The state should ensure that excessive resources are not committed to funding teachers' pension systems.
As of June 30, 2015, the most recent date for which an actuarial valuation is available, South Carolina's defined benefit pension system for teachers is 62.0 percent funded, a decrease of 2.7 percentage points since NCTQ's last report. Its current pension debt exceeds $22,400 per pupil throughout the state. It also has a 30-year amortization period. This is due to an accounting method, however, in which South Carolina uses an open 30-year amortization period, meaning that the amortization period is reset to 30 years every year. Thus, the unfunded liability is never fully amortized. Under a closed amortization method, if the plan earns its assumed rate of return and makes its full actuarially determined contribution payments, it would take the state over 30 years to pay off its unfunded liabilities. Neither the state's funding ratio nor its amortization period meets conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.
In addition, South Carolina commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 11.09 percent is too high, in light of the fact that districts must also contribute 6.2 percent to Social Security. This rate is set by the South Carolina Budget and Control Board. While this rate allows the state to pay off liabilities within a 30-year period, it does so at a high cost, precluding South Carolina from spending those funds on other, more immediate means to retain talented teachers. The mandatory employee contribution rate to the defined benefit plan of 8.19 percent is also excessive in light of the fact that employees also contribute to Social Security. This rate is set by the state legislature.
The employer contribution to the defined contribution system is a reasonable 5 percent. Employers still must make a 11.09 percent contribution for all of their employees, but for defined contribution participants only 5 percent is allocated to employees' accounts and most of the remainder is used for paying down the unfunded liabilities of the defined benefit system.
Ensure that the pension system is financially sustainable.
The state would be better off if its entire system was over 95 percent funded to allow more protection during financial downturns. The state should also use a 30-year "closed" horizon for amortizing its debt rather than its current 30-year "open" amortization method so that the burden of paying today's promises is not put off onto future generations. South Carolina, however, should consider ways to improve its funding level without raising the contributions of school districts and teachers. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention and crowd out funding for other areas in education.. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.
South Carolina indicated that the percentage of the UAAL attributed to teacher membership in the larger system estimated by this analysis was too large. The state asserted that the UAAL for school districts should be $8.1 billion instead of $10.2 billion. However, the state did not provide any supporting documentation.