News: CJ Exclusives

Study: Public Debt Puts N.C. In Nation’s Bottom Third

Each taxpayer owes nearly $15k to cover retirement benefits, other state debt

North Carolina is $37.6 billion short of the money it needs to pay its long-term bills, according to a June 25 report by the Institute for Truth in Accounting.

The “Financial State of the States” report reveals that North Carolina is one of 44 states with financial obligations far outweighing government assets.

As of June 30, 2010, the state had obligated taxpayers to $60.7 billion in debt, with only $23.1 billion in assets that could be used to pay that debt, leaving an unfunded liability of $37.6 billion.

That means the state has put each taxpayer $14,800 in debt, the report says. The financial burden on North Carolinians is worse than that on taxpayers in 34 other states, landing not too far behind California and New York on a scale of indebtedness. State officials challenge the methods used by the study and say the state’s debt situation is much less dire than the institute reports.

A large chunk of North Carolina’s $60.7 billion in future obligations represents health care benefits promised to state employees when they retire.

The institute determined the unfunded liability for retiree health care benefits is $32.9 billion, a larger sum than indicated a year ago in a Carolina Journal report. Unfunded pension benefits make up another $2.5 billion of the debt.

Despite a constitutional requirement that North Carolina government maintain a balanced budget, the state also has accumulated $15 billion in bonds and $16.1 billion in other liabilities. The state can borrow money for capital needs and emergencies, but not for normal operating costs.

Instead of setting aside money for future obligations, most states have been shifting the costs to future taxpayers, the report says. “This is especially true in relation to employee compensation costs, which include retirement benefits.”

Because pension and health care benefits are not immediately payable in cash, states ignore most of these compensation costs when calculating annual budgets, the report continues.

“Truthful budgetary accounting would include the portion of retirement benefits employees earn in current compensation cost every year they work.”

State Budget Director Andy Willis took objection to the report’s suggestion that the state has been dishonest in its financial reporting.

“I would say that we have been truthful and follow GASB [Governmental Accounting Standards Board] rules when reporting what our long-term obligations,” Willis wrote in an email.

The state’s obligation to retirees “is a snapshot of 20 to 30 years into the future, and current assets don’t have to necessarily meet the long-term obligations,” he added.

Julia Vail, a spokeswoman for the state treasurer’s office, said she’s not sure how the Institute for Truth in accounting came up with its numbers.

“As of December 1, 2010, the actuarial value of assets for the Teachers’ and State Employees’ Retirement System (TSERS) was $57.1 billion and accrued liability was $59.9 billion,” Vail said. “Thus, the unfunded liability was $2.77 billion. Given these facts, TSERS is 95.4 percent funded.”

Fergus Hodgson, director of fiscal policy studies at the John Locke Foundation, said if anything, the Institute for Truth in Accounting has been generous in its assessment of North Carolina’s financial health.

The data the institute used came from the state’s own Comprehensive Annual Financial Report, he said.

He added that part of the problem is that GASB accounting rules have not required states to include future liabilities in their annual budgets. Also, the rules allow states to use exaggerated discount rates to determine how much they should save now in order to fulfill promises in the future.

To address the problem, Hodgson suggests the state start using defined contributions rather than defined benefits for its employee retirement programs.

In other words, the state would say “We’ll put away this much money for you now. … We don’t know how much it’s going to be worth in the future, but at least this money is all yours. There’s no liability,” Hodgson said.

As it stands, he said, the state is estimating about how much it should save, and isn’t reporting these obligations in the annual budget.

“The conversion [to defined contribution] would not do away with the accrued debt, but it would stop the situation from worsening immediately,” he said.

Hodgson praised the Institute’s report, saying it shed light on the states’ deceitful accounting methods, which he noted would be illegal if practiced by private organizations.

He called the $14,800 debt per taxpayer “blatant fiscal negligence,” and pointed out that the figure was up 32 percent from the previous year, in which taxpayers were in debt $11,200 each.

Without reform, default is inevitable, he said.

Sara Burrows is a contributor to Carolina Journal.