Off Base Again: Attacks on the NC Pension Plan
About a week ago the North Carolina State Treasurer announced that the state’s pension assets returned 15.9% in the past 12 months and now top $90 billion. I’m not a big proponent of trumpeting short-term results because doing so undermines the required long-term focus of managing a public pension. However, it is customary for every public pension to tout its short-term results, especially when the numbers are positive.
Predictably the State Employees Association of North Carolina (SEANC) took the opportunity to disparage the results by pointing out that North Carolina underperformed the average large public pension plan in the last 12 months. SEANC seems to make this argument several times a year, and each time they completely miss the reason why North Carolina underperforms the average pension plan during a sharply rising stock market. As I’ve said repeatedly, it isn’t alternative investments (at least not yet) that are the reason why our pension plan trails the average plan. See “A Misguided Analysis of Pension Returns” (December 11, 2013) for a detailed discussion. North Carolina continues to carry a greater weight in fixed income than the average pension plan.
What’s strange about SEANC’s latest critique is that it criticizes the State Treasurer for not investing more in equities. Much like an unsophisticated retail investor, SEANC is lured by the short-term performance of the stock market. The 24.7% return in equities for the past 12 months has SEANC yearning for more equity risk. If we’d followed SEANC’s prescription (even with index funds) over the past 15 years, the state’s pension plans would be in a very deep hole. Equities only returned 5% during that period (including the big rally in the last couple of years). Fortunately, the pension was exposed to fixed income, which returned 6.9% over the last decade and a half.
SEANC also hits the Treasurer for highlighting the fact that the state’s pensions now have $90 billion in assets. According to SEANC, this is merely the result of state employees contributing 6% of their paychecks and taxpayers kicking in another 9%. This assertion is also wrong.
· First, the 6% and 9% contributions only apply to the Teachers’ and State Employees’ Retirement System (TSTRS) pensions (roughly 70% of all NC pensions). The other pensions, most notably Local Government Employees’ Retirement, use a different formula.
· Second, it’s only in the last couple of years that the taxpayers’ contribution has been even close to the 6% employee payment. Since 2001 state employees and teachers have contributed $9.0 billion to the pension system, while taxpayers have chipped in $5.1 billion. In order to balance the state budget, the legislature has let the long-term pension deficit slowly rise instead of keeping up the taxpayer contribution. It’s a policy choice that may come back to haunt us one day.
· Third, the employee and taxpayer contributions are largely necessitated because retirement payments are escalating. Since 2001, the TSERS has paid out $32.4 billion in benefits. In my first year as CIO, the TSERS paid out $1.8 billion in benefits. In the last fiscal year, those benefits were $3.7 billion, and are likely to top $4 billion this year.
· Fourth, and this is the part SEANC really doesn’t want to talk about, the number of active members in TSERS has fallen from 349,000 in 2001 to 320,000 in 2013 (-8%), while the number of retirees has grown from 112,000 to 180,000 (+61%). During this period compensation has been stagnant. Meanwhile our state’s population has grown from 8 million to 9.8 million (+23%). In other words, the burden of the 6% contribution by state employees and teachers is the result of a failure by the taxpayer to support public employees and their wages. It’s also a failure of SEANC to defend its constituents. The remaining teachers and state employees have carried a heavy burden as the retirement rolls rise, and the employer contributions remained relatively small.
· Fifth, no matter how a pension plan allocated its assets, the capital markets did not return anything close to the assumptions of even the most conservative pension plans. For the past 10 to 15 years, almost any basket of stocks, bonds, and alternatives returned between 6% and 7%, and that wasn’t enough to keep pensions from having larger deficits. It’s only been in the wake of the financial crisis that risky financial assets have rebounded.
SEANC isn’t the only one making off-base assertions. Their consultant, Edward Siedle, recently suggested that North Carolina would be better off paying Treasurer Janet Cowell a billion dollars just to go away. He asserts that the Treasurer’s foray into alternatives is so disastrous that our State would come out ahead if we bought out the State Treasurer in order the pave the way for purging our pension of alternative investments. While I have growing concerns about the excessive use of alternatives by North Carolina and most other public pension plans, I don’t think we get very far by making ridiculous proposals.
However, the members of SEANC might take up Mr. Siedle’s idea on a more modest scale. They might be better off paying SEANC not to lobby on their behalf. SEANC’s track record isn’t very good, and its attack on the pension plan is only giving opponents another reason to gut the pension.