North Carolina Teachers & State Employees Retirement System Solvency Analysis
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Policy Study

North Carolina Teachers & State Employees Retirement System Solvency Analysis

Investment performance falling short of return assumptions has been the largest contributor to the public pension plan's growing debt, adding $7.6 billion in unfunded liabilities since 2008.

The North Carolina Teachers & State Employees Retirement System is a well managed and healthy public pension plan relative to its peers in states across the country. Even so, a Reason Foundation analysis finds that despite the value of their asset portfolio recently hitting an all-time high, the plan’s funding levels have been steadily declining for decades.

Despite the longest bull market in American history, TSERS had amassed over $11 billion in unfunded liabilities prior to the onset of the COVID-19 pandemic. Today the plan has only 86.4 percent of the assets on hand needed to fully fund the plan in the long term and just 20 years ago, in 2001, TSERS had over 111 percent of the needed assets. While the state has taken important steps in recent years to improve the solvency of the pension system the debt continues to increase.

The new analysis updates the findings of a policy study published in February of 2020 using the latest reported data from TSERS and is updated to include the Pension Integrity Project’s stress testing of the plan.

The system’s declining solvency stems from multiple sources. Investment performance falling short of return assumptions has been the largest contributor, adding $7.6 billion to the unfunded liability since 2008. Additionally, interest on debt has resulted in a $3.5 billion increase in unfunded liabilities during the same time period. Increasing unfunded liabilities threaten to take resources away from other public priorities appealing for state dollars.

In search of higher investment returns, TSERS steadily expanded into riskier assets following the 2008 financial crisis. Despite the shift, the TSERS portfolio still has not delivered average returns consistent with the system’s long-term assumptions. And this trend is likely to continue. The “new normal” for institutional investing suggests that achieving even a 6 percent average rate of return in the future is optimistic.

This analysis, produced by the Pension Integrity Project at Reason Foundation, spotlights structural problems within TSERS that are contributing to rising pension debt and public service crowd-out. The analysis looks at the primary factors driving the system’s unfunded liabilities over the past few decades and offers a stress testing analysis designed to highlight potentially latent financial risks and exposure to market volatility.

To protect taxpayers, employees and retirees, stakeholders must gather together around a central, non-partisan understanding of the challenges TSERS faces. With independent third-party actuarial analysis and expert technical assistance, our organization stands ready to help North Carolina policymakers and stakeholders as they address the shifting fiscal landscape.

North Carolina Teachers & State Employees Retirement System (TSERS) Solvency Analysis

Jen Sidorova is a policy analyst with Reason Foundation's Pension Integrity Project.

Leonard Gilroy is vice president of government reform at Reason Foundation and senior managing director of Reason's Pension Integrity Project.