"N.C. State Pension May Be Underfunded" and the budget isn't really balanced

"...new government-mandated accounting methods show [North Carolina's $87 billion state pension fund] might be underfunded by more than $15 billion instead of operating in the black, as official state figures claim.

...$15 billion “is nothing to sneeze at,” and “having to pay these pensions means taxpayers are going to be on the hook. And when you pay it you’re going to have to raise the money either by cutting services or by raising taxes and revenue fees.”

Government officials generally use much rosier financial predictions than the private sector.

Public pension plans incorporate a “key fudge factor” in rate of return on investments. By predicting a high rate of return, based on riskier investments, a government does not have to shift as much tax money into near-term funding of the system.

If risky investments tank, higher return projections may not pan out. And because the state officials overseeing the pensions reduced their cash allocations to pursue riskier investments, the pension plans are left underfunded.

The independent, quasi-private Government Accounting Standards Board ...has a new methodology kicking in this year...

...The new accounting procedures are an improvement but do not go “nearly far enough because the stricter standards will apply only if you are less than 80 percent funded,” Hogan said. Therefore, North Carolina would not have to use that methodology.

...According to North Carolina’s officially reported figures, the state pension plan has $1.1 billion in assets above its payout liabilities.

But a study by James Naughton of Northwestern University, and Reining Petacchi and Joseph Weber, both of Massachusetts Institute of Technology, arrived at very different results using a 20-year average from 1990-2009.

When re-estimating the plan using fair market value based on Treasury rates, it showed North Carolina’s pension plan was $15 billion in the hole, representing 5.4 percent of the state’s GDP.

...CEI results showed North Carolina’s state pension underfunded at 0.9 percent of state GDP.

...“The North Carolina Retirement Systems assumes a [“key fudge factor”] 7.25 percent rate of return on investments...

...“the amount of benefits to be paid out to future retirees is fixed by a formula and legally guaranteed, so public pension programs that are underfunded may require further infusions of cash, lest they become insolvent,” Sarvis wrote."

Dan Way
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"North Carolina Budget Is NOT Balanced"

"What if you went to the grocery store,
charged the groceries to your account and ate the food.

Then you don’t pay your account until next year.

Does this mean you didn’t eat the food and can ignore your grocery bill?

Yes, if you are a North Carolina legislator.

Next year state employees will earn their compensation,
including a portion of their pension benefits.

The state will charge some of these payroll costs to the pension plan.

Because the state will not pay this deferred compensation until years later,
the legislators believe these payroll cost have not been incurred.

These costs were not included in the “balanced” budget passed by the legislature...

Truthful accounting recognizes employees earn a portion of their pension benefits
every year they work.

Accurate accounting provides that these real and certain expenses
be included in the budget calculation when earned, not when paid.

Just because the state uses a deferred compensation scheme
to avoid paying all of this year’s payroll cost,
doesn't mean that these costs can be ignored.

If these costs are not included in the budget calculation,
then the state’s budget is NOT BALANCED."

North Carolina Budget Watch, 2009