Study: N.C. fiscal health has room to improve

| July 8, 2015

Dan wayby Dan Way, Carolina Journal, July 8, 2015.

Even though North Carolina ranks behind its four neighboring states in overall financial condition, the state’s fiscal health is mostly sound, said the author of a just-released national study.

Eileen Norcross, senior research fellow at the Mercatus Center at George Mason University, authored the center’s annual Ranking the States by Fiscal Condition, pulling 2013 data, the most recent available, from the 50 states’ Comprehensive Annual Financial Reports. Those are the states’ official, audited financial statements.

“North Carolina is doing pretty well. But I think like all states, I would focus on pensions,” Norcross said. said the state’s pension system has an unfunded liability that’s $61 billon larger than the liability the state reports. (Unfunded liability is an estimate of the amount of money needed to pay all future benefits above the fund’s current cash value.)

The research looked at each state’s short- and long-term debt, other major fiscal considerations, unfunded pensions, and health care benefits to come up with the rankings. Fourteen components were spread across five categories — cash solvency, budget solvency, long-run solvency, service-level solvency, and trust fund solvency — to compute an overall ranking.

North Carolina finished 27th overall. Tennessee ranked eighth, South Carolina 17th, Virginia 21st, and Georgia 26th.

North Carolina ranked ninth among all states for trust fund solvency, its best showing in any category. According to the state’s figures for 2013, North Carolina’s pension system had a $3.8 billion unfunded liability, and was 96 percent funded.

“You’re doing pretty well relative to the other states, and that has to do with the amount of the unfunded liabilities in the pension system relative to state personal income, [other post-employment benefits], and other debt as well,” Norcross said.

However, she believes the pension numbers are wrong.

“I recomputed them based on the idea that these should be valued like bonds, and when you value them like bonds, North Carolina has an unfunded liability of $65 billion, and the system is only 55 percent funded, not as well funded as the state is reporting,” Norcross said. “That’s the area where probably some attention should be paid.”

She said the [other post-employment benefit] liability “is large at $23 billion, and it’s only funded at 3 percent, which means it’s practically on a pay-as-you-go basis.”

“North Carolina’s AAA bond rating from all three ratings agencies, and our status as one of the best-funded pensions in the country indicate North Carolina’s solid financial underpinnings,” Schorr Johnson, spokesman for state Treasurer Janet Cowell, said in response to the study.

“The Department of State Treasurer stands ready to work with the governor and the General Assembly to ensure the long-term fiscal stability of the State Health Plan,” he said.

“I’m not familiar with this group’s study nor the metrics they used for their interpretation,” said Josh Ellis, spokesman for Gov. Pat McCrory.

“North Carolina has scored very well in other well-established rankings. The CATO Institute ranked Gov. McCrory first on its 2014 Fiscal Policy Report Card on America’s Governors,” Ellis said. “In addition, [the American Legislative Exchange Council] ranked North Carolina fourth for its 2015 economic outlook.”

Norcross contends accounting assumptions used in U.S pension finance practices are incorrect, states are not valuing their pensions correctly, and “therefore they will have a tendency to underfund them, and that can take its toll over the long run.”

North Carolina appears to be in no trouble in the short run.

“But as New Jersey, and Illinois, and some states have learned, if you continue to operate off of a wrong set of numbers, your choices are going to matter over time,” Norcross said. “I think that’s the lesson of what we’re looking at in countries, and places like Puerto Rico, and Detroit, and places that really did learn the hard way over many decades of making poor choices based on rosy assumptions.”

An accurate valuation of the pensions, and determining proper contributions “is a conversation they need to have” in North Carolina, she said. New government accounting standards that are coming online soon should reveal more, but not all, of the full liability of pension plans in future years.

According to the study, a state’s cash solvency reflects the cash it can easily access to pay its bills over the next 30 to 60 days. North Carolina ranked 42nd there, its worst showing of the five categories.

“By the strictest measure of cash they have less cash than short-term liabilities, so that’s where they get a little bit dinged in the rankings,” Norcross said. North Carolina was one of only 14 states in that situation.

“In terms of the long-run solvency the picture changes a little bit,” she said. Long-run solvency measures each state’s ability to cover yearly costs, including pension benefits, and infrastructure, with incoming revenue, according to the study. North Carolina’s long-term liabilities are 22 percent of total assets, ranking it 24th.

North Carolina was 18th among the states for budget solvency, a measure of whether a state can meet its spending obligations during the current fiscal year.

Service-level solvency is similar to a measure of the tax base — computing the level of taxes, expenses, and revenues relative to state personal income. That can be used to determine if a state has room to increase spending or raise taxes if conditions warrant. North Carolina was 24th in that category.

Taxes take up 6 percent of all state income, and total revenues are 12 percent, Norcross said. That means North Carolina is drawing on things other than taxes to pay for government spending.

Norcross said a state’s Comprehensive Annual Financial Report contains a wealth of vital information about a state’s fiscal health that hardly anyone reads.

“Hopefully, with these measures we can extract something more meaningful from these balance sheets so the public has a quick read of the state finances,” she said.

Norcross said the overall state rankings are not as important as the individual categories.

“The states around North Carolina have got their own fiscal story going on. I wouldn’t necessarily compare them and say South Carolina is better. You have to go behind the scenes, look at those individual ratios and what the CAFR is saying,” she said.

For example, North Carolina’s cash solvency is likely to be a one-year event, and once rectified its standing will improve when 2014 numbers come out.

And she noted that some states doing well now — such as Alaska and other Western states where tax revenues from natural resources, oil, and gas are flooding their treasuries with cash —could be in trouble if a recession hit, and prices for those commodities plummeted. Those states may lack the flexibility to raise taxes or other revenue to offset that hit.

Category: Economy, SPIN Blog

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