A couple of months ago, I blogged here about how North Carolina’s pension fund is likely in much worse shape than even the current $2.8 billion unfunded liability represents. The reason is because North Carolina, like many state and local government pension funds, uses unrealistically optimistic investment return projections in their actuarial valuation.
This year’s state budget includes a roughly $811 million appropriation to help shore up the pension fund (that’s your tax dollars). That expenditure is projected to grow to more than $1 billion in five years. And that is using the exceedingly rosy expected return rate of 7.25%.
What kind of condition would the pension fund be in if the state used a more realistic, industry-standard expected rate of return, like 4.5% to 5.5%?
State Treasurer Janet Cowell is asked about this at the 3:00 minute mark in this video clip from Bloomberg TV. “Obviously, that means more burden on taxpayers,” is Cowell’s reply.
More burden? How much more than the projected $1 billion annual taxpayer support?
Should NC face financial reality and provide a truer appraisal of the state pension fund’s condition, as Cowell suggests we may, this could translate into hundreds of millions of additional tax dollars that will need to go toward keeping the fund at acceptable funding levels. The alternative is for the Treasurer’s office to engage in more risky investments in the hopes of achieving the higher rate of return.
A better idea would be to take the politics out of state retiree pensions, and instead convert state workers to a 401(k) style defined contribution retirement plan, in which the workers themselves own and manage their own retirement funds. Taxpayers should not continue to be exposed to the risk of poor pension fund returns, overly generous benefits promised by vote-seeking politicians, and unrealistic actuarial assumptions.
Convert pensions to 401Ks.
“Taxpayers should not continue to be exposed to the risk of poor pension fund returns, overly generous benefits promised by vote-seeking politicians, and unrealistic actuarial assumptions.”