The Palmetto Insider

The blog of the South Carolina Policy Council

Posts Tagged ‘public finance

All Five South Carolina Retirement Funds Are Not Created Equal

with one comment

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.