Thursday, March 16, 2017

FAQ: Impact of pension reform on S.C. cities and towns

The debate over the future of the state's pension systems has drawn substantial attention in recent weeks. 

This week, the House passed its budget that includes funding for 1 percent of the 2 percent increase in employer contributions. More details on the bills' status are in the March 3 issue of From the Dome to Your Home.

The FAQ below addresses many of the questions the Municipal Association staff has received from city officials and reporters about pension reform.

1 – What is the impact on South Carolina cities and towns of the proposal to increase employer contributions to the state pension programs 1 percent annually for the next six years? A conservative estimate is around $8.5 million annually for every 1 percent.*

2 – How many South Carolina cities and towns participate in the State Retirement System and the Police Officers Retirement System? Of the 270 cities and towns, 208 participate in SCRS and 181 police agencies participate in PORS.

3 – What does “unfunded liability” mean and how does it impact cities and towns? The unfunded liability means the difference between the amount that has been contributed to the system by employers, employees and investment gains and the amount that would be required to pay out benefits when due.

4 – How does the unfunded liability impact cities and towns? As required by the Governmental Accounting Standards Board (GASB Statement 68), the Public Employee Benefit Authority allocates a portion of the total unfunded liability of the state pension system to each member city, and the city must show that liability on its financial statement.

A city’s portion of the $20 billion unfunded liability is based on the employer contributions remitted to the particular retirement system (SCRS or PORS) in proportion to total employer contributions to the plan.

Example:  PEBA allocates $15 million of the $20 billion unfunded liability to City A. City A must recognize this liability on its books just as it would recognize bonded indebtedness to build a new city hall. However, just like the bond debt for city hall, the $15 million unfunded pension liability is not an amount that the city would ever have to pay in a lump sum. 

5 – Do cities participating in the state pension programs have the ability to limit the growth in the unfunded liability? No. City councils have no authority to set employee or employer contribution rates, determine investments or determine retirement benefits. Therefore, councils have no ability to change the amount of the city's unfunded liability. 

6 – Can participating cities get out of the state pension programs? No. There is no legal mechanism for an employer to exit the retirement systems.

7 - How are the state pension programs funded? There are three sources of revenue for the retirement systems – investment income, employee contributions and employer contributions. If any source of funding doesn’t meet assumptions, the other sources must be increased to keep the system stable. 

* estimate based on data from the Municipal Association’s compensation survey.

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