Framework To Reform our State Retirement System

The Joint Committee on Pension System Review met earlier this week to consider the final draft of recommendations to restore the long-term financial integrity of our state retirement system. These recommendations, gathered from testimony given by pension professionals from Pew Charitable Trusts, Reason Foundation, and Funston Advisory Services along with our own professional staff from LAC, SCDOR, RSIC and PEBA, will form the framework of legislation to be introduced in the House and Senate.

This framework is a starting point for debate but its core components of increasing funding into the retirement system and reforming the governance of PEBA and RSIC must remain intact for the legislation to be effective.

Before I outline the framework, please indulge me to make a couple of personal observations.

Any legislator who expects that this will be the only bill necessary to reduce our unfunded liability does not understand the seriousness of the threat posed by this debt. We accumulated a $20 billion unfunded liability over 20 years. It will take us another 20 years to squirm our way out of it.

The Joint Committee should be made into a permanent oversight committee to ensure that the intent of any current and future pension reform legislation is carried out. Furthermore, the committee chairman should be required to deliver a report to a joint assembly each year to update the members. The General Assembly takes the time to meet in joint session to hear from the head of the American Legion each year. Why not pay attention to the $20 billion that we owe our public employees?

The framework contains funding and governance reforms. These reforms reflect the advice of our independent pension experts regarding how a properly structured system should be organized.

The governance reforms identify and define the duties of fiduciaries, trustees, custodians, board members and executive directors. Some have questioned if the reforms purposely remove our State Treasurer from having oversight of RSIC. The reforms do not. In fact, the reforms require the Treasurer to appoint one of the RSIC commissioners. However, the Treasurer cannot appoint himself. There is a reason for this change. The reforms grant the Governor authority to remove commissioners for cause. We do not want RSIC politicized by the possible efforts of a future Governor trying to remove a future Treasurer as a commissioner of the RISC.

On a personal note, I commend the ceaseless efforts of Treasurer Curtis Loftis. He was a lone voice crying in the wilderness years before the Joint Committee was formed. My support of these reforms is not intended to criticize the oversight carried out by him. However, we will not always have Mr. Loftis as our Treasurer and the $20 billion debt is larger than any one person. We must have an accountability procedure that does not depend upon politics or personality.

Now, on to the framework:

Funding of the Retirement System (SCRS and PORS)

  1. Decouple the employer/employee contribution rates to eliminate the 2.9% differential as required by law
  2. Cap employee rates at 9% for SCRS and 9.75% for PORS
  3. Increase employer rates a minimum of 1% over an extended number of years
  4. Reduce the assumed rate of return from 7.5% to 7% as soon as financially prudent
  5. Reduced the unfunded liability amortization period from 30 years to 20 years as soon as financially prudent
  6. Retain COLA’s as long as they are funded when granted
  7. Pay an annual negative amortization payment

Governance

  1. Change the Process of Setting the Assumed Rate of Return
  • The General Assembly, through forthcoming legislation, would change the assumed rate of return which would be affective beginning July 1, 2017
  • The rate would expire every four years thereafter
  • By January of each year in which the rate is set to expire, PEBA must submit a proposed assumed rate of return that is developed in consultation with the actuary and the RSIC. That proposal must be submitted to Chairmen of Senate Finance Committee and House Ways and Means Committee as well as the Joint Review and Oversight Committee on Pensions (to be created by this legislation)
  • The General Assembly would be able to enact a Joint Resolution to change the assumed rate of return but if it fails to do so, the proposed rate would then be enacted by PEBA.
  1. PEBA Board of Directors Membership
  • Extend their terms from two to five years and limit to serving only two terms
  • Stagger the terms in order that the entire membership’s terms do not expire at the same time
  • Allow for members to be removed only for cause by the Governor
  • PEBA Board and Executive Director named as fiduciaries
  • PEBA Board employs an Executive Director who serves at the pleasure of the Board.
  1. PEBA and RSIC fiduciary audits
  • Set a rotation schedule for the fiduciary audit of every four years
  • The State Auditor shall be the employing agency.
  • Provide that this audit shall be submitted to the Governor, President Pro Tem, Speaker of the House, Chairmen of Senate Finance and House Ways and Means Committees
  1. State Treasurer Fiduciary Responsibilities Clarification
  • Treasurer shall appoint someone to serve on the Investment Commission instead of serving himself
  1. RSIC Commission
  • Limit membership to two five-year terms
  • Add qualifications for serving on the commission
  • Define role of the Executive Director
  • All employees serve at the pleasure of the Executive Director
  • The Commission may engage attorneys (without prior approval by the Attorney General)
  • Additional voting members
  • The Executive Director of PEBA shall serve on the commission, ex officio, without voting privileges
  1. Custodian of Assets
  • PEBA Board is the custodian of the assets of the Retirement System
  • RSIC has the exclusive authority to select the custodial bank

A Short Reflection on the Electoral College Effect

Imagine a wintry Washington, DC in 1801. Though Thomas Jefferson from Virginia had won the popular vote in the recent Presidential election when he defeated John Adams from Massachusetts, an odd circumstance occurred. Jefferson received the same number of Electoral College votes as Aaron Burr, a New Yorker.

