The State of North Carolina is the largest employer in the state with nearly 325,000 full-time equivalent positions.
Like most large employers, the State offers its employees a benefits package that includes a retirement plan, health care coverage, and a number of non-monetary benefits. All told, the state adds several thousands of dollars in benefits to the base pay for each of its employees.
These benefits are liabilities, meaning that payment must be made using state tax dollars. Yet, these future payments are kept separate from the General Fund’s accounting ledger, thereby imposing a costly, unpredictable, and largely hidden burden on current and future taxpayers in North Carolina.
- Benefit plans are not considered “hard” liabilities because they are based upon estimates of costs the state will incur in the future and the payment timetable is uncertain.
- While the General Fund has a specific amount of debt capacity it can manage, pensions and benefit plans are not within that capacity. Because these liabilities are not part of the state’s debt capacity calculation, any unfunded obligations do not represent liabilities the same way debt service does. One such liability is the unfunded portion of retiree health care benefits, which totaled $23.1 billion or $2,347 per capita at the end of 2012.
- The State Employees’ Health Plan is receiving increased attention from rating agencies. If this unfunded amount remains high, it could have a negative impact on the state’s bond rating.
- The state has fully funded the annual required contribution for the Teachers’ and State Employees’ Retirement System for 71 of the last 72 years. It is currently funded at 94 percent and is considered by some rating agencies to be the third best-funded state retirement system in the country.
- The total unfunded liability for all benefit plans in North Carolina is more than $27 billion or $2,751 per capita.
- Pension and other employee benefit plans are not included in the government-wide financial statements, because the resources of those funds are not available to support the state’s own programs. They are reported as required supplementary information, which is listed after the basic financial statements, making it very difficult for the average citizen or lawmaker to find.
- Pensions and other benefit plans do not impact the debt capacity of the General Fund, but can have a negative impact on the state’s bond ratings. An actuarial annual required contribution is already in place for pension plans and should be established for the State Health Plan. An annual appropriation needs to be established for both plans until they are at least 95 percent funded.
- Increase the transparency of the pension and other employee benefit plans. The financial statements for these accounts need to be included in a convenient place, preferably an easily accessible website, and considered a priority when evaluating the state’s fiscal situation.
- Pension plans should move away from a defined benefit model and toward a defined contribution model. The current defined benefit plans pay benefits based on a formula of the employee’s salary and duration of employment. If the plan does not have enough to pay this predetermined amount to retirees, the state must make up the difference by reducing spending elsewhere in the budget or raising taxes. A new defined contribution plan would set aside a certain percentage from each employee’s salary plus a matching contribution from the state. When employees reach retirement, they would receive the amount contributed plus any earnings made on the investment during their time of employment. The latter is much easier for budgeting purposes and also reduces the risk to taxpayers for future liabilities.