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Treasurer: Reality-based management healthy for state pension fund

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Dale Folwell

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By Michael Abramowitz
The Daily Reflector

Wednesday, August 15, 2018

North Carolina’s state treasurer said last week that the state employees’ pension fund is healthier because he manages what he sees rather than what he would like to see.

The $100-billion pension fund for the North Carolina Retirement System posted overall gains of 7.3 percent for fiscal year 2017-18 that ended on June 30, but earnings to date for the 2018 portion reflected only a 1.3 percent increase, according to an earnings report issued at the beginning of August from the State Treasurer’s Office. 

The earnings report comes as a national survey confirmed that North Carolina continues to have the second-lowest administrative costs among U.S. public pension funds in its peer group, according to a news release from the treasurer’s office.

Pension administration costs for North Carolina are $23 per member, which is $70 below the peer average of $93 per member, reflecting an annual savings of over $55.3 million, the report said. 

“For the first six months of 2018, the plan has paid out over $3 billion in benefits and $300 million in Wall Street fees while earnings were essentially flat,” said State Treasurer Dale Folwell, whose office manages the fund. “Additionally, the 20-year average of 6.1 percent misses the assumed rate of return by almost an entire percentage point.”

The figures show that the state pension fund is not earning the amount of money it is spending, based on market influences, Folwell said.

“It just goes to show you that even though we’re one of the five best-funded pensions in the U.S., we have headwinds, as demonstrated by the first six months of this year,” he said. “The stock market doesn’t care what my needs are, or the bond market and gold market. We’re in a period where when interest rates go up, our bond portfolio goes down. It’s just the numbers, as the 20-year rate demonstrates.”

In April, the investment return assumption for the North Carolina Retirement Systems (the Fund) was lowered from 7.20 percent to 7 percent beginning with the Dec. 31, 2017, valuations, the treasurer’s report said. The move was unanimously approved by the Teachers’ and State Employees’ Retirement System and Local Government Employees’ Retirement Systems Boards.

The change translated into a reduction in the funded status of the affected systems by two to three percentage points.

“That’s why treasurers have not lowered the assumed rate of return; the fundedness goes down at the snap of a finger as soon as I do that because you’re more optimistic than the reality,” Folwell said. “I lowered the assumed rate of return in conjunction with the General Assembly, county commissioners and municipalities. As soon as I lowered that rate, they had to increase the amount they sent me (for the fund). I told them why I was doing it and what it would cost them.””

While keeping the pension fund fiscally sound, the action also reaffirmed the state’s AAA bond rating, Folwell said.

“Rating agencies know we’ve got only a 6.1-percent, 20-year earnings average, so we’re not fooling anyone,” he said. “This is another example of understanding what needs to be done and doing something about it. We’ve lowered the assumed rate of return. I think we’re going to have a hard time earning 7 percent over the next 20 years.”

Folwell said he made the decision based on his understanding that the better funded a pension plan is, the harder it is to lower the rate of return.

“Lowering the assumed rate of return, the fundedness of the plan fell by a few billion dollars, because we now start calculating it less optimistically,” he said. “Treasurers across the country are less inclined to lower the assumed rate of return because the fundedness drops immediately and it makes them look bad.

“The 7.25 percent I inherited had been in place since I was in high school,” he said. “The reason I was elected is because I promised I would tell the truth. But as a result, the rating agencies understand that we understand and aren’t just putting our head in the sand.”

Folwell and his investment management team also continued to reduce costs significantly during the fiscal year to provide more value to members of the pension plan, his office said. Fees paid to Wall Street investment managers have been cut by $86 million since January 2017, for a projected savings of approximately $344 million in four years, more than tripling his original pledge to cut fees. 

The North Carolina Retirement Systems provides retirement benefits and savings for more than 900,000 members, including teachers, firefighters, police officers, state and local government employees and other public workers. For more information, visit www.nctreasurer.com​.​

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