By Andy Brack

Many state employees and retirees may have choked on their morning coffee when they read about a $420 million error recently uncovered in the state retirement system.

Relax. A big pot of money isn’t missing. The error occurred in financial forecasting. It’s not about the accounting of money in any state account. Here’s what happened:

The state has about $24 billion in its retirement system for employees. Not only does it earn interest, but current employees and the state pay a fixed percentage into the account every paycheck.

But to ensure the long-term viability of the system, the state office that manages the retirement system (unassumingly called S.C. Retirement Systems), does long-term forecasts to figure out whether there will be enough money over time to continue to pay benefits.

These long-term forecasts are done by actuaries, not accountants. They’re the guys who consider all sorts of statistics to determine how long people will live so they can forecast how long they’ll have to pay benefits. With 300,000 people in the system, there are a lot of equations, assumptions and calculations.

Until recently, the state’s actuaries forecasted a long-term liability of 27 years, which meant if everybody’s claims had to be paid out in one big lump sum (which doesn’t happen because everybody doesn’t die on one day), then it would take 27 years to pay off the debt incurred to fund the lump sum.

But recently a new team of actuaries found that a former team had made a couple of assumptions with which they didn’t agree. In turn, that changed the long-term forecast and the unfunded liability. The difference? $420 million. And here’s what it meant to the payback period; it extended it from 27 years to 28 years.

Where all of this financial talk gets tricky and more confusing is when you throw in the long-term costs of cost-of-living adjustments, or COLAs, for retirees.

Under the current system, COLAs are funded by the General Assembly. When forecasters make their calculations about long-term unfunded retirement liabilities, they don’t assume COLAs will be added. But when they are, COLAs increase the unfunded liability of the retirement system. That makes sense. If you increase a benefit but the same amount of money essentially is coming in from current employees, there will be more liability down the road.

The public policy problem now is that state law, based on Internal Revenue Service standards, sets the unfunded liability limit at 30 years to keep the system sturdy. With the state now approaching that firewall, there’s not enough wiggle room to give a 3.4% COLA this year because it would raise the liability to 32 years, which the state can’t do. The law also doesn’t allow the state to give a partial COLA.

Bottom line: The state will have to give serious consideration to making changes to the state retirement system to provide more flexibility.

“The option of doing nothing is not a viable option,” says state Sen. Thomas Alexander, R- Walhalla, who is chairing a special Senate finance subcommittee that recently started looking at the retirement system. “Our goal is to maintain the soundness and viability of the retirement system for retirees and current employees who will become retirees.”

Among the options they may consider in coming weeks are altering a popular program that allows employees to retire but keep working at their current salary levels; increasing the amount the state pays for employee retirement (which would reduce the liability); returning the state to requiring 30 years of service for retirement instead of 28 as changed a few years ago; or reducing benefits.

One thing is for sure: the system isn’t broke, but fixes and changes loom on the horizon.

CORRECTION: In last issue’s column, we suggested the State Board of Education was opposed to a plan to create a statewide charter school district. It, in fact, hasn’t taken a position, according to a board member. The State Department of Education, however, testified against the plan in a legislative hearing.

Andy Brack publishes the South Carolina Statehouse Report (www.statehousereport.com), a business forecast of developments in the South Carolina Legislature and state government. He can be reached at brack@statehousereport.com.

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