North Carolina State Treasurer Dale Folwell
“Even as the General Assembly has fully funded the pension, we have witnessed the unfunded health care and pension liabilities of our state continue to grow,” said North Carolina State Treasurer Dale Folwell.

BRADENTON, Fla. – North Carolina's $38 billion of unfunded pension and retiree healthcare costs led a key committee to advise raising the state's debt capacity and increasing annual funding to address the liabilities.

The recommendation was included in the 2017 Debt Affordability Study, released Thursday by State Treasurer Dale Folwell.

Although the Debt Affordability Advisory Committee has mentioned pensions in the past, this year's report is the first to offer specifics on dealing with the liabilities, said a spokesman for Folwell, who chairs the nine-member committee.

"Even as the General Assembly has fully funded the pension, we have witnessed the unfunded health care and pension liabilities of our state continue to grow," said Folwell. "Deliberate, gradual action is required to address this issue and cannot wait another year."

North Carolina uses the ratio of debt service as a percentage of revenues as the controlling metric that determines the state's debt capacity.

The report recommended that the state's targeted debt limit ratio be raised to 4.5% from 4% of general tax revenues to allow for debt capacity in the general fund after placing additional revenue in trust for pension and other post-employment benefit liabilities.

The committee suggested depositing $153.3 million in the first year, and additional amounts thereafter.

The Teachers' and State Employees' Retirement System has 875,000 active and retired public employees, including teachers, police officers, firefighters, and other public servants, according to the treasurer, who is charged with administering the plans.

Even though North Carolina has fully funded the pension system's actuarially required contributions in 74 of the last 75 years, the debt report said the liability determined grew to $5.3 billion as reported Dec. 31, up from $2.4 billion the prior year, due to assumption changes and lower than expected investment returns.

OPEB healthcare and disability costs rose to $32.5 billion, an increase of $5.9 billion primarily attributable to increased mortality and healthcare cost assumptions.

"On a combined basis, the state's pension and OPEB liabilities are approaching 20% of the general fund budget," the report said, adding that rating agencies are increasing focus on post-retirement benefits as they relate to fiscal flexibility and how states address and manage the costs.

All three rating agencies assign triple-A ratings to North Carolina's $3.03 billion of outstanding general obligation bonds.

Analysts have noted the state's well-funded pension system compared to its peers, although OPEB liabilities have been cited as a growing burden.

In addition to the committee's recommendation regarding new pension and OPEB funding as well issuing the $2 billion of Connect NC infrastructure bonds approved by voters last year, the report said North Carolina can issue $181 million of new GO debt annually over the next 10 years.

The report will be used by the governor and General Assembly as a guide in developing the budget for the upcoming fiscal year.

"The [pension and OPEB] recommendations in this study are a necessary recognition of a changing fiscal landscape," Folwell said. "With this action, we are taking a step towards solving the problem. North Carolina is certainly not alone on this issue but we have the unique opportunity to lead the nation and make a generational difference for North Carolinians."

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