South Carolina ended the last fiscal year with a plethora of funds and an annual financial report that shows that though the state’s improved its financing of key state agencies, it still has more bills to pay than cash to pay for them.
Earlier this year, the Greenville News reported that SC was battling bills from the state’s pensions systems that were more than twice the size of its annual budget.
Latest financial statements from the SC Public Benefit Employee Authority, the agency that oversees pension funds, showed the state had improved its financing for its retirement systems by 5%.
However, since the state underfinanced its pension plan in the past, it keeps accumulating significant interest on its bills.
Perception and opticsSC will cut income taxes while an unceasing pension debt persists
For instance, the state’s biggest retirement fund, the SC Retirement System, had a service cost of $1.06 billion in fiscal year 2022. But it had nearly $3.7 billion in interest.
In fact, since 2014, the state has been accumulating more interest− almost three times its service cost, every year.
South Carolina is currently sitting on a debt of about $27.5 billion borne from its five retirement funds that cover state employees, police officers and state judicial officials. That money could help fund the state’s annual state budget for nearly two years.
SC not alone among states with debt burden
South Carolina is not the only state experiencing pension debt burden on varying scales, according to a July 2022 report by Pew Charitable Trust.
And states are not obligated to pay their debt in a short period of time. Long-term economic management relies on budgeting on a five-year and 10-year basis and there are multiple ways to raise revenue.
David Draine, senior officer with the public sector retirement systems team at The Pew Charitable Trusts, said that there were tests to see whether a state’s fiscal health was in dangerous waters.
One was to see the cashflow: whether incoming funds from employer and employee pension contributions and investment income from the assets – like stocks in the pension fund – was greater than the promised pension payments to retirees.
The next test, Draine said, was to look at whether South Carolina was contributing enough to pay down pension debt over time, and if the state was making sufficient payments to fund the benefits for workers currently doing work in the state.Is the state was paying off the interest on the pension back? Does it have strategies to pay off the original principal amount so that the debt balance goes down with each repayment?
In 2014, South Carolina did not pass that test. This meant that it wasn’t paying enough of its debt back to see a decline in its bills.
However, now, it’s one of 38 states that passes the test, Draine said.
“I think credit really goes to the 2017 funding policy reform in the state,” he said.
In 2017, the state decided to phase in a five-year increase in employer contributions to the SC Retirement System and Police Officers Retirement System. For SCRS, state employers were going to increase their contribution from 11.56% 13.56% starting July 1, 2017.
The goal was to reach 18.56% contribution by SCRS employers and 21.24% for PORS employers.
“South Carolina policymakers realized that they needed to put more money into the system. They made thoughtful changes as part of a collaborative process and and did exactly that,” Draine said.
However, if pension contributions go up, it could make it harder to fund other aspects of state government and local government, Draine said.
The latest annual financial report showed the state’s employer contribution rates climbed to 17.56 and 20.24 percent for the SCRS and PORS, respectively.
Here’s what SC policymakers may consider in 2023
Experts have long said that the unfunded liabilities such as the pension system can get worrisome if the amount states are obligated to pay gets too high.
In the July 2022 Pew report, researchers said that an overextended pension bill may mean that there is less money available to fund other priorities, such as health care or education. These liabilities could also affect credit ratings and borrowing costs, they added.
Those are concerns that Gov. Henry McMaster expressed in his 2022 State of the State address.
McMaster said that SC had been hearing alarm bells for years. “With inaction – it gets louder every year,” he added.
Earlier this year, the state’s top fiscal watchdog was disappointed when the legislature did not allocate some of the surplus money into reducing the pension burden.
SC Comptroller General Richard Eckstrom’s office said in an Aug. press release that the legislature used the $4.3 billion surplus to fund agency wish-list items and local community projects “at levels never before seen,” while completely ignoring state government’s pressing need to deal with its largest outstanding liability by far.
“For many elected officials, paying-down debt is not nearly as gratifying as spending money oncitizens and community projects back home,” the press release continued. “After all, most citizens aren’t even aware that the retirement system debt exists, so using part of this year’s unexpected surplus revenue to begin paying it down would provide little political benefit.”
The Comptroller-General’s office said that the existing pension debt crisis could add to a tax burden on future taxpayers.
The state’s current tax system is considered to be a “skewed tax” and “regressive” system. And while low-income earners pay the lowest share of individual income tax, they pay the highest share of the sales and excise tax as well as property tax.
Draine said that the next test for most states, including SC, would be to see if their policies are recession ready.
“You had in 2021 a once in a generation investment windfall, followed by in 2022 – a real drop in in returns,” he said.
In most states, the drop in returns led to asset losses. “How you manage that volatility is going to be a test for South Carolina and every other state,” he continued.
Devyani Chhetri covers the South Carolina State House and is a watchdog SC government reporter. You can reach her at dchhetri@gannett.com or @ChhetriDevyani.
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