The State Health Plan’s unfunded liabilities have soared to $42 billion, the latest figures show, and Treasurer Dale Folwell said expenses will exceed earnings again this year.
“We’re going to dip into reserves by hundreds of millions of dollars this year in the State Health Plan,” Folwell said Tuesday during his monthly Ask Me Anything teleconference with reporters.
But that most recent actuarial report only includes the state’s share of the State Health Plan’s unfunded liabilities. It does not include future costs incurred by municipalities or counties.
Folwell said new accounting standards have taken effect this year that are designed to determine who’s responsible for unfunded liabilities. The University of North Carolina system and local school districts make up a substantial portion of unfunded liabilities in North Carolina, he said. His staff is now in the process of implementing those standards to gain precise data.
He said his office was not involved in drafting a big-ticket item included in the Senate’s $22.9 billion budget that would affect his department’s operations: discontinuing retiree health care benefits for state workers hired after July 1, 2018.
Folwell noted that 16 years ago the Treasurer’s Office spent $50 million in fees to pension fund investment managers. That accelerated to $600 million paid out last year.
Since taking office in January, he has cut $30 million in fees among the 175 investment fund managers overseeing 325 separate funds. Folwell said he is gathering data on other fees associated with pension investments such as legal, accounting, travel, auditing, and other areas he may not be aware of yet.
Even though fees are being cut, the amount paid out might still go up. That is because there are performance fees attached to tens of billions of dollars in some investment contracts. Folwell said his staff is researching to determine whether those performance fees are part of what has been paid out annually, or if fund managers are still sitting on years’ worth of those fees that could drive up payouts.
Pension fund assets were valued at $92.2 billion at the end of the first quarter of 2017, up from $89.1 billion at the end of the fourth quarter of 2016.
However, the pension showed just 4.1 percent in gains for the first quarter. The designated rate of return is 7.2 percent, which was just lowered from 7.25 percent, with a goal of dropping to 7 percent gradually.
Folwell said his ability to shift the pension fund’s allocation of assets to achieve higher returns is limited. That is because $26 billion was placed into lower-performing alternative investments with 10- and 15-year contracts.
In another matter, the Council of State approved reissuing nearly $500 million in bonds at lower interest rates at its last meeting. That will save the state an estimated $50 million that likely would be plowed into the state’s Rainy Day Fund. Folwell’s goal is to work with lawmakers to create a solvency fund to direct future savings of this nature into unfunded liabilities.