Before you start thinking Ross Perot or John Anderson, Burr was not running for President as a third-party spoiler. He was running for Vice-President from the same political party as Jefferson. In those days, the Electoral College process did not differentiate between a vote for President and a vote for Vice-President.

The Electoral College tie vote threw the election to the House of Representatives whose members representing 16 states would determine the next President. Jefferson or Burr needed nine states to win. On the 36th ballot, Jefferson finally carried the day and became the third President of these United States. Burr became Vice-President.

Jefferson went on to serve two terms as President during which he, among other things, suppressed the Barbary pirates, doubled the territory of the United States through the Louisiana Purchase, sent Lewis and Clark to explore our far new country, stopped the British from boarding our ships on the high seas to kidnap and force our sailors into the British Navy.

Burr went on to serve one term as Vice-President during which as President of Senate, he oversaw the impeachment of Supreme Court Justice Samuel Chase. Chase was acquitted. Jefferson dropped Burr as Vice-President candidate from the next Presidential ticket. This was well before Dan Quayle was born. As his term ended, Burr ran for Governor of New York but was defeated. He then killed the first Secretary of the Treasury Alexander Hamilton in a duel regarding a question of personal honor. Burr escaped west to rebuild his fortunes with the French or Spanish only to be charged with treason by Jefferson. Burr was acquitted.

American politics has always been a frontier sport full of power driven people, regional driven plots, foreign intrigue and national reputations made, destroyed and then remade. Like it or not, these are the original political threads woven into the tapestry of our Republic.

Little wonder that the Framers built so many checks and balances into our Constitution. The Electoral College serves as one of those checks on power. It was designed to protect small states with low populations during the Presidential election process. On rare occasions, the Electoral College acts as the Happy Fun Ball of the Constitution, throwing a little chaos and politics into the process, while diffusing power, as it should.

Organizing the House – December 2016

This past Tuesday and Wednesday, the South Carolina House of Representatives met for our organizational meeting. We took our oath of office for the coming two-year session, adopted House Rules, elected the Speaker of the House, Speaker Pro Tempore, Clerk of the House, Reading Clerk, Chaplain and Sergeant at Arms. There were no changes in any of these positions from last session.

We also received our official committee assignments. There was noticeable movement between committees with some members happy with their new assignment and others not so much. I remained on the Education Committee and Rep. Rita Allison was re-elected as our chairlady. I hope to retain the k-12 subcommittee chairmanship that I held last session but that decision will be up to Rep. Allison. The Education Committee lost some talented members but we made up for it by the experience and levelheadedness of the members who transferred onto our committee. We are looking forward to a productive session.

I was also assigned again to the Legislative Oversight Committee. My service on this committee last session was truly informative as the committee structure allows us to dig into how efficiently various state agencies are managed. Rep. Weston Newton was re-elected as chairman. He did an incredible job last session organizing this new committee and forging it into an effective oversight tool for the House.

As a member of the Joint Committee on Pensions, I continued meeting on Tuesday and Wednesday with House staff to refine a viable and fair plan to stabilize and protect our state retirement plan. I remain encouraged that members understand the accelerating risk posed to the state by the plan’s unfunded liability and seem willing to put politics aside and hammer out a bill.

Our state faces two festering financial challenges. Our statewide road and bridge system, though we have increased funding to SCDOT, remains in poor condition. We still need to create a long-term solution to bring our infrastructure up to an acceptable and safe status.

Our state retirement system continues to widen the gap between what we owe government employees in retirement benefits and how much we will actually have on hand to pay them. This unfunded liability gap must be carefully reduced and eliminated. The solution will not come in the form of a one-time fix-it bill that will eliminate the liability in one fell swoop but will require Legislative oversight and adjustments for the foreseeable future. We owe it to our state retirees who depend upon their retirement plan and to the state taxpayers who are the final safety net for the plan to implement a solution that works. There’s no room for failure on this one.

Tommy Stringer