For those foolish enough to think that we have recovered from the Great Recession in the State of North Carolina, a look at the numbers is most sobering. As of February 2011, the State had improved in the past year from a level of 3,848,800 jobs to 3,879,300 jobs. That’s an increase of 30,500 jobs. Unfortunately, the employment figure in 2009 was 3,896,750 jobs, with 2009 being not as good as 2008. So, we still haven't recovered to the employment level of a lackluster 2009.

But even these numbers mask the true nature of employment in North Carolina. Why? These employment numbers include public sector jobs. Under the ARRA, the federal government supported thousands upon thousands of public sector jobs in North Carolina.

How many public sector jobs are there in North Carolina? That’s not clear. The Bureau of Labor Statistics only reports ownership on a national basis, not on a state basis. However, if you add the educational and the government sector jobs in North Carolina (which are reported) you come up with a total of over 1,200,000 public sector jobs. That’s about 30% of the total jobs in the state. In other words, two North Carolinians work in the private sector to support the job of a third North Carolinian in the public sector. How sustainable is that situation?

To give further context to the current state employment situation, consider that the total number of manufacturing jobs in the state is about 432,000. That means for every person engaged in manufacturing, there are three public sector jobs to be supported.

If you think this is a local problem, think again. In the USA, there are nearly twice as many people working for governments (over 22,000,000 as reported by the BLS) than in all of manufacturing (over 11,000,000). In 1960, about 15,000,000 national manufacturing workers supported about 9,000,000 government workers. More Americans work for governments than work in construction, farming, fishing, forestry, manufacturing, mining, and utilities combined. Nearly half of the $2.2 trillion state and local government bill is the $1 trillion-a-year tab for pay and benefits of state and local employees.

Don’t look for progress any time soon. Witness the failure of the Town of Carrboro to cut Planning Department jobs, despite a dramatic and long term diminution in property development within the town’s planning area. Pulpsters should look at the upcoming government budgets sans ARRA support. The only way to maintain state and local government head count is to raise taxes even more.

A study from the Center on Budget and Policy Priorities reveals that the 50 states face a combined $112,300,000,000 revenue gap next year. If the revenue predictions are as rosy as this year, the gap could be as much as $60,000,000,000 higher.

Where does North Carolina stand? It’s 13th on the hit parade, with an expected gap of $3,000,000,000 or ~15.4% of the budget.

The good news is that North Carolina isn’t in the position of the State of Illinois - $15,000,000,000 in the hole or ~ 46.2% of its budget.

Here’s the scoreboard:

A report issued last year reveals that each of the ~4,230,000 households in North Carolina owes ~$14,000 in unfunded government worker pension benefits.

Unlike your pension (if you’re lucky enough to have one), most U.S. state governments offer their employees 1950s, UAW style, defined benefit pension plans. Translation, government workers deserve an annuity. No 401(k) or 403(b) plans are good enough for North Carolina state government workers (the state has another unfunded pension plan for your local government employees, school teachers and school administrators). You might have to save for your own retirement and manage your own investments, but you can afford to pay them an annuity.

Under the 1950s-style pension, the North Carolina government is making a legal promise of a future payment to millions of workers. It’s creating a financial liability for you, its taxpayers. According to the report authors, the “good news” is that North Carolina has $68,700,000,000 in pension assets. That’s only 2% of the $3,230,000,000,000 cumulative unfunded liability for all 50 states.

~$27,000 Per Household in Unfunded Pension Debt Nationally

On average, each household in America currently owes state (and in many cases local) government workers ~$27,000 in unfunded pension liabilities. That doesn’t include federal retirees or military retirees. For further perspective, total state debt with pension liabilities included is actually almost 4.5 times the value of all outstanding state bonds.

The bad news is that North Carolina has $117,000,000,000 in liabilities, leaving an unfunded liability of $58,300,000,000.

Don’t look to the State’s pension fund to give you these numbers. According to the State the pension liabilities are only $68,700,000,000, leaving an unfunded liability of only $10,400,000,000. But that’s the beauty of accounting, isn’t it? Haven’t our state bean counters learned well from the multi-national corporations?

