Treasurer Loftis Editorial: America's Credit Rating Warning - A Wake-up Call For South Carolina
April 15, 2011
By Curtis Loftis, Jr.
Last week’s decision by Standard and Poor’s to slap a “negative” credit outlook on the federal government is a wake-up call for policymakers in South Carolina.
This unprecedented action – and the credit downgrade that will inevitably follow if Washington politicians fail to rein in deficit spending – represents a clear and present economic danger to our nation. A credit downgrade would not only result in higher borrow ing costs and a further devaluation of the dollar, but could trigger any number of negative ripple effects throughout the financial markets and economy as a whole.
Closer to home, it’s a stark reminder of the fundamental choices facing state leaders who have been tasked with the stewardship of your money.
Will we cap the growth of state spending and implement the reforms necessary to get our fiscal house in order? Or will we follow the example of Washington and continue to spend recklessly while making promises we cannot keep?
While a balanced budget requirement affords South Carolinians some protection against the rampant waste we see in Washington D.C., by no means is our state government proceeding on sound financial footing. In addition to spending record amounts of money in the state budget, our unfunded liabilities are reaching dangerous levels. This combination adds explosive power to a ticking time bomb – one that will gain even more destructive force if we do not take steps now to correct the problems.
What’s the cost of doing nothing? Just ask any of the South Carolina businesses that are currently paying tax increases of up to 600 percent in order to replenish a $933 million hole in our unemployment insurance fund.
This is why we need to act now to get ahead of problems – particularly those related to our state’s pension fund.
The current unfunded actuarial accrued liability (UAAL) of our state pension fund is $13.5 billion up from $11.9 billion just one year ago. Meanwhile, the latest actuarial valuation would increase the fund’s amortization period from 30 years to 37.6 years. Cleary, these numbers are moving in the wrong direction.
Unless our state wants to end up like Washington, its leaders must take immediate steps to relieve the strain on our retirement system. Unfortunately, some of our leaders don’t even want to acknowledge that the problem exists.
Recently, I attempted to introduce the latest actuarial report into the public record and to recognize the pension fund deficit. But that effort of transparency was rebuffed, effectively putting taxpayers on the hook for all costs associated with its growing imbalance.
How much money are we talking about? In the upcoming fiscal year, the report estimates that the employer (i.e. taxpayer) contribution to the system must be increased by $88.9 million. That money will now have to come directly from public funds – meaning it won’t be available for tax relief or to pay for things like teachers, police officers or prison guards.
How do we keep this from happening in the future?
Aside from implementing a cap on the growth of state government – one that includes a rebate mechanism for surplus money – we need to specifically address what is driving the growth of our unfunded pension liability.
Firstly, we must consider alternatives to our current “defined benefit” system, including moving South Carolina towards a "defined contribution" system. Under such a plan, retirement benefits would be provided based on what employees actually pay into the system - in addition to whatever investment return is generated by the state's fund managers. Currently, our state operates on a "defined benefit" system, which guarantees payouts without any thought as to whether the money is there to fund them.
Secondly, for future employees, South Carolina must scrap its costly twenty-eight year retirement plan and return to a thirty year standard.
Thirdly, we must close the Teacher and Employee Retention Incentive (TERI) program to new participants as this well-intentioned program has been a huge drain on our system.
None of these reforms are new ideas. In fact, each of these proposals has been introduced on several occasions over the last few years. But they, along with numerous other changes that I have submitted to the retirement system, are needed to right our pension plan.
Without prompt attention our system will continue to hemorrhage billions of dollars...with the taxpayers of SC liable for these losses.
South Carolina cannot afford to follow the example of Washington. We must take prudent steps now in order to avoid serious pitfalls later. We must unite the stakeholders...government employees, retires, and taxpayers, in an honest effort to maintain our promises, and to do so in a manner that is affordable. As the state’s treasurer, trustee of the retirement system, and the custodian of the pension funds, it is my responsibility to push for these reforms that will place our state on a more responsible fiscal course and preserve our state’s AAA credit rating.
Curtis Loftis is the Treasurer of South Carolina.