In a move that will make government-employee pensions less risky for taxpayers, N.C. Treasurer Dale Folwell announced Tuesday, Feb. 2, that the assumed rate of return on the main state retirement plan will be lowered.
Folwell and the Retirement Systems Division said the assumed rate of return for investments in the North Carolina Retirement Systems Fund will be reduced from 7% to 6.5%. The move was unanimously approved by the boards representing teachers, state employees and local government employees on Jan. 28.
Lowering the rate requires greater contributions from state and local governments, but keeps debt from piling up in the long term.
This is the third time in the past four years the rate has been lowered, and the biggest percentage drop. The assumed rate of return was reduced from 7.25% to 7.2% in 2017 and then further lowered to 7% in 2018. State officials expect those changes to allow the state to retire $14.8 billion in unfunded liabilities over the next dozen years.
Fiscal watchdogs criticize high rates of return for such government pension plans because taxpayers eventually have to pay the bill if the investments don’t meet the expected returns. A press release from the State Treasurer’s office noted that even though the plans have failed to achieve their assumed rates of return for the past 20 years, the rates weren’t reduced for nearly six decades.
The latest change resulted from a study by actuarial firm Cavanaugh Macdonald Consulting, which reviewed the plan and compared it to actual market results. The estimated 20-year return on the fund is 6.28%. Although the assumed rate of return is still higher than those previous results, the treasurer’s office said the new assumption represents the best estimate for long-term future gains.
Folwell said that while the state pension is fund is one of the best funded in the country, officials need to make “realistic assumptions” about the ability to meet the expected investment gains.
“We owe it to the General Assembly, taxpayers, public employees and future generations to be transparent and realistic about the true valuation of the pension plans,” he said. “Lowering this assumption will provide the best opportunity to meet the state’s long-term obligations as well as maintain its AAA bond rating.”
The N.C. Retirement Systems is valued at nearly $116 billion, making it the ninth largest public pension fund among the states. More than 950,000 public-sector workers and retirees in North Carolina are in the plan.
In its annual examination of pension debt across the U.S., Chicago-based Truth in Accounting ranked North Carolina 15th in the country. The financial watchdog said that of $53.4 million in retirement benefits promised to government employees, that state had not funded $4.8 billion in pension and $15.3 billion in retiree health-care benefits.