State pension fund may need an overhaul, state treasurer says :: WRAL.com

– State Treasurer Dale Folwell said North Carolina is in good financial shape to weather a recession. But bigger problems could lie in wait, especially for the state’s $100 billion pension plan.

Folwell says the state pension fund has lost about 7% of its value over the past fiscal year. That may sound like bad news, but he says it’s “exceptional” comparatively.

The Standard and Poor’s 500 stock index lost about 11.9% in the 12 months to June 30.

“We don’t like being down 7%, but we like it better than [the performance of the S&P 500],” he said.

The loss means there will be no pension increases for state pensioners next year to help offset inflation.

Folwell noted that state lawmakers included a one-time 4% bonus for retirees in this year’s budget. But, he added, the bonus money came from the state’s general fund, not the pension fund.

“We cannot pay a cost of living adjustment if there is no money to pay for it,” he told WRAL News.

It has been many years since state and local government retirees have seen a permanent increase in their pension. Folwell says that’s because the state pension fund never fully recovered from the stock market crashes of 2001 and 2008. The current market has only made things worse.

“For the first time in my life, we had to deal, month after month after month, not only with the dramatic fall in the stock market, but also with the spectacular fall in the bond market,” Folwell said.

This is important because the fund keeps nearly half of its assets in savings rather than stocks. He says higher interest rates will actually help his bottom line.

“When you have about $45 billion worth of things that earn interest, and we haven’t been able to earn interest on that money for about three years, and now we can get 3.5% to 4.5% on government bonds, it makes a huge difference,” Folwell said. “Higher interest rates are not a blessing for citizens, but they are a bit of a blessing for a pension plan the size of ours.”

However, the treasurer warned, the state’s defined benefit scheme is structurally unbalanced. It was designed 60 years ago, when interest rates were higher and pensions shorter.

Folwell said that in 1977 only 300 people over the age of 90 received state pensions. Now it’s over 7,000. Meanwhile, government bonds have fallen from 10% to less than 1%

“This retirement plan was never designed to have interest rates this low, people retiring this early, and people living this long,” Folwell said.

He said a large cash injection from the legislature could help the fund catch up. But sooner or later, he said, lawmakers will have to restructure it.

“As long as I’m state treasurer, I try to preserve and strengthen that particular plan,” he said. “But we have to look at how we’re going to sustain the plan for the next generation of public service workers.”

Dolores W. Simon