RALEIGH — Last year, State Treasurer Janet Cowell warned state legislators that they could face a $1.2 billion bill in the coming year if they did not start forking over adequate state pension plan contributions.
Of course, they didn’t much listen. And no one should expect that they’ll pay the bill this coming year.
North Carolina’s $65 billion state employee pension fund is among the most flush in the country. It’s one of just a few public employee pension funds that hover around being “fully funded,” meaning it has enough money to meet known current and future obligations.
But the formula by which the fund can meet its obligations to the 820,000 state government pensioners and current state employees contains assumptions.
One is that legislators will keep pumping tax dollars into the pension fund. The other is that the pension fund will see returns on its investments of better than 7 percent.
Over the last decade, someone has been doing too much assuming.
Legislators haven’t put much money in the system lately. In some years, they’ve put nothing. Last year, a $21 million dribble came to the fund. This year, $160 million is scheduled to be contributed.
As for investment returns, eight years of interest earnings were wiped out in a single year, 2008. After gains in 2009, pension fund investments have lost money the last two quarters.
There’s also an unstated assumption, something not yet part of the drag on the pension fund: If medical costs keep rising, policymakers will eventually begin to look harder at tapping the pension fund to pay medical costs for retirees.
All of these pressures are almost certain to bring structural changes to the state’s retirement system in the not-so-distant future.
Or maybe I’m wrong. Maybe some political revolution occurs in which large numbers of North Carolinians hold tea party rallies calling for substantially higher taxes. Or, maybe the stock market enjoys another early-‘90s-like ride, hitching to some new technology wave.
And maybe Rahm Emanuel is voted nicest guy in or out of Washington.
More likely, North Carolina policymakers will be forced to look at some other pension plan changes around the country and follow suit.
In Michigan, changes signed into law this year will mean that newly hired public school teachers will be put into a hybrid defined benefit/defined contribution plan, instead of the traditional defined benefit plan. Teachers will also have to contribute 3 percent of their salaries to a fund used to offset retirees’ health care.
The changes are expected to save $3 billion over 10 years.
Alaska went to a defined contribution plan in 2003. New Jersey is considering doing the same.
Of course, many private sector businesses moved to defined contribution or hybrid plans a decade or more ago.
Company CEOs, though, had to deal only with economics, not electoral politics. As the pressures mount, politicians here and elsewhere are going to be trapped between the wants of private-sector taxpayers and public sector workers.
Soon enough, the squirming will begin.
Scott Mooneyham writes about North Carolina politics for the Capitol Press Association.