The Palmetto Insider

The blog of the South Carolina Policy Council

Archive for the ‘Public finance’ Category

All Five South Carolina Retirement Funds Are Not Created Equal

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We have recently published a fact-sheet on 10 different ways to reform the S.C. Retirement Systems. The South Carolina Retirement Systems, with more than $12.052 billion unfunded liability reported by the state’s Budget and Control Board, has become one of the hot issues for the policymakers.

Note that the S.C. Retirement Systems consists of five major defined benefit pension systems:

  1. S.C. Retirement System (SCRS) – It is the most prominent pension plan. It accounts for about $10.964 billion out of the $12.052 billion unfunded liabilities.  Almost all state employees, such as teachers, state and municipal employees, fall under this category.
  2. The Police Officers Retirement System (PORS) – This accounts for about $955.819 million of unfunded liabilities.  Membership includes police officers, peace officers, firefighters, and magistrates. Probate judges and coroners may also elect to participate in PORS.
  3. Judges and Solicitors Retirement System (JSRS) – The JSRS system accounts for $75.083 million of unfunded liabilities. It covers all justices, almost all judges, circuit public defenders and all solicitors.
  4. National Guard Retirement System (NGRS) – There are $36.108 million of unfunded liabilities in the NGRS. The plan consists of all members of South Carolina National Guard.
  5. General Assembly Retirement System (GARS) – Members of the House and Senate are covered by this plan, which has $21.933 million of unfunded liabilities.

Neither all defined benefits pension plans are created with similar benefit packages nor do all plans have the same funded ratio, which ideally is 100 percent.

Not all funds are funded equal.

NGRS, in particular, is funded only at 32.6 percent (or 67.4 percent underfunded). In contrast, PORS is funded at 77.9 percent (22.1 percent underfunded).  SCRS, the largest of five pension plans, is funded at 69.3 percent (30.7 underfunded).

Historically, NGRS hasn’t been funded at a reasonable actuarial model. But that’s just one of the major reasons why NGRS is highly underfunded.

Another reason is that NGRS is the only plan that does not have any member contribution. As a result, the only way to get the plan fully funded is through employer contributions and governmental funding. Indeed, since FY2006, the General Assembly has given a cumulative $22.875 million of General Fund revenue to supplement the NGRS’s regular pension benefit expenses and administrative expenses.

Not all funds’ benefits are equally calculated

JSRS has the highest average unfunded liability per member ($229,612 per member). The second highest, GARS, is at $37,816 per member. SCRS, PORS and NGRS are at $24,236, $19,366 and $1,901 per member respectively.

There is a likely explanation for JSRS’s and GARS’s high unfunded liability per member. Both plans have more generous benefit packages than PORS and SCRS.

For example, retirees at JSRS are granted an allowance of 71.3 percent of the current active salary of the member’s position. In comparison, retirees at SCRS earn    1.82 percent of Average Final Compensation times years of credited services.

So in order for a SCRS retiree to earn comparable pension benefit as retiree from JSRS, the retiree at SCRS would have to work at least about 39 years of service (based on the calculation of 71.3 / 1.82).

Yet, judges and solicitors can earn the 71.3 percent pension payment with as low as only 15 years of service to a maximum of 25 years. If they work more than 25 years, then their pension benefit increase by another 2.67 percent for each additional year and can earn up to a maximum of 90 percent of the current active salary.

Similar could be said about pension benefits for the House of Representatives and Senators. Their benefit payment is 4.82 percent of earnable compensation times years of credited service. So this means House and Senate members can earn a pension benefit that is 2.64 times more than members of SCRS if both earn the same salary.

Next steps

As the state is deliberating the budget and spending crisis, perhaps one of the opportunities is to implement detailed and long-term solution reforms for the South Carolina Retirement Systems. The 10 reform proposals are good start.

One of them is the defined contribution plan.

Defined contribution plans give employees more control about their investment options, greater portability with their pension fund, option to make additional contributions out of their salary to the plan to capture the compound interest return and thus greater fund.

With greater control over their accounts, and more personal investment, the state will likely cut down on its massive unfunded liability. It’s at least a start.

How Big Is Big Government in Your County?

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As part of its ongoing commitment to help small, independent businesses in South Carolina, the Policy Council is examining the impact of big government, state and local tax burdens, the regulatory environment and other policy issues in counties statewide.

Recent reports include:

Federal Spending in South Carolina: How Does Your County Rank?

County Tax Burdens on Local Business: Where Does Your County Rank?

