The state should ensure that excessive resources are not committed to funding teachers' pension systems.
As of June 30, 2009, the most recent date for which an actuarial valuation is available, South Carolina's defined benefit pension system for teachers is 67.8 percent funded and has a 30-year amortization period, provided planned employer contribution increases are implemented. This means that if the plan earns its assumed rate of return and maintains current contribution rate plans, it would take the state 30 years to pay off its unfunded liabilities. While its amortization period meets regulatory benchmarks, South Carolina's funding level is too low. The state's system is not financially sustainable according to actuarial benchmarks. South Carolina's defined contribution plan is fully funded and sustainable. Employers make mandatory payments credited to employees' individual accounts.
In addition, South Carolina commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 9.24 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 the required 30-year period, it does so at great 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 6.5 percent is reasonable. 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 9.24 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 for the unfunded liabilities of the defined benefit system. A reasonably small percentage (0.15 percent) funds the death benefit coverage run by the retirement system.
Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2010, Pension Trust Funds for the State of South Carolina http://www.retirement.sc.gov/publications/cafr2010.pdf Disclosure of Pension Information as of June 30, 2010 http://www.retirement.sc.gov/financial/auditdisc/auditdisc2011.pdf
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. However, South Carolina 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. Improving funding levels necessitates, in part, systemic changes in the state's pension system. Goals 4-G and 4-I provide suggestions for pension system structures that are both sustainable and fair.
South Carolina recognized the factual accuracy of this analysis.