North Carolina has been among a handful of states to fund its pension program fully for public school teachers and state workers in recent years, but it will have to pay millions more this year and for years to come because of the recession and the downturn in financial markets.

To keep the Teachers’ and State Employees’ Retirement System fully funded, state Treasurer Janet Cowell asked the General Assembly to contribute an extra $29 million in the new fiscal year and $329 million more in the following year.

Projections show state and local agencies may have to boost the percentage of employee pay that they contribute to TSERS almost fivefold, from 3.36 percent in the 2008-09 fiscal year to 15.82 percent by 2015. The biggest previous state contribution was 10.03 percent in the 1980s.

“The good news is we lost less than almost everyone else,” said Deputy State Treasurer Michael Williamson.

The pension fund’s assets dropped last year by almost 20 percent to $60 billion. In comparison, the median public pension fund loss was about 25 percent, according to Wilshire Associates, a California consulting firm.

North Carolina’s fund, the ninth-largest public pension fund in the country, is invested in a mix of stocks, bonds, real estate, and other investments.

The soundness of a pension plan can be evaluated by looking at the value of its assets divided by the value of its liabilities. Pension analysts recommend a ratio of 80 percent or better.

The scores can vary depending on what method is used to value the assets and liabilities.

Public pensions traditionally look at the value of assets over time, usually five years, which allows investment losses and gains to be phased in when markets fluctuate. Standard & Poor’s, which has named North Carolina’s pension fund the second strongest in the nation for the past three years, has looked at the funding ratio this way. Under this actuarial method, North Carolina’s funding ratio for 2008 is estimated at 100.

J.P. Aubry, a research associate at the Center for Retirement Research at Boston College, said using actuarial values lets states avoid “jerking around” the state budget from year to year based on market spikes.

“It protects plans from large fluctuations in contributions and protects taxpayers from large fluctuations,” Aubry said.
But some economists say phasing in investment losses and gains over time, known as “smoothing,” distorts the value of pension assets and liabilities. They say market-based values should be used. This method would put the funding ratio for North Carolina for 2008 at an estimated 82 percent, still considered a good score.

A study last year by the U.S. Government Accountability Office, using the actuarial method, found that 58 percent of 65 large public pension plans were at that 80-percent level or higher in 2006, a decline from 2000 when 90 percent of the plans met that target. Forbes magazine, also using actuarial values, estimated that only Oregon was above the 80-percent level for 2008, but it used a higher figure for market losses than North Carolina’s pension plan actually suffered.

More than 820,000 people are covered by the pension fund, including teachers, state employees, firefighters, police officers, and other public workers.

Employees automatically contribute 6 percent of their pay to the pension system. The state makes additional payments to the retirement portion of the pension plan if its actuarial funding falls below 100 percent.

For years the state’s contributions have been modest because of high investment earnings. In 2003, the state didn’t contribute at all, and in 2004 the state contributed an extra 0.22 percent of employee pay.

North Carolina’s contribution has been low compared to public pensions in other states, reports the Public Fund Survey of 101 public retirement systems sponsored by the National Association of State Retirement Administrators and the National Council on Teacher Retirement.

The State Employees Association of North Carolina has criticized the state for contributing such a small percentage of pay. Ardis Watkins, the association’s legislative affairs director, said the state had matched or exceeded the employee contribution until the administration of previous State Treasurer Richard Moore. She said the state pension plan didn’t have a buffer against the economic downturn.

“They were digging a hole that the General Assembly was going to have to fill with general fund money,” she said. “That was just a very bad planning decision.”

But Williamson said the state has made the required contributions. “Our position has always been to make contributions that match what the actuary says is needed to fund the system,” he said.

The investment patterns of state and local government pensions are similar to private pensions, but public pensions generally provide more generous benefits, according to the Center for Retirement Research. Both had about 70 percent of total assets invest¬ed in equities in 2006.

Another advantage public employees receive is that TSERS, like most public pensions, are defined-benefit plans. They guarantee set payments to retirees no matter how sound the pension’s funding ratio may be.

By contrast, the vast majority of private retirement programs are defined-contribution plans, including 401(k)s, with benefits that vary based on how well workers’ investments have performed in the marketplace.

North Carolina’s pension plan is fairly conservative with about 41 percent of its investments in stocks and about 47 percent in bonds.

Real estate accounts for another 6 percent of the investments, and alternative investments such as limited partnerships account for about 6 percent of the portfolio.
Under state law, alternative investments are supposed to make up no more than 5 percent of the retirement system’s assets.

That limit was exceeded because plunging stock market prices boosted the relative value of alternative investments in the portfolio.

Sarah Okeson is a contributor to Carolina Journal.