by Joseph Coletti
Senior Fellow, Fiscal Studies, John Locke Foundation
Investment returns in the state pension system missed their mark for the third straight year in 2016. The 6.22% return was much better than the 0.36% return in 2015, but still short of the 7.25% assumed rate of return. The funded ratio for pensions at year-end was 90% on an actuarial basis, and 86% at the market value of assets. Keeping the pension plan on track looks likely to take 12 percent of payroll. The assumed rate of return for the next year will be 7.20%, down five basis points as part of a strategy to improve the system’s financial integrity. A lower discount rate will require more state funding for the system. Despite these concerns, North Carolina has the third best-funded state employee pension in the country.
The Raleigh News & Observer notes that the State Health Plan is not on such solid footing. The unfunded liability for health benefits is $33 billion, nearly five times as large as the actuarial shortfall for pensions. State Treasurer Dale Folwell explained to the N&O, “No money, for 37 years, has ever been put aside for that.” Employees new to state government after 2020 will no longer be eligible for health benefits in retirement as one way to close that gap.
Lawmakers should consider ways to strengthen the financial condition of the health plan and retirement system with sustainable reforms that acknowledge the risks to taxpayers and retirees alike.