State pension fund may need an overhaul, state treasurer says

State treasurer Dale Folwell says North Carolina is in good financial shape to weather a recession. But bigger problems could lie ahead, especially for the state’s $100 billion pension plan.

Folwell says the state pension fund lost about 7% of its value over the past fiscal year. That might sound like bad news, but he says comparatively speaking, it’s "outstanding."

The Standard and Poor's 500 stock index lost about 11.9 percent during the 12 months ending June 30.

"We don't like being down 7%, but we like it better than [the performance of the S&P 500]," he said.

The loss means no pension increase for state retirees next year to help offset inflation.

Folwell noted that state lawmakers did include a one-time 4% bonus for retirees in this year's budget. But, he added, the bonus money came from the state's General Fund, not the pension fund.

"We can't pay a cost of living adjustment if there's no money to pay it with," he told WRAL News.

It's been many years since state and local government retirees have seen a permanent pension increase. Folwell says that's because the state pension fund never fully recovered from the stock market crashes in 2001 and 2008. The current market has only made it worse.

"For the first time in my lifetime, we have dealt with month after month after month of not only the stock market going down dramatically, but the bond market going down dramatically," Folwell said.

That matters because the fund maintains nearly half its assets in savings, rather than stocks. He says higher interest rates will actually help its bottom line.

"When you have about $45 billion in things that earn interest, and we haven't been able to earn interest on that money for about the last three years, and now we're able to get 3.5% to 4.5% percent on government bonds, that makes a huge difference," Folwell said. "Higher interest rates are not blessings for individual citizens, but they are a little bit of a blessing for a pension plan the size of ours."

However, the treasurer warned, the state's defined benefit plan is structurally imbalanced. It was designed 60 years ago, when interest rates were higher and retirements were shorter.

Folwell said in 1977, only 300 people over 90 were collecting state pensions. Now, it's more than 7,000. In the meantime, government bonds went from 10% to less than 1%

"This pension plan was never designed for interest rates to be this low, people to retire this early, and people to live this long," Folwell said.

He said a large cash infusion from the legislature could help the fund catch up. But sooner or later, he said, lawmakers will need to restructure it.

"As long as I'm state treasurer, I'm trying to preserve and strengthen this particular plan," he said. "But we have to look at how we're going to sustain the plan for the next generation of public service workers."