Even in Recession Local Governments Keep Growing

City of Aiken:  Local Businesses Paying the Price for High Government Spending

Oconee County: Economic Development Spending Hurts South Carolina’s Economy

We are now examining government spending—from all sources—in S.C. counties in a new report.

When times are tough, the government dole seems attractive—but economically it’s a deal with the devil. Higher government expenditures must be financed through higher taxes today or more borrowing that will result in higher taxes tomorrow. Moreover, government spending crowds out private sector spending, diminishing the private economy’s rate of growth.

Total government spending in 2008 varied from a high of $4,156 in Jasper County to a low of $1,854 in Saluda County. Between 2002 and 2008 the counties with the highest growth in government spending were Newberry, Jasper, Calhoun and Greenwood.  Saluda, Bamberg, Berkeley, Greenville, Spartanburg, Abbeville and Chesterfield saw per capita government spending decline over the same period.

Many factors drive government spending in counties, but it’s clear that population alone doesn’t explain changes in per capita spending.

Percent change in population and per capita government spending

  Copyright SC Policy Council

 

Written by Robert Appel

July 14, 2010 at 10:20 am

What the Governor Is Telling Us That Legislators Aren’t

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Remarkably, the House voted to sustain 51 of 107 of Governor Sanford’s vetoes. Over the history of Sanford’s term, 88 percent of his vetoes have been overridden, so this is regarded as a victory for the governor, and perhaps for taxpayers hoping for an indication from lawmakers that this year’s budget can’t be just politics as usual.

But the most striking difference between the budget as debated by the Legislature and the rationale for the governor’s budget vetoes is that the governor actually offered a rationale, as explained in our latest policy piece.

Broadly speaking, the governor used the following criteria in issuing his vetoes:

  • Eliminate duplication
  • Set budget priorities
  • Balance the budget (as required by the state constitution)
  • Encourage privatization and private investment
  • Use existing resources more efficiently
  • Save money for future Medicaid expenses
  • Reduce administrative expenses
  • Eliminate waste

South Carolina legislators enjoy a monopoly of power, so they don’t behave as if they have to give taxpayers reasons for what they do. They just do it and dare the governor—and taxpayers—to tell them otherwise.

It seems, though, that that is precisely what is beginning to happen.

Written by Robert Appel

June 18, 2010 at 1:08 pm

Budget Priorities Come into Focus as Session Ends

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The Nerve is running an excellent piece that explains the significance of the governor’s veto of Part IV of the budget – which uses $213.5 million in federal funding to balance the state budget. Except Congress has not – and may not – approve this funding.

Currently, the federal money is only available until the end of calendar year 2010. Absent Congressional approval, the budget will become unbalanced for the second part of the fiscal year – that is, the first six months of 2011.

As the governor’s veto notes, several states have balanced their budgets without using this money. Other states, such as Mississippi, plan to place some of the money (if it materializes) in a reserve fund; or, in the case of Vermont, use it on non-core functions.

Here in South Carolina, lawmakers did the opposite, using the federal (FMAP) dollars to fund health services and agency operating expenses. “It seems this budget’s priorities are reversed,” wrote the governor. “It funds core requirements of government with speculative money, while it funds supplementary or speculative programs with money that is certain.”

Some of the programs the governor might have in mind here are:

The governor has vetoed all three of these items.

The larger problem is that spending is too high in South Carolina.

If we compare the Legislature’s spending habits to the average household, it’s like running through your monthly paycheck to throw a big party for your friends (and the Legislature seems to have a lot of “friends”); and then using your federal tax refund to pay your rent. But suppose the refund is late? Or doesn’t come at all?

We can talk about how the Legislature needs to change its attitude toward budgeting, reset its priorities and be more fiscally disciplined. But, in reality, only one thing is going to cure South Carolina lawmakers from their spend-and-tax (via hidden fines and fees) ways. And that’s an effective spending cap.

Yet, legislation (H 4232) that would limit spending increases to population, plus inflation, died in committee this session.

Indeed, in spite of having apparently made passing a spending cap a top priority for 2010, Senator Glenn McConnell seems unable to persuade his fellow senators to take a concurring vote on S 2 – a much weaker reform that would limit General Fund spending to a 6 percent annual increase. (Recall that General Fund appropriations currently account for less than ¼ of the total budget.)

The bill passed the Senate in March; and then an amended version passed the House in late May.

Only when limiting spending becomes a priority will legislators find the will to actually prioritize their spending.

