Supremes nix city investment plan

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

Charleston and other local governments have been looking for ways to invest the large amounts of money that the federal government requires them to set aside for future retiree health benefits. Charleston, for example, had to invest $3.4 million in 2007, with similar amounts due in future years.

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

However, municipalities are limited by the state 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," Supreme Court Justice Donald W. Beatty wrote for the 4-1 majority.

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 greater returns, even if investments are limited to government-backed bonds.

"With or without the referendum, if the trust is allowed to continue, we'll be better off by pooling our money in a trust," said Bedard.