News: CJ Exclusives

Pension assets surpass $100 billion briefly, treasurer says

While pension fund remains among nation's healthiest, he wants to reduce assumed rate of return to what he considers more realistic rate

Image courtesy of Pixabay
Image courtesy of Pixabay

North Carolina’s pension plan value surpassed $100 billion for the first time in recent days, but volatility in the stock market has eroded a chunk of the gains, state Treasurer Dale Folwell reported.

Folwell made his remarks during his monthly Ask Me Anything teleconference with reporters Tuesday, Feb. 6. He added he had not received a daily update on the pension plan before the call, but estimated it was between $95 billion and $100 billion.

“We’re very pleased about this performance given the risk profile that this state pension has had … over the last 40 years,” Folwell said. The state’s combined pension plans invest about 35 percent in low-risk, fixed-income assets, and about 65 percent in investments more vulnerable to market swings.

The market bounced wildly between gains and losses Monday and Tuesday. Folwell said every 1 percent drop in the stock market equals close to $1 billion in pension plan value.

“The volatility is obviously a concern, but we are well-prepared to absorb any volatility,” Folwell said.

“We have the cash on hand to meet the billions of dollars’ worth of capital costs” associated with commitments made by Janet Cowell, the previous treasurer, “and we have plenty of cash on hand to pay out the more than $500 million of pension benefits that are going out on a monthly basis right now,” Folwell said.

Folwell announced the pension plan delivered a 13.5 percent rate of return for calendar year 2017. Pension fund assets were valued at $98.3 billion at the end of 2017, up from $89.1 billion at the end of 2016.

The following 2017 performance figures are reported net of all fees and expenses:

  • Public equity, which makes up almost 40 percent of the total fund, gained 24.4 percent
  • Private equity rose 12.0 percent
  • Non-Core Real Estate and Opportunistic Fixed Income returned 12.4 percent and 7.1 percent respectively
  • The multi-strategy portfolio rose 13.6 percent for the twelve-month period
  • Inflation-sensitive and diversifier investments increased by 8.6 percent
  • Investment-Grade Fixed Income earned 4.4 percent

Despite the strong year, he cautioned that performance was an anomaly. The plan has not reached its assumed rate of return on average over the past 20 years.

Hitting the annual target will require the legislature to assume a more realistic rate of return, Folwell said. Now, it’s 7.2 percent. He said will propose a 7-percent rate at the April meeting of the pension plan board, and adopt a plan to revise the rate every five years based on actuarial reports.

The General Assembly then could allocate tens of millions fewer dollars to hit the target, while giving a truer picture of pension plan underfunding. It’s now funded at 92 percent, one of the highest levels of any state pension plan.

In another matter, Folwell said he has lingering concerns about what effects a proposed mega-partnership between UNC Health Care and Carolinas HealthCare System might have on the pension plans and State Health Plan. Former federal antitrust regulators have raised similar concerns to Carolina Journal.

“We can no longer sustain these plans by being part of the medical arms race that’s going on in this state, and this country,” Folwell said.

State taxpayers have made billions of dollars of investments into the UNC hospital network on behalf of 14,000 employees, Folwell said. The health care system contributes $800 million a to state pension and health-care plans for hospital and university employees. Last year the state spent almost $450 million on the two hospital systems.

Folwell said he has a fiduciary responsibility to question any transaction that transfers assets away from the state, and has the potential to increase health care costs.

He also raised concerns about a proposal N.C. Transportation Secretary Jim Trogdon floated Monday, Feb. 5, at a House Transportation Committee meeting.

Trogdon said a law allowing the Department of Transportation to borrow now against future state funding could offer a short-term funding solution for local transportation projects. The state borrows money for highway projects under a similar federal program, known as GARVEE bonds.

Folwell said the Local Government Commission he chairs, and Edgar Starnes, chief policy advisor for the Treasurer’s Office, have been asking for several weeks for details of Trogdon’s proposal. Folwell said he had not yet received details.

Proponents say a bill would be submitted in the short session that starts in May. Folwell, a former legislator and member of the House Republican leadership, said based on that timetable, he is confident somebody has a bill draft outlining the proposal.

Folwell said he has aggressively advocated both safeguarding the state’s AAA bond rating and responsible borrowing. His focus is shoring up unfunded pension and health plan liabilities to maintain the AAA rating, rather than possibly adding debt that could chip away at the bond rating.