A new independent report that aims to provide a more realistic evaluation of state pension plans across the country rates North Carolinas funding gap as the sixth-lowest in the nation.
The report issued last week by Moodys Investors Service found that North Carolinas funding gap, which takes into account the pension funds assets and its projected benefit payments, amounts to 18.3 percent of the state governments annual revenue. Thats well below the national average of 60.6 percent and the median of 45.1 percent, and light years from the 241.1 percent for the Illinois state pension fund, which ranked as the worst in the country.
North Carolina, from an economic perspective, really doesnt have a major problem, said Andy Silton, former chief investment adviser for the North Carolina state pension fund and the author of a blog called Meditations on Money Management. The good news is that North Carolinas burden is nothing compared to the rest of the country.
North Carolina perennially ranks well, compared with the other states, in evaluations of the health of its pension plan.
As the Moodys report shows, North Carolinas retirement system is one of the most fiscally sound in the country, Schorr Johnson, a spokesman for state Treasurer Janet Cowell, wrote in an email. Our system had the sixth best liability-to-revenue level in the country and was one of nine states with liabilities below 20 percent of state revenues.
But Johnson also noted that Cowell and the National Association of State Treasurers have challenged the methodology Moodys used for its report. Cowell, who oversees the states $81.1 billion pension fund, is chair of the associations pension and trust investment committee.
Cowell wrote in a letter to Moodys last September that she was concerned that the Moodys report could result in an inaccurate measure of a governments future obligations and its ability to meet those obligations. This could create the unintended consequence of forcing governments to reduce pension obligations even when such changes are unwarranted or wise.
Likewise, Silton said the Moodys report could become a political issue in North Carolina and elsewhere because Moodys assessment of the states pension burden is significantly higher than the states calculations. Moodys assesses North Carolinas funding gap for fiscal 2011 at $7.48 billion. Thats double the $3.72 billion North Carolina calculated for 2012, according to the states latest annual financial report.
Silton said that larger funding gap, as calculated by Moodys, is manageable for a state the size of North Carolina.
Its a liability you have to pay over the next 20-30 years, he said. Its not like its owed now.
Nevertheless, he added, fiscally conservative Republican legislators or Gov. Pat McCrory could use the report as justification for launching an effort to curtail retirement benefits for state employees as a way of reducing the states pension burden and limiting how much taxpayer money is allocated to the state pension system each year.
Bid for flexibility pending
Cowell has been urging legislators to give her more flexibility when investing the states pension money in order to avoid boosting the amount of taxpayer dollars used to fund the pension system. A bill that would do just that was passed by the Senate and is awaiting action in the House.
The Department of State Treasurer is committed to protecting and growing the North Carolina pension fund, Johnson wrote.
Silton agrees with Moodys that the funding gaps calculated by the states are significantly understated.
The states calculations, he noted, are based on the rules set by the Government Accounting Standards Board. Its not as if the state has done anything wrong, he said.
Under GASB rules, the states discount their funding gap by the rate of return that each state presumes it can generate by investing its pension money. In North Carolina, the states expected return is 7.25 percent.
But Moodys contends that the rate of return generated by high-grade, long-term corporate bonds is a more reasonable discount rate. What we owe the retirees and current employees is a lot more certain than the returns of the stock market, Silton said. So we need to have a discount rate that is much more consistent (with that) certainty.
But the National Association of State Treasurers disagrees.
We are puzzled by Moodys choice of high grade long-term corporate bond rate as the discount rate, the organization wrote in a letter to Moodys.
The association, and Cowell, also objected that Moodys released its report just as the states are transitioning to new GASB accounting standards for pensions. The timing will create confusion, the association cautioned.
Moodys officials couldnt be reached for comment.
Blogger: Squishy guess
Silton noted that projections of pension liability are themselves squishy because they rely on a host of assumptions of what the state will end up owing decades from now. For example, since state pension amounts are tied to the salaries earned by the retirees, you have to predict what state wages will be in the future.
The Moodys report found that states with the largest funding gaps have at least one thing in common: a history of contributing less to their pension plans than the actuarially required contribution (ARC).
At the other end of the spectrum, states with the smallest funding gaps have little in common outside of a commitment to making full ARC payments to their pension plans.