Creative Pension Accounting 101

The North Carolina government accounting standards require states to use procedures that severely understate its liabilities. The State does project the payment they owe to retirees. Unfortunately, the State is using an unreasonably high discount rate in its calculation. In the words of the report: “In particular, government accounting standards require them to discount their liabilities at the expected return on their assets. This approach is analytically misguided: the magnitude of pension liabilities and how a pension’s funds are invested are two separate issues that should be considered independently. In practice, the accounting standard being used sets up a false equivalence between pension payments, which are extremely likely to be made, and the much less certain outcome of a risky investment portfolio.”

Oh, the report gets better. According to the authors, “Under current pension fund investment policy, there is a wide distribution of possible future funding outcomes. The outcomes are skewed in such a way that there is a small probability of an extremely good outcome and a large probability of poor outcomes.”

The authors used the by Accumulated Benefit Obligation or “termination liability” methodology of accounting for pension promises. The state views the obligation to its workers as fully funded if the fund could deliver an annuity that would cover all retirement benefits that have already been earned. In other words, the state could view its pension liability as though all of its workers were going to quit work today, wait until the retirement age, and collect their promised benefits.

The states use a combination of the Entry Age Normal method (new service liabilities accrue as a fixed percentage of a given worker’s salary, that is, states recognize the cost of the retirement benefits accruing to a worker in a given year as a constant fraction of the worker’s salary) and a Projected Benefit Obligation method (projected future salary increases into account, but not future years of service.)

The authors used the interest rates on Treasury securities as of January 2009 to discount the projected cash flows implied by Accumulated Benefit Obligation pension promises. The states use a constant 8% rule-of-thumb discount rate.

Why is this important? “Standard financial theory suggests that financial streams of payment should be discounted at a rate that reflects their risk, and in particular their covariance with priced risks. In the case of state pension funds, the 'risk' is the level of certainty as to whether certain payments will need to be made. From this point of view, the right discount rate for Accumulated Benefit Obligation pension liabilities is not 8 percent, a rate which implicitly assumes a high covariance with the market, but rather a risk-free interest rate, like the interest rate on Treasury bills and bonds.”

Pulpsters should not that the $3,230,000,000,000 underfunding would be larger under any broader accounting measure than the more conservative Accumulated Debt Obligation methodology.

Years of State Tax Revenues Needed

At least North Carolina isn’t Ohio. Ohio would need to devote 8.75 years of tax revenue to pension funding simply to catch up on already-made promises. Of course, Ohio would need additional revenue to fund new benefits that employees earned over that time period, and would need further tax revenue to run state programs other than its retirement systems. North Carolina would only have to come up with 2.56 years of state tax revenue.

Pension Gambling On Moneys Borrowed From Government Workers?

One of the most interesting observations from a public policy standpoint is the equivalence of state pension equity investing with gambling. According to the authors: “Equity investing inside of public pension funds can be viewed as equivalent to matching liabilities with bonds, and making side bets which entail borrowing money from the states’ employees and investing in the stock market. Consider an employee entitled to a one-time, certain $10,000 benefit in 10 years, and suppose the 10-year Treasury is yielding 3.6 percent. That obligation could be matched by purchasing a 10-year Treasury for about $7,000 today ($10,000/1.03610), so the present value of the pension obligation must be $7,000. If the state invests in something else, such as equities, then it’s as if the state matched its pension liability by buying a 10-year Treasury for $7,000, and bought $7,000 in equities as a speculative investment that it funded by shorting the 10-year Treasury. There is no speculative element in funding the obligation to the employee with Treasuries. Any correct accounting of assets and liabilities will show no change in net obligations if the state moves from holding the $7,000 in Treasuries to shorting the $7,000 in Treasuries to fund their equity position.”

Let’s end with the authors’ final conclusions: “Our analysis also highlights for policymakers the perils of focusing only on average expected outcomes for invested pension fund assets. Distributions of the outcomes of state pension investments will not matter if households can systematically alter their own investment and consumption plans to offset government policy. However, given the lack of transparency of the state pension fund system,households are currently unlikely to understand what such an offset would entail. Furthermore, households face risks that are unspanned by securities markets, such as the possibility that their neighbors will move away and leave them to pay the taxes that will be levied to cover the shortfall. The lack of transparency of state pension fund systems makes it more difficult for taxpayers to optimize their own portfolios and consumption choices over the life cycle.”

