(Raleigh, N.C.) – With an eye toward the magnitude of the state’s combined unfunded pension and retiree health care costs, State Treasurer Dale R. Folwell, CPA, said it is imperative the state’s capacity for future borrowing is accurately calculated to avoid fiscal strain and budget predicaments.
Treasurer Folwell chairs the Debt Affordability Advisory Committee (DAAC), which met Wednesday, Jan. 6, to continue work on the annual Debt Affordability Study, including a vote not to raise the level of state borrowing in the coming year. The committee was created by the General Assembly in 2004 and is one of the few such bodies in the U.S. It is tasked with issuing an annual report providing the Governor and General Assembly with an overview of how much debt the state currently carries, and how much more borrowing is possible.
“The state has new and ongoing capital needs such as school construction every year. But it also carries existing bond and other debt obligations for past years’ projects. The Debt Affordability Study is North Carolina’s most important tool in determining how much debt the government can issue and to prioritize those capital needs,” Treasurer Folwell said.
“The annual assessment offers the executive branch and legislative budget writers clear markers on prudent borrowing limits,” Treasurer Folwell said. DAAC members voted to keep the state borrowing cap at 4% of state budget revenues.
“The debt analysis also is essential in helping to preserve the state’s superior bond rating.” Control of debt burden is one of the key factors used by rating agencies’ analysts in assessing credit quality.
All three national rating agencies have given North Carolina a Triple-A rating, the highest possible. That enables the state to sell its bonds at low interest rates, providing enormous savings to North Carolina taxpayers.
“Having a well-funded pension plan is the biggest reason for that Triple-A rating,” Treasurer Folwell said. “It is important that the state adheres to the Debt Affordability Study recommendations so neither the pension plan nor our credit rating are jeopardized.”
While the state pension plan is among a handful of the best funded in the nation, the most recent data available shows the Teachers’ and State Employees’ Retirement System has an $11.5 billion unfunded liability, and the Local Governmental Employees’ Retirement System is underfunded by $3.3 billion. The State Health Plan has $27.7 billion in unfunded liabilities despite a deficit reduction of $5 billion under Treasurer Folwell’s watch. Should the state exceed the Debt Affordability Study recommendations it becomes more difficult to attack those liabilities.
The statutory deadline to submit their report to lawmakers is Feb. 1, but members voted to seek a delay to March 1.
“The report this year is particularly ticklish because we don’t have any revenue forecast data since May 2020,” Treasurer Folwell said. Revenue projections were lowered then over concerns about the pandemic, and due to adoption of a continuing budget resolution amid fiscal uncertainty created by a veto stalemate of a new budget. Revenues are now expected to be much higher than May’s downbeat forecast.
“The forecast provides a baseline for preparing the Debt Affordability Study, so we look forward to getting those numbers as quickly as possible,” Treasurer Folwell said.
The Office of State Budget and Management and the legislative Fiscal Research Division produce consensus revenue forecasts so that everyone is working off the same numbers in preparing the state budget. That consensus is expected to be completed by Feb. 10.
Members also voted to maintain the N.C. Department of Transportation’s borrowing limit of 6% of revenues from the State Highway Fund and Highway Trust Fund, which pay for transportation projects. Large cost overruns and a scathing state audit have plagued NCDOT, and Treasurer Folwell noted that Standard & Poors has warned that a lack of commitment to maintaining prudent management and strong affordability guidelines could result in a lower state credit rating.
The committee agenda included a recommendation that the General Assembly make an appropriation to the Unfunded Liability Solvency Reserve in the upcoming state budget. Last year $100 million was requested; $30 million was appropriated. That employee benefits trust was created by lawmakers to drive down pension and health care unfunded liabilities, which are in excess of $42 billion.
The Debt Affordability Study is prepared by the staff of the State and Local Government Finance Division of the Department of State Treasurer.
Other DAAC members are Ronald Penny, Secretary of Revenue; Linda Combs, State Controller; Charles Perusse, State Budget Director; Beth Wood, State Auditor; Frank Aikmus, Senate Appointee; Bradford Briner, Senate Appointee; Donald Pomeroy II, House Appointee; and Eugene Chianelli, House Appointee.