North Carolina's State Capitol Building

North Carolina's State Capitol building in Raleigh, NC.

North Carolina’s state pension plan has been on a recent decline, resulting in $9.64 billion pension liabilities, according to a report by free-market think tank John Locke Foundation.

Even though the state has one of the top 10 pension plans in the nation, researchers say North Carolina Teachers’ and State Employees’ Retirement System has weaknesses that have left it in the red.

“When it comes to pensions, little moves now can have big pronounced effects for down the road,” Leonard Gilroy, one of the authors of the report, said Monday at a pension solvency roundtable in Raleigh.

North Carolina Teachers’ and State Employees’ Retirement System has 87.4 percent of the funding in hand that it needs to service the hundreds of thousands of state workers that would rely on it during retirement.

State workers and educators become eligible for full retirement benefits between the ages of 60 and 65 years old.

According to the Department of State Treasurer, 297,192 retired state and local government employees receive benefits from the state’s pension system, as of December 2019. A total of 661,652 employees currently contribute to the system, which distributes $535 million a month.

North Carolina’s pension system fares better than most other states, where the average funded status is 70 percent.

Missed investment assumptions, “lackluster” investment performance and changes to the cost of living have led the state from being overfunded to accumulating pension debt.

Ignited by the economic crisis of 2008, the fund declined by $14 billion from 2007 to 2017, according to the Locke Foundation’s report.

To recover its assets, Locke Foundation researchers recommend the state lowers the target rate of return, changes the discount rate and offers a multi-tier system.

The pension system’s current target rate of 7 percent most likely will not meet the mark over the next two decades, research shows. Forecasts show a less than 40 percent chance of achieving the current rate. 

“Although a more realistic ARR would mean higher contributions to the plan by the employer, higher contributions would reduce the long-term risk associated with uncertain and volatile market returns,” researchers wrote. “This is because the plan’s unfunded liability would grow less if the employer contributions are at the appropriate level.”

Research also shows that lowering the time value of the funds also will reduce the gap.

“For every dollar the state owes, it can account for about 86 cents,” said Jen Sidorova, one of the authors of the report.

The state also could recover from its pension debt by offering more conservative plans to new hires and letting current members choose funded-capped plans, such as cash balances.

State lawmakers filed a bill in March 2019 that would have eliminated three of the plan options to members who retire after July 2020. However, the bill failed after its first reading in the House of Representatives.

Teachers and state worker groups disagreed on the legislation, with teachers in opposition.

The North Carolina Association of Educators did not respond to requests for comment.

Staff Reporter

Nyamekye Daniel has been a journalist for three years. She was the managing editor for the South Florida Media Network and a staff writer for The Miami Times. Daniel's work has also appeared in the Sun-Sentinel, Miami Herald and The New York Times.