The beautiful thing about an annuity is that you can move away from the state paying the annuity, thus draining the state of capital.

Perspective is perhaps the hardest attribute to attain in pondering public policy. Pulpsters know that for local Progressives, perspective is really another term for myopia. What is going on around you doesn't matter unless it matters to you as a Progressive, unless the facts fit your fantasized future, they're fiction.

An excellent example is how local Orange governments offering government employees bonus/incentive pay and not raises for FY 2011 is trumpeted as ”holding the line” in an increasingly bleak economic time.

Now for some facts that help Pulpster gain perspective. According to the Center for Budget and Policy Priorities, the projected FY 2011 shortfall in the North Carolina state budget is $5,800,000,000. That's 30.8% of the entire FY 2010 state budget. That's the seventh worst state shortfall (as a percentage of a state budget) in the nation. That's after cutting $5,000,000,000 in FY 2010 and $3,800,000,000 in FY 2009.

Contrast that reality to local government's maintenance of planning, zoning, and inspection departments at pre-Great Recession staffing rates.

Will the last bureaucrat at the Department of Revenue please turn off the lights when they leave?

Up until November 2009, the North Carolina Department of Revenue published monthly reports on taxable sales and sales tax collections on a county basis. Then it simply stopped. You can't get the information to compare Xmas 2009 to Xmas 2008.

Since the October 2009 report, no more reports have been listed at the DOR website. No explanation has been given for the lapse in reporting. Pulpsters having the need to know can look below at a table comparing the sales tax performance in October 2009 to that of October 2008. Curiously, although the taxable sales amount remained virtually flat, the tax collections rose statewide by eighteen percent (18%). Orange County had a three percent (3%) dip in taxable sales, yet managed to increase tax collections by two percent (2%).

The winning county was Pamlico. It increased taxable sales by forty percent (40%) and tax collections by forty seven percent (47%).

The losing county was Cherokee. It decreased taxable sales by thirty two percent (32%) and tax collections by thirty six percent (36%).

Ignorance is bliss.

The latest government food assistance numbers paint a revealing montage of the current economic conditions. In North Carolina, about one in seven people use food stamps from the government to eat as of March 2010. That places the state as having the seventeenth highest percentage of the state's population using food stamp users.

The good news is that North Carolina is not as bad off as Mississippi or Tennessee where one in five are using food stamps. The bad news is that SNAP participants increased in North Carolina by 20.5% from January 2009 to January 2010.

Here’s a table showing the numbers:

North Carolina is one of 37 states that have achieved unemployment insurance insolvency, according to the FY 2009 Financial Report of the United States Government. That’s the good news.

The Unemployment Insurance Program (UIP) was created in 1935 to provide temporary partial wage replacement to workers who’ve lost their jobs. The program is financed through the collection of Federal and State unemployment taxes that are credited to the unemployment tax fund (UTF) and reported as Federal tax revenue. (Of course in Chapelboro, rampant off-the-books employment or service contributions reduce the amount of moneys available for unemployment insurance - anarchism in action.)

Each state accumulates UTF net assets or a state reserve balance that provides a defined level of benefit payments over a defined period to unemployed state residents. To be considered minimally solvent, a State’s reserve balance should provide for one year’s projected benefit payment needs based on the highest levels of benefit payments experienced by the State over the last 20 years. A ratio of 1.0 or greater indicates a state is minimally solvent.

So how is North Carolina doing? Look at Chart 15 below.



North Carolina is out of money in its UTF account, one of 20 states in a similar condition. It’s borrowing funds from the Federal Unemployment Account (FUA) to make benefit payments. However, the FUA balances have been depleted during FY2009. In turn, the FUA borrows from the Treasury General Fund.

So what’s going to happen?

The following Chart 14 shows projected cash contributions and expenditures over the next 10 years under “expected economic conditions”. What are these conditions? The unemployment rate will top at 9.92% in FY 2010, decreasing to below 6.0& in FY2015 and thereafter.



