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State Pension Fund Shrinks

Fund Dips 5.8% In Last Fiscal Year

Nov 5, 2002 | Raleigh News

Plunging stock prices, corporate accounting scandals and a state budget crisis have left North Carolina's public employees pension fund $3.3 billion poorer than it was a year ago.

The N.C. Teachers and Employees Retirement System, which guarantees pension benefits to 600,000 current and former state employees, has lost 5.8 percent of its assets, dropping from $56.6 billion to $53.3 billion in the year that ended June 30. About $100 million of this decline came from a handful of stocks, including AOL Time Warner and scandal-ridden Enron and Tyco International.

But state workers are less worried about the market-related losses than they are about the state government's decision to suspend its regular contributions to the pension fund. In September, the General Assembly withheld $144 million in payments to the plan in order to help eliminate the state's budget shortfall.

"When the market is down, that's when you should be contributing more to the pension fund, not less," said Dana S. Cope, executive director of the State Employees Association of North Carolina, which represents 60,000 current and retired state workers. "This is making a bad situation worse."

State workers are now shelling out 6 percent of their annual pay to the public pension fund, while the government is paying nothing. If this arrangement continued, the pension fund would face a $1 billion shortfall by 2010, according to an actuarial projection made by the state treasurer's office in July.

"We absolutely must get back on the road to making regular contributions to the fund," said state Treasurer Richard H. Moore, who oversees the fund. "It should be as fundamental to running the government as turning on the lights and the heat."

Added Rep. Art Pope, a Republican from Raleigh: "We're going to have to step back in soon [and make contributions], or we'll risk having to make much bigger contributions later."

Nearly all of the pension fund's losses came from its $27.4 billion stock portfolio, which plunged 14 percent during the 12 months that ended June 30, 2002. The fund incurred nearly $100 million in losses by selling shares of Tyco, Enron and AOL Time Warner after their prices plunged.

Despite these losses, North Carolina's public retirement system remains one of the top-performing public pension funds in the nation. Between 1997-98 and 2001-02, the fund generated an average annual return of 6.7 percent, compared with a 5.5 percent median return for pension funds nationwide. During the last fiscal year, the fund ranked No. 8 among 93 of the nation's largest pension funds, according to Wilshire Consulting, a consultant to pension funds.

Moore plans to improve this performance by shifting about $3 billion from bonds into stocks. By next June, the state plans to have 55 percent of the pension fund invested in stocks, compared with 44 percent at the end of this June. "We are committed to buying stocks while they are cheap," Moore said.

But the benefits of these moves will be muted, Moore said, if the government does not "pay its fair share" to the public pension fund.

"The biggest drag to the system is that we don't have enough money coming in," Moore said. "This can't go on forever."

State workers fear the state will try to trim the fund's costs by eliminating the annual cost-of-living adjustment, which protects them from rising consumer prices.

"A pension fund is great, but only if it keeps pace with inflation," said Mark Dearmon, 49, a media production specialist at N.C. State University who had planned to retire in three years. "If it doesn't, then many of us will face the very real prospect of having to work longer."

With another budget shortfall looming, however, state workers will face an uphill battle persuading legislators to renew contributions, predicts Richard C. Kearney, professor of political science at East Carolina University. There will be a strong temptation to keep the state's contribution at zero to avoid making cuts to schools, prisons and roads, he said.

"Of course, this is irresponsible," Kearney said of the government's decision to cut contributions to the pension plan. "But given the state's poor fiscal condition, it's also completely understandable."

Moore said he will lobby for an increase in the state's contribution when the next legislative session begins. "It's a fairness issue," Moore said. "You don't hire people, tell them that you have a retirement plan, and then cut the contribution. Regardless of the condition of the state budget, we should be making regular contributions."

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