The Legislature checked one of the big items off its to-do list earlier this month when it passed H.3726, to reform the state’s public employee pension system. Gov. Henry McMaster should veto it.
H.3726 increases taxpayers’ annual contributions to the public employees’ retirement system by 60 percent. Currently, taxpayers contribute $1.36 billion each year; once the increase is phased in in 2023, that annual contribution will be $2.18 billion, an increase of $826 million.
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For some perspective, consider: General fund revenues are projected to be $9.6 billion in 2023; if all the increased taxpayer funding mandated by H.3726 comes from the general fund (as it does in this year's budget), then 13 percent of every dollar paid by taxpayers into the general fund would go toward the public employees’ retirement system. Even if the money doesn’t come from the general fund, taxpayers still end up footing the bill.
By contrast, H 3726 requires public employees to pay only $40 million more a year for their pensions. Hiking taxpayers’ annual contributions by $826 million and public employees’ by only $40 million is a tough pill to swallow.
If this bill becomes law, 13 percent of every dollar in the general fund will go toward the public employees’ retirement system.
The Heartland Institute recently reported that half of state pension plans require taxpayers to contribute more than employees. It suggested that “a fair rule of thumb would be that government workers should contribute at least as much toward their retirement as taxpayers.”
H.3726 has taxpayers paying more than double into the pension what public employees do; nevertheless, I would have supported the bill if the underlying cause of the pension-funding shortfall had been addressed — that is, if it had tackled the thorny issue of defined-contribution vs. defined-benefit plans. Unfortunately for taxpayers, the General Assembly punted on this.
South Carolina’s public employees participate in a defined-benefit plan, which provides for an exact monthly payment for life in retirement based on tenure and salary; historically, this has been the norm with public-sector pensions. In recent years, however, 15 states have shifted at least one of their pension systems to a defined-contribution plan, where a certain amount of money is set aside each year for each employee’s benefit; in other words, the contribution is defined, but the benefit is not.
Whether it’s roads, health care, K-12 education or whatever, the legislative response to a problem is ‘let’s spend more of the taxpayers’ money now and fix the system flaws later,’ and then later never comes.
This trend tracks what has already happened in the private sector, which has rapidly shifted toward defined-contribution plans. As the Reason Foundation notes, “traditional plans are expensive, unpredictable and unsustainable in the long run,” putting “virtually no risk on the workers or retirees, because taxpayers must make up any funding shortfalls.”
I proposed and the Senate approved an amendment to H.3726 to provide that, once the pension system became solvent as a result of the increase in taxpayer funding, all new employees would be placed into a defined-contribution plan. Those promised defined benefits would get them, but a sustainable defined-contribution plan would be phased in for new hires.
That amendment was stripped out during negotiations with the House, with legislative leaders promising to pursue this later. Now, they insisted, the focus must only be on getting more of the taxpayers’ money into the public employees’ retirement system.
I have heard this before. Almost always — whether it’s roads, health care, K-12 education or whatever — the legislative response to a problem is “let’s spend more of the taxpayers’ money now and fix the system flaws later” … and then later never comes.
Let’s not let this happen with the pension bill. Gov. McMaster should veto H.3726 and insist on a bill that both ensures retirees and current employees receive benefits they were promised and enacts the reforms needed to avoid more taxpayer-funded bailouts in the future.
Sen. Davis is a Beaufort attorney; contact him at TomDavis@scsenate.gov.