina must reform its system to make money management truly independent, coherent and relevant to the modern market. All avenues must be explored. For example, the simple return to a retirement threshold of 30 years would reduce the unfunded liability by $540 million and eight years of amortization. More importantly, a non-political trustee with the power to control all investments and create diverse and dynamic portfolios that include vehicles such as real estate, venture capital funds and funds of funds (currently used in many other states) could reap large benefits to the bottom line of our system.

President Bush recently made Social Security reform his top priority because he knows that the implosion is coming and that doing nothing will destroy any retirement security baby boomers and their children now enjoy. We must act similarly in South Carolina. The numbers do not lie, and ignoring them abdicates our responsibility to the employees of South Carolina and their families.