For a second year, a key North Carolina committee is recommending the state increase debt capacity to address rising pension and healthcare liabilities.

Increasing the debt cap will allow the gilt-edged state to contribute more toward liabilities and issue $1.8 billion of voter-approved general obligation bonds over the next five years, according to a Debt Affordability Advisory Committee study.

The North Carolina General Assembly building in Raleigh, the state capital.
North Carolina's debt advisory committee recommended a 4.5% allowable ratio of annual debt service costs to available general fund revenue. Adobe Stock

“The committee is reiterating its recommendation that the state recognize the magnitude of its unfunded pension and other post-employment obligations that cover retiree healthcare costs,” State Treasurer Dale Folwell said in a letter to the governor and General Assembly.

Unfunded pension and OPEB obligations combined total $40.7 billion, up from $37.8 billion in 2017.

Folwell said the state should put more toward funding liabilities using “principles of gradualism that are appropriate for a state with a long history of good fiscal management” and that has triple-A ratings from Fitch Ratings, Moody's Investors Service and S&P Global Ratings.

The committee recommended increasing the allowable ratio of annual debt service costs to available general fund revenue to 4.5% from 4%. It made the same recommendation in 2017.

The actual ratio of debt service to revenues is projected to peak at 3.32% in fiscal 2020.

Although the state has fully funded the actuarially required contribution for the Teachers’ and State Employees’ Retirement System in 75 of the last 76 years, the debt study said the unfunded liability is $7.9 billion. The actuarially determined employer contribution is about $1.6 billion.

The liability for OPEBs covering retiree healthcare plans administered by the state is $32.8 billion, while the annual OPEB cost is estimated at $2.65 billion.

North Carolina paid 36.6% of its annual OPEB cost in 2015, according to a comparison of 11 peer triple-A rated states.

Combined, the amount of the state’s actuarially determined pension and OPEB contributions are approaching 20% of the general fund budget.

“It does not appear to be consistent with our leadership in this area to not begin to address these liabilities now,” the committee said.

The study also laid out the schedule for issuing the remainder of GO bonds for the state’s $2 billion Connect NC infrastructure finance plan.

The bonds were approved in a statewide referendum in March 2016. The first $200 million tranche was sold in August of that year.

Based on the cash-flow needs of projects included in the plan, the debt study said the treasury expects to issue $600 million of Connect NC bonds this year, followed by $690 million in 2019, $430 million in 2020, and $80 million in 2021.

GO proceeds are funding state university and college facilities, water and sewer loans systems, National Guard and state agency projects.

The debt report will be used by Gov. Roy Cooper and the General Assembly to guide decisions during this year’s legislative session, which runs through mid-July.

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