Kevin Bryant

By GREG RYBERG Guest Columnist The State Newspaper
Over the past decade, politicians heaped out generous new benefits to state retirees with no realistic plan to pay for them. The government simply said “yes” and then hoped everything would turn out OK.

Well, it didn’t turn out OK. The State Retirement System, nearly solvent and fully funded in 1999, now carries a $13 billion unfunded actuarial accrued liability and a 37-year amortization period — seven years past the limit for a system that is considered “sound.”

And even these depressing numbers conceal the depth of the problem: They assume that investments will achieve an 8 percent return, which is simply not realistic.

Warren Buffet, in his 2007 letter to Berkshire Hathaway shareholders, wrote of an 8 percent return for public pensions that, “Many (advisors) are apparently direct descendants of the queen in Alice in Wonderland, who said: ‘Why, sometimes I’ve believed as many as six impossible things before breakfast.’”

Michael Bloomberg, billionaire investor and mayor of New York, said that, “It’s overstating it a little bit to say the only one who’s done that well is Bernie Madoff, but 8 percent for a long period of time is not something that very many pension funds have ever achieved.”

The unfunded liability of the system soon will wreak havoc among our other finances. Moody’s and Fitch have announced that they will begin adding unfunded pension liability into their evaluation of state credit ratings. The managing director for public finance at Moody’s said that they are “liabilities that need to be paid out and put stress on your operating budget.”

Moody’s calculates that our unfunded liability more than quadruples our state debt, bringing it to more than 10 percent of our gross state product (13th highest in America), 264 percent of state revenue (fifth highest) and more than 15 percent of personal income (15th highest). And that calculation was made when the liability was just $12 billion.

Both employers and employees make contributions to the Retirement System to fund the benefits, just as occurs in the private sector; this is termed “normal cost.” State employees contribute 6.5 percent of their salary, and their employers — the state agencies — contribute 3.51 percent of the employees’ salaries. All of that, of course, is taxpayer money.

But taxpayers also have to pay for the accrued liability, which is essentially interest on debt. That’s money that buys nothing but time.

For fiscal year 2010, that extra cost adds 6.17 percent to the agency contributions, or more than $660 million. That money will not be spent on teachers and law enforcement personnel or tax cuts. It goes straight into a black hole, and that is what frightens the credit-rating agencies.

More than half of that comes from local agencies and school districts. The state sends a bill, and they ante up. Much of that ante, unfortunately, comes at the expense of classroom teachers.

The Richland County school districts coughed up more than $20 million in 2010 just for the unfunded liability. Since the average total compensation for a Richland County teacher is approximately $50,500, Richland Districts 1 and 2 essentially lost 309 teachers in 2010 alone because of the broken retirement system. Those two districts have blown nearly $60 million on the unfunded liability since 2000.

The Lexington County districts lost the money that would have paid 308 teachers when they were forced to send in $19.6 million to fund the unfunded liability. Lexington districts have handed over more than $56 million since 2000.

And remember, that doesn’t touch the $13 billion. That just keeps us afloat — for this year. Current projections show that over the next decade, taxpayers will have to contribute nearly $8 billion just to keep the system at 30 years of amortization (the limit for a sound system). Not to pay down the debt — just to keep it sound.

Gov. Nikki Haley, like Gov. Mark Sanford before her, recognizes that the time bomb is ticking.

I have filed legislation each year since 2000 to address the growing problem. I have tremendous hope that the General Assembly now has the will to address the problem, and I look forward to working with all interested parties. This process will be painful, but we no longer can kick this can down the road.

Mr. Ryberg, an Aiken Republican who chairs the Senate Labor, Commerce and Industry Committee, can be reached at gregryberg@scsenate.gov.

© 2011 TheState.com and wire service sources. All Rights Reserved. http://www.thestate.com

A young woman was finishing her first year of college. Like so many others her age, she considered herself to be a very liberal Democrat, and was very much in favor of the “redistribution of wealth.”

She was deeply ashamed that her father was a rather staunch Republican, a feeling she openly expressed. Based on the lectures that she had participated in, and the occasional chat with a professor, she felt that her father had for years harbored an evil, selfish desire to keep what he thought should be his.

One day she was challenging her father on his opposition to higher taxes on the rich and the addition of more government welfare programs. The self-professed objectivity proc laimed by her professors had to be the truth and she indicated so to her father. He responded by asking how she was doing in school.

Taken aback, she answered rather haughtily that she had a 4.0 GPA, and let him know that it was tough to maintain, insisting that she was taking a very difficult course load and was constantly studying, which left her no time to go out and party like other people she knew. She didn’t even have time for a boyfriend, and didn’t really have many college friends because she spent all her time studying.

Her father listened and then asked, “How is your friend Audrey doing?”

She replied, “Audrey is barely getting by. All she takes are easy classes, she never studies, and she barely has a 2.0 GPA. She is so popular on campus; college for her is a blast. She’s always invited to all the parties, and lots of times she doesn’t even show up for classes because she’s too hung over.”

Her father th en asked his daughter, “Why don’t you go to the Dean’s office and ask him to deduct a 1.0 off your GPA and give it to your friend who only has a 2.0. That way you will both have a 3.0 GPA and certainly that would be a fair and equal distribution of GPA.”

The daughter, visibly shocked by her father’s suggestion, angrily fired back, “That wouldn’t be fair! I have worked really hard for my grades! I’ve invested a lot of time, and a lot of hard work! Audrey has done next to nothing toward her degree. She played while I worked my tail off!”

The father slowly smiled, winked and said gently, “Welcome to the Republican Party.”

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.00
If they paid their bill the way we pay our taxes, it would go something like this…

The first four men [the poorest] would pay nothing.
The fifth man would pay $1.
The sixth man would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man [the richest] would pay $59.

So that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.  “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.”  Drinks for the ten men would now cost just $80.

The group still wanted to pay their bill the way we pay our taxes.  So the first four men were unaffected.  They would still drink for free.  But what about the other six men?  How could they divide the $20 windfall so that everyone would get his fair share?

They realized that $20 divided by six people is $3.33.  But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using.  He proceeded to work out the amounts he suggested that each should now pay.

So, the fifth man, like the first four, now paid nothing [a 100% savings].
The sixth man now paid $2 instead of $3 [a 33% savings].
The seventh man now paid $5 instead of $7 [a 28% savings].
The eighth man now paid $9 instead of $12 [a 25% savings].
The ninth man now paid $14 instead of $18 [a 22% savings].
The tenth man now paid $49 instead of $59 [a 16% savings].

Each of the six was better off than before.  And the first four continued to drink for free.  But once outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20 savings,” declared the sixth man.  He pointed to the tenth man, “but he got $10 in savings!” Yeah, that’s right,” exclaimed the fifth man.  “I only saved a dollar, too.  It’s unfair that the richest among us got ten times more benefit than me!” “That’s true!” shouted the seventh man.  “Why should he get $10 back when I got only $2?  The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all.  This new tax system exploits the poor!” The nine men surrounded the tenth and beat him up.

The next night, the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him.  But when it came time to pay the bill, they discovered something important.  They didn’t have enough money between all of them for even half of the tab.

And that, boys and girls, journalists and government ministers, is how our tax system works.  The people who already pay the highest taxes will naturally get the most benefit from a tax reduction.  Tax them too much, attack them for being wealthy, and they just may not show up anymore.  In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.