Written by Jameson Taylor

June 16, 2010 at 8:00 am

Crying Wolf on Fines and Fees

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It came as a mild shock that the General Assembly did not pass any new fine and fee increases this session – at least as part of the provisos section of the budget (and at least as far as we could find).

Readers of our Best/Worst 2009 will recall that last year the General Assembly passed no fewer than 12 provisos that raised fines and fees, along with 11 fine/fee increases as standalone legislation.

Of course, the Senate tried. Provisos 37.14 and 37.15 would have raised watercraft fees and hunting/fishing license fees, respectively.

Likewise, the Senate attempted to increase drug court fees (proviso 89.141). This was in addition to legislation (H 3161) that would have increased a variety of court fees by $24 million. The proposal was vetoed by the governor.

Before taxpayers breathe a sigh of relief, though, we should point out that the current budget sets the stage for significant fine/fee increases in future years.

As explained in our recent report on the Other Funds part of the budget, lawmakers have habitually used earmarked fine/fee revenue to sustain high levels of General Fund spending.

The current budget, in fact, contains several flexibility provisos (cf. 39.14; 65.7; 80A.38) that enable state agencies to use earmarked and restricted revenue to supplement general agency funding. The worst of these, which we have repeatedly discussed, is proviso 89.87. As we wrote earlier this week:

This proviso authorizes agencies to use earmarked/restricted accounts (i.e., Other Funds) funded with fine and fee revenue to absorb General Fund cuts. This practice, in itself, is objectionable, but this proviso also allows agencies to increase spending to FY08-2009 levels (i.e., $6.736 billion). Thus, in theory, the proviso permits agencies to increase spending by $1.621 billion.

In other words, the proviso permits agencies to draw down Other Funds revenue by as much as $1.6 billion. That’s for one fiscal year alone.

So what happens when these earmarked/restricted accounts become exhausted? (Each fund, i.e., the Tire Fund, is supposed to contain dedicated revenue allocated toward special projects.) To begin with, the General Assembly will likely drain nonessential funds to replenish essential funds. (For more on that, see this Nerve story.) Second, they’ll cry wolf and raise fines and fees.

So in spite of not passing any fine/fee increases in the state budget, the legislature is still spending through existing fine/fee revenue. Only next year, taxpayers will be watching for such hidden tax increases.

Written by Jameson Taylor

June 8, 2010 at 4:00 pm

General Assembly Passes Largest Budget in State History

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In spite of handwringing and complaining about budget cuts, the General Assembly has just passed the largest budget in state history. Consider:

  • The total budget for FY10-2011 is $21.149 billion: $8.268 billion in Federal Funds; $7.766 in Other Funds; and $5.115 billion in General Funds.
  • The new budget is almost half a billion dollars more than last year’s authorized budget of $20.695 million.
  • It is $290 million more than the FY08-2009 authorized budget, which was $20.859 billion before mid-year cuts reduced the budget to $19.97 billion.

In other words, this is the largest budget in state history. Clearly, record federal spending is driving the increase. But the Other Funds part of the budget, which is derived from fines and fees, has also substantially increased

For FY10-2011, Other Funds accounted for 37 percent of the total budget, compared to 39 percent in Federal Funds and 24 percent in General Funds. For FY09-2010, Other Funds appropriations were $7.175 billion; and $7.028 billion for FY08-2009. Given previous patterns, it is also likely that Other Fund revenue has been significantly underreported (by about 7 percent).

Overall, the state budget has increased by 2 percent over last year. Federal funding is up by 6 percent and Other Funds are up by 8 percent. General Fund appropriations are the only part of the budget that decreased, going from $5.174 billion in FY09-2010 to $5.115 billion, a 1 percent decline.

Exclusively looking at the General Fund budget leads to a misreporting of state spending trends and fosters a lack of transparency. The real story with this year’s budget is not that spending has gone down, but that it’s going up.

Written by Jameson Taylor

June 4, 2010 at 12:35 pm

General Assembly Adopts State Budget

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After rejecting the conference committee report on the state budget Wednesday, the House reconsidered their vote and adopted the conference report 64-54 Thursday afternoon.

The conference report was then sent to the Senate, where they also failed to adopt the report on the first vote. After reconsidering their vote, however, the Senate adopted the report 22-16. The budget was sent to the Governor, who has until June 9th to return the bill with any vetoes.

Those vetoes will be addressed by the General Assembly when they return June 15th.

Written by SC Policy Council

June 4, 2010 at 10:37 am