However, this chart is not based on a double dip recession or stagflation scenario. Under Recovery Scenario Two (higher than expected unemployment), the unemployment rate is assumed to reach 10.62% in FY2010 and “gradually fall” over the next five years. The present value of UTF expenditures would exceed the present value of income by $42,900,000,000. From a trust fund perspective, the program has $1,600,000,000 in assets. When combined with the present value of net cash income under Scenario Two economic conditions, the UIP has a deficit of $29,300,000,000, not $15,800,000,000.

The following table 10 lays out the details of these scenarios.



What’s the bad news? The above numbers are as of September 2009. They do not include the continuing unemployment of the last five months, nor the extension of the term for receiving unemployment benefits.

How Big Is The Debt?
Unfunded healthcare benefits in North Carolina for state and local municipal employees are $24,600,000,000. That's the fifth highest amount in the nation. That exceeds the amount for the entire FY 2007-2008 General Fund budget. For a family of four today in North Carolina, that’s over $11,000 of hidden debt.

Moreover, the above $24 billion plus figure doesn’t include North Carolina county and municipal unfunded retiree health benefit liabilities. With county governments returning 20% of their local sales tax revenues to the state (½ cent of 2 ½ cents) in exchange for the state assuming the counties’ share of Medicaid costs, further pressure is put on increasing local taxes without increasing services.

The GASB Bomb
The Governmental Accounting Standards Board (GASB) changed the playing field in in 2005 with GASB 45. This accounting guideline calls for states to calculate and disclose the total costs, in current dollars, of financing the accrued health benefits for current and future state retirees.

As with many actuarial reports, the devil is in the details. The above North Carolina figure is based on healthcare costs not rising as they have in the past. Over the past decade, costs have been rising annually in the range of 10% to 14%. Many state actuarial reports are forecasting 5%. What does this mean as to the actual debt for North Carolina? For the state of Hawaii, a 1% increase (from an assumed base of 5%) in the annual healthcare cost rise means a 20% increase in the unfunded liability. (See NC State Authored Paper.)

The North Carolina Plan
Since the inception of the current state system (which includes local school and state university employees), unfunded healthcare benefits spending has increased 720%. For those thirty years, the General Assembly never set aside enough funds to pay for retirees, despite the known demographic baby boomer bulge working its way through the population. North Carolina finances retiree healthcare premiums on a pay-as-you-go basis.

Until CY 2006, state workers needed only five years of state service to be eligible for free enrollment in the state health plan upon retirement. Now, with a change in state law, (S.L. 2006-174), future retirees are required to accumulate 20 or more years of “retirement service credit” to be eligible for fully subsidized health insurance premiums. With 10 to 20 years of service, half of the insurance premiums are covered by the state. With 5 to 10 years of service you can enroll in the state health insurance plan at your own cost. (Even this drives up state healthcare insurance benefit liabilities by raising the average insured policyholder age of the pool.)

How Much Would It Cost To Pre-fund The Healthcare Retirement Benefit?
After thirty years that figure is now over $2,400,000,000 annually, more than the entire FY 2007-2008 Justice & Public Safety budget. That figure assumes that healthcare costs don't increase as they have in the past. That figure would be an additional increase in the General Fund budget of about 11%. And the problem grows. During Governor Mike Easley’s term as governor, the state added over 25,000 new employees.

What Do Other States Do?
In response to the GASB 45 bomb, over 12 states passed legislation establishing an account or fund in which money is to be set aside to pay for future retiree healthcare costs. North Carolina was not among them.

Some states (such as neighboring Virginia and South Carolina) have longer eligibility requirements (10 and 15 years, respectively). Some states have increased the co-pay for retirees. More and more states are looking at adopting fully paid funding. The State of Nebraska has no healthcare retiree debt.

Pulp readers should be used to local government behavior towards those reporting embarrassing problems (read reality) to government authorities. If you report the problem, then you are the problem. The real problem is not the problem, so long as no one talks about it.

Back in February 2008, the Pulp posted about an N&O story on the toe tapping behavior out at nearby Jordan Lake. (See Pulp Wild Life Story.) The salacious aspects of rampant public lewdness were embarrassing to the North Carolina Wildlife Resources Commission (NCWRC).

Eight months later, the reward to the New Hope Audubon Society (NHAS) for reporting the “advanced sexual acts” to the NCWRC is to be told to leave the Indian Creek Trail area after 20 years and to move to another part of the lake.

