Confronting Our Pension Challenge in North Carolina
Although I am highly skeptical of alternative investments, I am a strong proponent of public pension plans. Unlike 401(K)s, IRAs, and other defined contribution plans that are inadequate, the defined benefit plan works. It provides adequate and stable income to retirees, and is an enormous benefit to the overall wellbeing of the communities where retirees live. Nonetheless, these plans are under attack. I suspect that some of the animus is directed at public pension plans because the private sector has eviscerated the defined benefit plan for corporate employees. As a result, many citizens don’t think public employees should have something that they no longer have.
Another part of the attack is due to the fact that the economics of public pension plans are badly misrepresented. For example, most critiques don’t see why taxpayers should be the primary financial source for public pensions. While taxpayers are the backstop for public pensions, they are not the primary contributor paying to finance these plans. I went back to 2001 to look at where the North Carolina pension plans had received their funding. Since fiscal 2001, state and local government have contributed $7.8 billion to pension plans. While this is a lot of money, it is the smallest component supporting the various public pension plans in our state. Over the same period, employees have contributed $12.6 billion or about 6.5% of their salaries. Despite the stock market swoon in 2001-2002, and crash in 2008, the financial markets have produced $38.9 billion in gains and income.
Where has the money gone? The pension plans has paid $39.5 billion to retirees over that period. In other words, market gains and income have just about equaled the amount paid to beneficiaries. Another $5.2 billion has been paid out as investment related expenses, most of it to money managers, and only $180 million has been expended to administer the plans. Critics of government would be hard-pressed to run any business as efficiently as the North Carolina Treasurer has run the retirement system; $180 million is a pittance for such a large plan (the cost is about 2/100 of 1% of the plan’s assets).
While the books have balanced reasonably well in the last dozen years, there is a looming challenge. In 2001, when I made my appearance as CIO, North Carolina’s pension plans had about 3 employees for every retiree, and 2.1 employees per every retiree plus everyone eligible but not yet drawing benefits. We paid out $2 billion per year in retirement benefits.
Today, Treasurer Janet Cowell faces deteriorating ratios. In 2012, there were only 2 employees for every retiree, and 1.2 employees per retiree plus everyone eligible but not yet drawing benefits. Moreover, the pension plans now pays out $4.5 billion in retirement benefits per year. The increase in the number of retirees is the by-product of demographics (aging and longevity) and the decade-long squeeze on state and local government. Since 2002 our population has grown by over 21%, while the number of public employees has only grown by 9%. Moreover, in the last five years public employment has fallen by 2%, while the state’s population has grown by 8%. As our government has been hollowed-out by misguided and misinformed policies, we have been undermining the pension plan at the same time.
For thirty years, I’ve seen Wall Street and the money management industry promise state and local government painless solutions to their challenges. I ought to know, because I used to ply public pension plans with those sweet promises. Alternative investments are simply the latest money management incarnation of an “easy” solution to a complicated problem. I understand why public officials and trustees are embracing the message that pension plans just need to load up on alternatives in order to survive. Financial alchemy is preferable to confronting the truth.
In order to meet our state’s growing needs, we have to retain and then add to our public workforce. Stabilizing the workforce would help steady the pension plan. Unlike some states where the pension plan probably cannot be salvaged, North Carolina’s public plans can be preserved. At some point, someone in public office will have the decency to tell us that we have to pay more for government services, including funding the pension plan, even if it costs them their job.
 North Carolina has several pension plans for employees. The largest two plans are the Teachers’ and State Employees’ Retirement System and the Local Government Employees’ Retirement System.
 The decline in the core functions of running state and local government is more pronounced since the number of school teachers, law enforcement officers, and fire and rescue has continued to rise through most of the past 12 years.