When Gov. Bev Perdue issued her budget for the next two fiscal years, her budget statement said, “this plan authorizes no new debt, utilizes one-time monies for one-time expenses, contains no accounting gimmicks, closes the shortfall without damaging North Carolina’s future, and continues our tradition as a national leader in fiscal management.”
But one fiscal analyst who reviews state and local budgets across the nation says Perdue’s method of accounting for the state pension plan is nothing more than a gimmick. Eileen Norcross, the lead researcher on state and local policy issues with the Mercatus Institute at George Mason University, says Perdue’s planned contribution to the Teachers and State Employees’ Retirement System is inadequate, but it’s the least of the state’s pension-funding woes.
Norcross says North Carolina and other states have understated dramatically the size of their pension liabilities, and have failed to provide enough money to prevent large either tax increases or major cuts in retirement benefits down the road.
Norcross projects the market value of North Carolina’s pension liability at more than $92 billion, and it’s only 60 percent funded, with an unfunded liability of $36 billion. That’s 15 times higher than the unfunded liability of $2.4 billion estimated in the state’s financial reports.
She bases her projections on the amount of money the pension fund will have to pay in benefits rather than the estimated growth in its assets. For years, she says, states have been calculating the value of their pension liabilities by looking at much money pension assets can earn through investing. “The problem with that, though, is the value of your liabilities is independent from the value of your assets,” Norcross said. She says states should look first at their future pension liability and then work backward to set aside enough money today.
A spokeswoman for the treasurer’s office says the actuarial evaluation of North Carolina’s retirement system follows the rules of the Governmental Accounting Standards Board.
In the near term, Perdue seeks to change how the state calculates its annual payments to the pension plan. Historically, those payments were based on a nine-year amortization period, but Perdue chose to base her payment on a 15-year term. This change would be much like refinancing a home mortgage by moving from a 15-year to a 30-year loan. The longer term lowers the required payment.
Perdue’s budget would contribute $618 million to the pension in fiscal year 2012 and $733 million the following year. Neither contribution comes close to those recommended by the pension’s actuaries.
Financing the pension plan adequately is a growing problem for the state, which failed to make the minimum pension contribution this fiscal year. Catching up for that missed payment would not be cheap. Based on figures provided by state Treasurer Janet Cowell’s office, both to make up for this year’s shortfall and stay current for its continuing pension obligations, the General Assembly should pay the pension fund nearly $1.2 billion in fiscal year 2012 and $1.5 billion the following year — or roughly double the amount in Perdue’s budget proposal.
One senior legislator says it’s time to be honest about the burden of benefits to public retirees. “It’s time we start talking to taxpayers and state employees as adults,” said Rep. Dale Folwell, R-Forsyth, the House speaker pro tem. He gives the state an F for both its communication of the pension liability and the funding it has allocated to satisfy that long-term obligation.
Anthony Greco is an associate editor of Carolina Journal.