BRADENTON, Fla. – Legislation pending in the South Carolina Legislature proposes new pension reform measures that S&P Global Ratings called a short-term step toward increasing funding requirements.
Measures to increase contributions and make changes to plan assumptions would increase funding, but may be insufficient over the long term, S&P analysts said.
"We expect the legislation, as crafted, to have a limited credit impact on South Carolina given the state's recent trends in revenue growth and economic indicators that outpace those of the nation," said primary commenter, analyst Timothy Little. "The individual credit impact on local governments is unclear."
Local government employers and school districts with weak reserves and those lacking forward-looking policies on budget planning likely will be vulnerable to rising costs, Little said.
The July 1, 2016 actuarial valuation of the South Carolina Retirement System - the largest of the state's five pension plans covering state and local teachers and public employees – said that contribution rates were insufficient to maintain the system's 30-year amortization as deferred investment losses become fully realized, according to S&P.
Although the state has historically fully funded its actuarially determined contributions for all five pension plans, the total aggregate funded ratio declined to 54% in 2016 - a level that S&P considers weak.
The drop in the funded ratio reflects relatively poor market returns of negative 0.39% for fiscal 2016 and an annualized rate of return of 4.49% over a 10-year period, compared with the assumed 7.5% rate of return.
The state's five pension plans cover about 550,000 public employees across the state.
House Bill 3726 and its companion, Senate Bill 394, are pending before lawmakers.
As currently proposed, the bills contain a number of recommendations, including reducing the rate of return assumption to 7.25%; increasing the employer contribution rate by 2% of payroll on July 1, 2017; and reducing the amortization period of unfunded liabilities to 20 years from 30 years over the next 10 years.
If passed, the legislation would increase SCRS's employer rates to 13.56% from 11.56% of covered payroll, while rates for police officers would increase to 16.24% from 14.24% in fiscal 2018.
Those employer contribution rates would increase automatically by 1% through fiscal 2023.
"We view these proposals as a positive step toward improving the pension plans' funding levels while adopting more conservative assumptions," Little said. "An assumed rate of return of 7.25%, while an improvement from 7.5%, may still prove to be too high."
S&P also said the state's five pension plans have had below-average performance over the past 10 years during one of the longest-running bull markets in history.
"We believe that a positive feature of the proposed legislation is the resetting of the assumed rate of return every four years, based on historical experience," Little said. "If the assumed rate of return is not met, contributions could increase over time."
State Treasurer Curtis Loftis, a long-time critic of the state's pension investments and fees that have been paid, commended S&P's assessment about the fiscal impacts of the proposed legislation.
"I remain concerned about the pension plan's health if plan assumptions are not met," Loftis said in a statement to The Bond Buyer. "Additionally, I remain concerned that an undue burden will be placed on the state's counties, municipalities, and school districts, as they may have difficulty in absorbing the employer costs increases called for in the reform."
Loftis said he would urge lawmakers to study the impact of pension reforms "on these less fortunate entities."
The South Carolina legislative session runs through June 1.