According to the NCWRC they are unable to stop male homosexual encounters in a public park space. NCWRC Sgt. Reggie Barker, who oversees enforcement for Chatham, Lee and Randolph counties, ”It would become very frustrating. It's not something you can deal with every day, and it's a delicate situation to handle.”

The flaunting of public lewdness became openly flamboyant by the summer 2008. At least 25 Craigslist internet advertisements for men seeking sexual encounters were posted. Sgt. Baker reports at least 20 cars in the parking lot at once, backed up to the forest line to hide their license plates. Undercover NCWRC officers have been solicited for illegal public lewdness every time they walked in the area.

No explanation has been given as to why the NCWRC did not photograph the plates. Furthermore, the NCWRC gives no explanation why other law enforcement manpower hasn’t been assigned to stop the illegal public lewdness behavior. For example, public lewdness at nearby Umstead Park in Raleigh has been abated by using local police. See N&O Public Lewdness Capitulation Story.

In a classic governmental response, the messenger is the problem. The NHAS has been asked to move their legal birding activities to where they will no longer see the problem, thereby “solving” the problem without changing anyone's behavior.

No word on whether or not the NCWRC has informed the birds as to where to move to be observed by the NHAS.

In related business news, Johnson & Johnson stock and Church & Dwight stock traded up slightly.

With the American Society of Civil Engineers (ASCE) recommending that American governments spend over $320,000,000,000 annually for the next five years, let’s look at how North Carolina is doing in providing and maintaining its public works. (All figures documented by the ASCE.)

Roads
• 42% of North Carolina's major urban roads are congested (2005), up from 40% in 2003.
• 34% of North Carolina's major roads are in poor or mediocre condition (2005), up from 33% in 2003.
• Vehicle travel on North Carolina's highways increased 50% from 1990 to 2003. North Carolina's population grew 27% between 1990 and 2003.
• The state has a $28 billion shortfall over the next 25 years in needed highway and bridge funding (2005).
• Driving on roads in need of repair costs North Carolina motorists $1,700,000,000 billion a year in extra vehicle repairs and operating costs — $282 per motorist (2005), up from $1,400,000,000 and $259 per year in 2003.
• Congestion in the Charlotte metropolitan area costs commuters $791 per person per year in excess fuel and lost time (2005).
• Congestion in the Raleigh metropolitan area costs commuters $460 per person per year in excess fuel and lost time (2005 pricing).

Bridges

31% of North Carolina's bridges are structurally deficient or functionally obsolete (2005), up from 30% in 2003.

Dams
• There are about 81 state-determined deficient dams in North Carolina (2005), up from 53 in 2003.
• North Carolina has 1,046 high hazard dams, i.e., a dam whose failure would cause a loss of life and significant property damage (2005).
• The rehabilitation cost for North Carolina's most critical dams is estimated at $394.8 million (2003).

Water systems
• North Carolina's drinking water infrastructure needs $2,700,000,000 over the next 20 years (2005).

Wastewater systems
• North Carolina has $5,920,000,000 in wastewater infrastructure needs (2005), up from $4,000,000,000 in 2003.

Solid waste systems
• North Carolina generates 1.08 tons of solid waste per capita (2005).
• North Carolina recycles 11% of the state's solid waste (2005).

Education
• 55% of North Carolina's schools have at least one inadequate building feature (2005).
• 68% of North Carolina's schools have at least one unsatisfactory environmental condition (2005).

Due to a federal “open border” policy and “sanctuary city” municipal policies, the Hispanic population in North Carolina increased from 76,726 to 597,382, a 770% increase since 1990 (U.S. Census Bureau). Moreover, Hispanic births increased 1100% times during the same period. Last year, one of every six babies born in North Carolina was Hispanic.

Womens’ Hospital (UNC-CH) reports that half (50%) of babies born there are now registered as Hispanic, up from 37.4% in 2005.

Uninsured mothers are eligible for emergency Medicaid regardless of immigration status. The average cost of a Caesarean birth with complications in North Carolina is $16,651 (Blue Cross and Blue Shield). For hospital births, all families earning up to 185 percent of the federal poverty limit are fully covered (roughly an annual income of $38,000 for a family of four).

(Originally reported in the 2 January 2008 Chapel Hill Herald)