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SC pension system faces $11 billion shortfall, report says

James H. “Jay” Lucas, Speaker of the House, pounds the gavel to close the 2015 legislative session.
James H. “Jay” Lucas, Speaker of the House, pounds the gavel to close the 2015 legislative session.

South Carolina should change its pension system to address a shortfall of up to $11 billion in 2043, according to a report on the state’s pension system released Monday.

The state should decrease the time it pays off new pension debt and potentially cap alternative investments — including real estate, hedge funds and private equity — which charge high fees, according to a report by the S.C. Legislative Audit Council.

“The LAC’s report reveals that our retirement and pension system’s longevity is in jeopardy and in need of immediate effective adjustments,” S.C. House Speaker Jay Lucas, R-Darlington, said in a statement. “Thousands of South Carolinians have voluntarily contributed to this program and their hard-earned dollars should always be managed in a way that produces the highest return possible.”

Lucas said he last week encouraged the House Republican Caucus, which controls the House, to include pension reform in its 2016 legislative agenda.

The 2013-14 fiscal year saw the pension system’s shortfall at $19.3 billion, according to the Audit Council report. The pensions are for workers at state institutions, including agencies, higher education, school districts and local government. About 30 percent of the pension system’s members are state workers; the remaining 70 percent are local government employees, the report stated.

The state should pay off its new unfunded pension liabilities within 20 years, a decrease from the current 30-year limit, the report recommends.

Reducing the payoff period could result in greater payments each year into the system from state workers and taxpayers, said state Rep. Gary Simrill, R-York. The goal of lawmakers should be to reduce those added payments into the pension system by having it earn more on its investments and reducing its fees, Simrill said.

“What we want to do is protect the hardworking men and women who have put money into the system,” he said. “That’s their retirement.”

From 2005 through 2014, investment fees increased to $467.3 million to $22.4 million, according to the report.

For the 10-year period that ended with the 2014-15 fiscal year, South Carolina’s pension investments earned a 5.2 percent rate of return, according to the report. That is below both the national average return of 6.9 percent and the state’s expectations — its “assumed rate of investment return” — of 7.5 percent, set by the General Assembly.

The Audit Council recommends limiting alternative investments, which include hedge funds, private equity and real estate.

However, the Retirement System Investment Commission “is concerned that placing a cap on alternative investments would likely be arbitrary,” the Investment Commission’s chief executive officer Michael Hitchcock said in a letter responding to the Audit Council report.

A cap also could result in the Investment Commission being “required to forgo opportunities to earn superior return through various market conditions,” he added.

In a statement, S.C. Treasurer Curtis Loftis said the Legislative Audit report validates his calls for significant reform of the state’s pension system.

Cassie Cope: 803-771-8657, @cassielcope

Preventing conflicts of interest

In order to prevent conflicts of interest within the Retirement System Investment Commission, the Legislative Audit Council recommends:

▪  Prohibiting former state employees from being paid to appear before or communicate with the commission in an attempt to influence its actions for at least one year after they leave the state agency

▪  Establishing a lifetime ban on former state employees being paid to appear before the commission to influence matters in which the employee was directly and substantially involved while a state employee

▪  Prohibiting Retirement System Investment Commission commissioners from directly or indirectly proposing investments

▪  Prohibiting the involvement of placement agents — or brokers — in investments made by state pension funds or, instead, having the Investment Commission annually report investments that involve placement agents