by Joseph Coletti
Senior Fellow, Fiscal Studies, John Locke Foundation
State Treasurer Dale Folwell is on his way to cutting $100 million in state pension management fees. He has cut six managers and renegotiated fees producing $25 million in savings so far. Savings like this are important, but amount to a rounding error in the $90-billion state pension fund.
As state pension systems go, North Carolina’s is in good shape, but some estimates put the $10 billion unfunded liability as much as four times higher than official reports, which would put it on par with the $30 billion unfunded liability for retiree health insurance. Because retirees count on their pension checks, the state should probably use a safe asset, like a US Treasury Bond as its comparison. The 30-year Treasury has an interest rate of about 3.0% today compared to the 7.25% return anticipated for the pension system.
Citizens could cover the difference between what is assumed and what is achieved in the form of higher taxes or fewer services, future employees could face higher contributions, or retirees themselves could have their benefits cut in retirement, when they can least afford it as has already happened in municipalities across the country.
Previous State Treasurers took more risk with bigger portions of state employees’ pension assets to try to reach that 7.25% assumed rate. Those risky bets have not always panned out.
The governor and legislature have taken steps to bridge the gap in funding. Reports have warned about the dangers of unfunded pensions for nearly a decade, during which time the gap has been growing. Longer delays will mean more pain when we eventually tackle the problem.
Two bills before the legislature provide possible solutions. The first (HB24/S22) would launch a study of the unfunded liability for promised pension and health care benefits, with recommendations to follow. The second (S467) would close the existing pension systems to state employees hired after June 30, 2018. Anyone hired after that date would go into a 401k-style plan and would also not have their health coverage paid by the state upon retirement. Legislators may not like either bill, but they will need to address the question.