South Carolina Retirement Plan Not Allowed To Invest In Stock

The City of Charleston, South Carolina provides its employees with retirement pay and other post-employment benefits (OPEBs) such as medical insurance, dental insurance, and other benefits. The City provided the OPEBs on a pay-as-you-go basis by budgeting the cost of the OPEBs for retirees each year.

In 2004, the Governmental Accounting Standards Board issued Statement 45, which required governmental employers to note on their accounting statements how much it would cost to fully fund current and future OPEBs. In response, the Municipal Association of South Carolina established the South Carolina Other Retirement Benefits Investment Trust (referred to as “ORBIT”) to receive funds from municipalities, to invest those funds in a way seeking the highest rate of return, and to disburse those funds in order to defray the future expenses of OPEBs.

ORBIT is an irrevocable trust, protected from creditors of participating employers, and the Board of Trustees has the authority to invest the funds in a variety of investments, including publicly traded stocks and securities.

Thomas O’Brien, a 29-year employee of the City of Charleston, filed a request for a declaratory judgment against ORBIT and the City seeking the declaration that the City’s participation in ORBIT was unconstitutional. The South Carolina Supreme Court agreed.

The key to the case was a provision in the South Carolina constitution that provides that “neither the State nor any of its political subdivisions shall become joint owners of or stockholder in any company, association, or corporation. The constitutional provision allows for investment in equity securities in only two instances. First, it provides that endowment funds at state colleges could be invested in equity securities. The second exception is that municipalities and counties that provide firefighting services are allowed to invest firefighter ‘pension funds’ in equity securities.”

The Court found that nothing in the exceptions to the constitutional provision “provides the authority for municipalities to invest funds intended for OPEBs in equity securities. The main section generally bars investment in securities with the exception of higher education and firefighter pensions. Allowing the City to invest in equity securities through a trust violates the intent of the constitution to protect public funds from risky investments.
“It is troubling that the City attempted to avoid the constitutional prohibition on investing in equity securities, thereby using government funds to jointly own a company with other investors, by merely setting up a trust. Although ORBIT is set up as a trust, it functions as an investment manager for the City and, as such, is no different than any other investment house. The veneer of a trust does not change that.”

O’Brien v. South Carolina ORBIT, 2008 WL 3821317 (S.C. 2008).

This article appears in the November 2008 issue