As the odors of mimeograph and Nespresso mingled together creating a jittery nostalgia, the freshly printed Legislative Audit Council Report on the state pension plan lay on my desk like a late delivered Christmas fruitcake. Fascinating and horrifying at the same time.
I knew it would make for interesting reading only to those of us familiar with pension mechanics – a subject ranking near quantum mechanics for sheer boredom but without the cosmic significance. Having worked with the compliance side of pension plans my entire adult career, I have proven my ability to endure tedious detail which makes the prospect of picking apart this particular fruitcake less daunting.
Let me break the big news first – the state pension fund is about $20 billion underfunded. The trust account has about $30 billion and liabilities of about $50 billion. Want to read it? Click here.
Actually, the debt is big; the news is not.
The LAC repeats what state treasurer Curtis Loftis has been saying since he took office seven years ago. Mr. Loftis picked up the mantra from outgoing governor Mark Sanford who had played the role of pension Cassandra for his eight years in office.
Mr. Sanford, who knew a thing or two about using charts as political props was not the first to sound the alarm bell. The Strom Thurmond Institute (STI) warned against unsustainable political tinkering with the state pension plan back in 1997. Note that the plan was underfunded by $2 billion in those days. Want to read it? Click here.
So, that’s almost 20 years of HEY HEY that the General Assembly has mostly ignored. Instead, they tinkered with the plan and they ignored the advice from the STI to link a required funding increase to their tinkering.
An example of tinkering would be granting state employees a future Cost of Living Adjustment each year without increasing their present contribution rate. Even worse is making the COLA retroactive for current retirees whose contribution formula while working did not include any such benefit. The General Assembly did both.
Then the General Assembly put a referendum on the November 2006 ballot to allow pension assets to be invested in equites. This was a distinct change of strategy as the assets had always been restricted to Treasury Bills or other less risky investments. The referendum passed and the pension assets were diversified into equities just before the stock market crashed in 2008. Let’s just say that no one shouted BINGO when that happened.
In 2012, the General Assembly attempted to atone for their prior lapses by restricting some plan benefits and raising the contribution rates for both the state and state employees. The effort was needed but did not go far enough.
Some legislators may say “So what? As long as we have enough money in the trust to pay current benefits, we are okay.” In psychology, that reaction is a primitive defense system called Denial. That along with Repression, Displacement, Sublimation, Projection, Intellectualization, Rationalization, Regression, Reaction Formation, Acting Out, Affiliation, and Aim Inhibition together make up the General Assembly’s twelve step program to suppress legislative anxiety. Unfortunately, denial does not erase debt. Real debt. $20 billion in debt.
A debt owed to state workers from a state that has a constitutional prohibition against deficit spending.
A debt carrying an internal interest rate much greater than what we pay on state issued bonds.
A debt that would be considered criminal if it had occurred in a corporate pension plan.
A debt that exposes the state to serious financial difficulties at the next recession.
I applaud the Speaker and those who requested the audit that brought this matter to the forefront again. The LAC performed an excellent audit. Their report gives the House and Senate leadership the information necessary to develop a viable funding strategy to bring the pension debt down – all while addressing that other great unfunded liability headache – our roads. Now, what comes after Denial?