Tuesday, March 16, 2010
Senator Marc Basnight, President Pro Tempore of the Senate
Representative Joe Hackney, Speaker of the House of Representatives
Debt Affordability Advisory Committee Report by Janet Cowell, State Treasurer. Only seven states have the highest AAA bond rating from the three major rating agencies. They are: DE, GA, MD, MO, NC, UT, and VA. The AAA rating is easy to lose and hard to get back and is based on several factors including; reserves, stability of revenue system, debt management and management of long-term liabilities. North Carolina’s Rainy Day fund has dropped to $150 million from a high of almost $800 million in 2008. Right now NC has a structural budget imbalance. The total debt is $1.9 billion with $487.7 million in general obligation and $1.413.3 million in special indebtedness. In addition, the legislature in 2009 authorized another $158 million in debt with three new projects. Based on the debt affordability study NC has a debt capacity of $18.1 million for 2010, which means they can only issue approximately $9.1 million each year over the next five years, based on 4% revenue gains. Transportation debt affordability is $0 for the next two years.
NC State Retirement System: The NC retirement system is fortunate in that they are experiencing above median returns with below median risk. We have an 8.87% return on investment over the past ten years. NC has one the most conservative states with a return assumption of 7.25% compared to other states, who use a figure of 8.00% on their returns. NC also has a higher percentage of fixed income in its portfolio. In reviewing state pension contributions the retirement fund is estimated to collect $364 million in 2009-2010, while the 2010-2011 actual collections should be $684 million and the appropriated rate for 2010-2011 is expected to only reach $503 million (net gain of $181 million). The annual retirement contribution is a small percentage of the total losses to the plan. The plan has lost slightly under $16 billion. The NC employer contribution rates are low compared to surrounding states: NC-6.7%, VA-13%, GA-10.4%, TN-9.4%, SC-8.1%, and other large private companies 7.3%. In 2002, the NC employer contribution rate as percent of salary dropped to 0 and increased to 2.17% in 2004 and will be at 6.71% in 2010 (reached a high of 10.03% from 1984-1987), while the employee contribution rate has remained stable at 6.0%. Projected contributions based on a current assumption rate of 7.25% return on investment will need to increase. In 2012, the rate will need to increase to 9.19% and climb to 12.20% in 2015-2016, before dropping slightly through 2010 to 11.43%. These rates should keep the plan funded above the 90% threshold. If NC delays making the actuarial required contribution the projection of funded ratios contribution gap will reach $9.8 billion by 2020 and that is based on 0% COLAs every year and annual market returns of 15% and 7.25% and a valuation interest rate of 7.25%. If the market returns only 6.25% (less than 7.25% assumption) the annual required state contribution rates will increase to 19 percent in 2011-2012 and reach 21.73% in 2013-2014, before dipping down to 16.75% in 2020.
In addition, NC is continuing to accumulate dept to pay unemployment. NC paid out $2.5 billion in unemployment insurance benefits last year. At the current rates of borrowing NC will owe the Federal Government between $3.2 and $3.5 billion by the end of 2010. The borrowed funds are interest free until December 31, 2010 and after that a 4.36% interest will be applied to these borrowed funds. At this interest rate NC will owe an additional $153 million in interest alone to the Federal Government.
Update on State Investments Janet Cowell, State Treasurer reported in her letter to the legislature the short-term investment fund has had a 1.73% fiscal year return through December 31, 2009. The total trust fund annual return, which is a combination of the long-term investment fund income and equity investment fund long-term investment, was 14.96% for the past year and over the past five years totaled an average return of 3.64%. The long-term fund as of December 31, 2009 was 2.68% over the past five years and the equity investment fund quarterly had $901 million more than the end of the prior reporting quarter. The annual return for the equity fund was 32.68%. Of these additional funds, $650 million was needed to pay benefits or was reallocated to other investment funds. A spreadsheet was presented with a list of the revenues, expenditures and investments for the state. The overall report on the investment funds shows a 14.96% return over the past 12 months. This includes the long-term fund, equity fund, real estate fund, and alternative investment fund. The total combined net assets are $78,870,409,577 billion.
General Fund Revenue Outlook and Economic Report Dr. Barry Boardman, Economist, NC Fiscal Research Division’s report highlighted: the State’s collections are $45 million below $12.1 billion target through February. The Revenue Department over collected $272 million otherwise the budget shortfall would be $320 million or 2.6% below target this fiscal year. Income tax withholding is down 4.1% through February, the same as in December and January making this $145 million below target. State tax collections continue to disappoint. Tax adjusted collections are down 11.0 % and net collections are up 12.2%, but budget targets expected a 15.9% increase. Sales tax collections are $125 million below target. Sales tax collections reflect the weak job employment outlook and consumer confidence. Withholding and Employment are nearly 2.2% below a $5.4 billion target. There has been no gain in total employment since January of 2008. Almost 300,000 fewer people are employed since the recession began in October 2008. Economic forecasts for 2010 are still pessimistic. The state budget included a 3.2% growth factor for 2010-2011, which will have to be reviewed. The 2010-2011 revenue adjustment is being affected by the slow recovery and lower tax collections. In addition, the federal estate tax expired for the 2010 year. The net loss for 2010-2011 to NC is estimated at $85 million. NC has anticipated the federal government would reenact the federal estate tax for 2010, but that has not happened yet.
Subcommittee on Health and Education Report Pam Leaman from Office of State Budget summarized six grants received by the NC Center for the Advancement of Teaching. These grants totaled approximately $136,000. DPI also received $83,229 from GEAR UP NC to reimburse costs associated with administering PSAT/NMSQT to all 9th, 10th and 11th graders attending one of the GEAR UP schools.
Brain Matteson, Fiscal Analyst reported on the status of the funding of highs school students in higher education programs. He updated the committee on their request for data needed to determine the most efficient and effective way to pay for high school students enrolled in community colleges and universities. The final results will be presented to Joint Education Appropriations subcommittee.
*Documents are available upon request from my office.