- Associated Press - Monday, December 21, 2015

COLUMBIA, S.C. (AP) - Legislators need to make immediate changes to shore up South Carolina’s pension system for public workers, House Speaker Jay Lucas said Monday following a report that concluded the last overhaul in 2012 didn’t go far enough.

“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,” said Lucas, who was among House members requesting the audit from the Legislative Audit Council.

The agency’s report says the system remains severely underfunded and vulnerable to severe economic downturns, with a $19 billion debt on promised benefits as of July 2014. That unfunded liability represents the difference in portfolio assets and what the state owes everyone currently in the system, including those still decades from retiring.

Any year-to-year increase in that debt should be paid off in 20 years instead of 30, reducing the state’s exposure to a potential crash and putting less debt on future generations, the report recommends. That could require significantly increasing how much employees contribute toward their retirement or cutting benefits.

Audit manager Andrew Young said it’s not yet clear how much contributions would have to increase. Any cuts would be a legislative decision.

The report lays out the possibility of transitioning from pensions to a “defined contribution” system, such as 401K retirement accounts that employees would manage themselves. But it stops short of recommending such a change, which employee advocacy groups have previously opposed.

“That’s something all private benefit funds are going to. It’s a hard mountain to climb for public systems, but I would certainly be open to the discussion,” said Sen. Kevin Bryant, R-Anderson, who’s led a Senate subcommittee on the retirement system. “If those funds aren’t there, the taxpayer has to pick up the tab.”

As of July 2014, the two largest of the state’s five pension plans were 61 percent funded, compared to 77 percent for pension systems nationally, the report said.

While it’s possible the current system would work out, a consultant projects the shortfall could still be $11 billion in 2043, the report says.

It recommended capping how much of the state’s portfolio can be in alternate investments, such as private equity and real estate that have an imprecise value not easily converted to cash. Alternate investments, which also include commodities and hedge funds, weren’t even allowed until a 2007 change in the state constitution.

A breakdown of the state’s portfolio in 2014 shows 38 percent of assets in alternate investments, 21 percent in public equity and 40 percent in public debt.

In 2012, legislators praised a reform compromise as keeping the system solvent while being fair to workers.

The law changed when employees can retire with full benefits and how those benefits are calculated, but those changes applied only to employees hired after June 30, 2012. It also increased employees’ contributions over three years and capped annual increases in retirees’ checks at $500 or 1 percent of their pay, whichever is less.

The report released Monday suggests revisiting the increase to retirees.

The State Retirees Association will oppose any further benefit reductions, said president Wayne Bell.

He called it “kinda bizarre” to pursue a 20-year payoff rather than the 30-year standard for public pensions.

“It kills me that less than four years after we went through a two-year study of the retirement system and put it on a course to improve over a long period of time, that now we’re once again yelling the sky is falling. I just don’t see it,” he said. He agreed, however, that the state’s portfolio needs to be earning a higher rate of return on investments.

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