Treasurer Curtis Loftis Featured in Dec Higher Tax RSIC Story from Post and Courier

This is a Dec 21, 2015 story from the Post and Courier. 

State’s pension fund woes could mean higher taxes, audit report says

By David Slade and Gavin Jackson

Dec 21 2015

COLUMBIA — Higher state and local taxes, cuts in public services or a combination could be needed to shore up South Carolina’s underfunded pension system for teachers and other public employees, according to a new Legislative Audit Council report.

The 80-page document released Monday says that despite requiring public employees and local governments to contribute more money in recent years, South Carolina’s retirement funds have “been significantly underfunded for more than a decade and are projected to remain underfunded for more than 30 years.”

In other words, investment gains, plus contributions from employees and employers, are unlikely to be enough to pay promised benefits.

S.C. House Speaker Jay Lucas, who was among lawmakers who requested the audit, said he wants comprehensive pension reform to be a priority next year. S.C. Treasurer Curtis Loftis said the report validates concerns he’s been raising about the pension funds for four years.

More than 261,000 employees currently contribute to the two main pension plans.

“Thousands of South Carolinians have voluntarily contributed to this program, and their hard-earned dollars should always be managed in a way that produces the highest return possible,” said Lucas, R-Hartsville.

Seeking higher investment returns, South Carolina has taken on more risk with pension money since 2007, when the state lifted a restriction on how the funds could be invested. What the state got in return, however, was high fees and investment returns that trailed most states, the report shows.

“Besides performing below its target, South Carolina’s portfolio performs below those of most other public pensions,” the audit report said. 

Missing the target

The state anticipated the pension funds would earn a 7.5 percent return yearly, but over the past decade the average was 5.2 percent. A seemingly small difference, compounded year after year, adds up to lots of money for a system that needs another $21.5 billion to pay promised retirement benefits over time.

The audit report said the shortfall may be larger than reported, and could grow once longer life spans are recalculated. The Public Employee Benefit Authority, which administers the pensions, said in a written response that it “had not understated the state’s public pension liabilities.”

High fees have also chewed away at South Carolina’s underperforming pension funds.

The Legislative Audit Council compared the state’s pension funds to the Vanguard Balanced Index Fund, a mutual fund made up of 60 percent stocks and 40 percent bonds, operated by one of the world’s largest retirement fund companies.

In 2005, the state’s pensions had low costs and returns similar to the Vanguard fund, but in the following years the state’s performance was worse, and the state’s costs soared.

Due to South Carolina’s increase in stocks and “alternative investment” holdings, such as hedge funds, from 2005 to 2014, annual expenses rose from $22.4 million to $467.3 million. In 2005, expenses amounted to less than one-tenth of a percent of the pension assets — .09 percent, the same as the Vanguard fund. The state’s expenses rose to 1.57 percent by 2014.

High costs, low returns

“The General Assembly should consider amending state law to limit the maximum percentage of alternative investments in the state-administered pension portfolio,” the audit report said.

Additional recommendations called for lawmakers to bar Retirement System Investment commissioners from directly or indirectly choosing investments, and to end the practice of allowing “placement agents” to broker deals between investment funds and the RSIC. Solicitations of investment fund companies by placement agents seeking commissions led to a State Law Enforcement Division investigation of “pay to play” allegations in 2012, but no wrongdoing was found.

South Carolina’s pension system is administered by the Public Employee Benefit Authority and assets are invested by the Retirement System Investment Commission.

At the end of June 2014, the fund had $29.9 billion in assets.

In written responses to the Legislative Audit Council report, the benefit authority and the investment commission said that some of the issues in the report were addressed by pension system changes and related legislation in 2012. 

The state made substantial changes to the way employees hired after July 1, 2012, accrue pension benefits, closed a particularly lucrative pension arrangement for state lawmakers, reduced the expected rate of return for pension investments and reduced the minimum cost-of-living benefit increase. 

Since 2012, employee and employer contribution rates for the main pension system have increased, to 8.16 percent and 11.06 percent of pay, respectively.

The employer is often a town, city or school district, and those higher employer costs are passed on to taxpayers.

Loftis told a state panel in November that South Carolina’s largest problem is the pension fund shortfall.

“I know there’s a lot of talk about roads, infrastructure and schools, but I would not be surprised if the pension didn’t eclipse all of that this year,” he said.

Michael Hitchcock, CEO of the Retirement System Investment Commission, said it is implementing several changes, such as reporting fees more transparently and adding more investment disclosures.

However, in a written response to the Legislative Audit Council, he said preventing commissioners from recommending investments could “inhibit” commissioners from sharing “attractive opportunities in the market they are seeing ... in which they have no interest.”

Lucas said the audit report “gives the General Assembly a starting point to offer assistance to the (commission) by helping them institute corrective measures that will put South Carolina’s pension plan on a path to solvency,” Lucas said.