High court rejects municipal trust fund

Fund formed to pool money invested for retiree health care benefits

The South Carolina Supreme Court has ruled a trust fund created so Charleston and other municipalities could invest in securities violates the state constitution.

Charleston and the other local governments have been looking for ways to invest the large amounts of money they are required to pay for future retiree health benefits.

Federal regulations now require governments to set aside funds for future benefits, rather than paying the bills when they come due. For Charleston, that meant investing $3.4 million in 2007, and similar amounts in future years.

If governments can invest in stocks and corporate bonds, which over the long term typically have greater returns than government bonds, they can then be required to set aside less money up front.

The South Carolina Retirement System is allowed to invest pension fund money in stocks, but municipalities are limited by the constitution to investments in government-insured bonds.

In an attempt to craft a constitutionally-sound way to let cities invest, the Municipal Association of South Carolina created a trust known as ORBIT. The trust did not invest in securities, but hoped to do so after winning a court ruling.

"You just about have to have equity investments in order to fund these benefits," said Howard Duvall, executive director of the association. "That's what the South Carolina Retirement System does."

Charleston and the Municipal Association created a test case for the courts, in which Charleston city employee Thomas O'Brien Jr. challenged the constitutionality of the trust. Not one of the Supreme Court justices concluded that cities could legally invest in the trust, however.

"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," wrote Supreme Court Justice Donald W. Beatty for the 4-1 majority.

Justice Costa M. Pleicones also found that municipalities could not invest in the trust, but for different reasons.

Duvall said there will be a constitutional referendum on the fall ballot that would allow municipalities to invest in equities. Meanwhile, the association is appealing the court's ruling that the trust be dissolved.

Charleston's Chief Financial Officer Steve Bedard said the trust is a good way for cities to pool funds and gain lower costs and higher returns, even if investments are limited to government-backed bonds.

Reach David Slade at 937-5552 or dslade@postandcourier.com.