St. Joseph Abbey

For years the 38 Benedictine monks at St. Joseph Abbey in Louisiana paid for their healthcare by selling timber. Then Hurricane Katrina wiped out their timber stand, so, to pay for their healthcare, the monks started building caskets – cheap, inexpensive, wooden caskets.

The monks’ new enterprise got the attention of a local undertaker who filed a complaint against them with the Louisiana Board of Funeral Directors and Embalmers. The monks, he said, didn’t have a state license. And the Board ordered the monks to stop.

Here in North Carolina, we have 55 of the same type of state licensing boards. Many of those boards are necessary – like the medical board that licenses doctors. But it’s also true many of our licensing boards exist for less public spirited reasons.

According to the Goldwater Institute, a John Locke-type think tank in Arizona, state licensing boards can stifle competition, drive up costs to consumers, and create a “drag on the economy” each year.

A simple first step toward reform – here in North Carolina – would be for the General Assembly to conduct a study to classify licensing boards into one of two categories: Essential (like doctors) or Nonessential.

Then the General Assembly could go to work to figure out which of theNonessential Boards create a drag on our state’s economy and should be reformed or disbanded.

A Rigged System

The other day, of all things on earth, I got wacked by a lobbyist, in a video.

Over a dozen different groups pay Ches McDowell to lobby for them – including the Association of Acupuncturists.

In his video, Ches said I’d introduced a bill that could ‘make acupuncture illegal.’ Then, just to make sure no acupuncturist misunderstood his message, he added, if my bill passed acupuncturists could be ‘out of business.’

There’s a lot of fact-twisting going on here – so let’s clear the air: There are 541 acupuncturists in NC and each one has to pay for a license. I introduced a bill to merge the acupuncture licensing board with other small boards to lower the cost of getting a license. If my bill had passed the worst thing that would have happened to acupuncturists would be their license fees going down.

Virginia charges $130 to apply for a license and $135 to renew the license for two years. North Carolina charges $100 to apply, $500 when the license is issued, and $300 for two-year renewal. Those are the fees I’d like to cut. But, I expect, Ches is focused on a different problem.

Cutting license fees will save working people money. But it also means less money flowing into licensing boards in Raleigh who hire insiders like Ches McDowell – who then tried to mislead acupuncturists by telling them my bill could ‘make acupuncture illegal.’

We’ve heard a lot of talk over the last year about how powerful people with lobbyists rig the system at the expense of working people. Don’t get me wrong, there are licensing boards that are needed. And do good work. But it’s also true there are other licensing boards that are an example of how a ‘rigged system’ works in Raleigh.

What’s the Price?

Democratic legislators quarreled with Jim Hunt. Republican legislators quarreled with Pat McCrory. It’s one of the oldest feuds: Legislators battling Governors.  It can even end up in court: When Republican legislators took control of the new Coal Ash Commission away from Governor McCrory he sued.

Whether they’re fighting over patronage, appointments, or regulations, whenever legislators and governors bump heads there’re fireworks.

More often than not, when the legislature passes a law, it’s a broad policy statement – followed by instructions to a state department (controlled by the Governor) to devise regulations to implement the policy.

Generally, I’m not a fan of government regulations. But when they’re unavoidable the goal is simple: To make the rules clear, fair, and consistent with (what lawyers call) the intent of the law.

However, no system devised by man is perfect. Especially politics. Sometimes state agencies (or Governors) don’t like a new law. They dig in their heels and resist. They even, at times, act as if the law doesn’t exist. And the result can be a nightmare. Because when the rules are not clear a citizen will suddenly find himself – or herself – face to face with a bureaucrat who, basically, says, “The law means what I say it means” – and that’s not the answer any citizen deserves in a society based on the rule of law.

Here’s one small example: Twenty years ago, in 1997, the General Assembly told the State Board of Elections, in statute, to make rules clarifying which campaign contributions and expenditures are legal and which are illegal. That wasn’t an earthshaking reform. It didn’t affect many people – only candidates for office. However, through four governors – one Republican and three Democrats – the Elections Board did nothing. It passed no rules defining which expenditures are proper and which are not.

What harm is done by these kinds of obtuse regulations? Part of our national debate over the past year has been about the fact that we are a constitutional democracy where there is no special, privileged class of people who are above the law. In our Democracy, everyone plays by the same rules. Everyone caught on the highway driving 80 in a 65 pays the same price.

But vague regulations, or no regulations, lead straight to loopholes that one group can use to its advantage.

State of Confusion

It’s not often the General Assembly passes a law that upends the North Carolina Constitution – but it happened back in 1971.

Article VII of the North Carolina Constitution states “The General Assembly…may give such powers and duties to counties, cities and towns, … as it may deem advisable.” In other words, local governments receive their powers – to tax and pass laws – from the General Assembly.

If you’re a mayor or a county commissioner you may not like that. Or not think it’s ideal. But it’s a tried and true legal principle: Way back in 1872 a Federal Judge – named John Forrest Dillon – wrote an opinion confirming that local governments receive their powers from the states and two years later, in 1874, the NC Supreme Court embraced ‘Dillon’s Rule.’

However, in 1971, the General Assembly threw a monkey wrench into the works with an odd declaration of its own. The General Assembly said the powers the state grants local governments “shall be broadly construed.”

Broadly construed was pretty ambiguous language and, to make matters worse, the General Assembly never clarified what it meant. It just left the concept hanging there in the air – vague and ambiguous.

For the next 45 years North Carolina courts struggled to figure out what legislators meant –  with some judges interpreting broadly construed one way and others another.

The UNC-School of Government has probably studied these problems more than anyone – and I have never heard them referred to as a Republican think tank. In a well-documented article, a decade ago, their staff suggested it would be a good idea to clear up the confusion.

It’s hard to argue with that – but it’s not as simple as it sounds. For example, who should be granted the power to determine local laws in Catawba County – counties or cities? If the answer is cities, Catawba County could end up with seven or eight different sets of local laws.

Untying a 45-year old legal knot won’t be easy. But, still, there’s not much doubt it would be preferable to what we are doing now.

Choices

The Trustees who run the State Health Plan faced a tough problem when they met last week: They were handed a report showing the plan – which pays for health insurance for 700,000 current and retired teachers and state employees – had unfunded liabilities of $32.5 billion.

What did the Trustees do about the plan’s debt? Did they cut costs?

No.

Instead, the Trustees voted to increase spending by adding a large new benefit to the plan – they voted to pay for sex change operations for state employees.

You couldn’t make this stuff up.

The Millionaire Next Door

In my last article, I explained how the Johnston County School Board spiked its Superintendent’s salary by $130,000 to increase his pension, how the Superintendent then retired at age 50 with a pension of $143,436, and how the State Treasurer then sent Johnston County a bill for $435,000 to pay for the ‘pension spike.’

Today, I’d like to discuss another side of the problem called pension spiking.

Say a private sector worker met with his financial planner and asked how much cash he’d need to put in his retirement fund or IRA in safe investments to be able to retire at age 50. Safe investments like the U.S. Treasury earn about 2.5% so a $143,000 pension is worth somewhere around $6 million. Which means to match the Johnston County Superintendent’s pension, a worker would have to be a millionaire six times over.

Of course, the Johnston County School Superintendent doesn’t have a $6 million IRA, but he receives a pension that is worth the equivalent of a six-million-dollar retirement account.

And whether you’re a school superintendent or another state employee that math makes pension spiking a sore temptation. It’s not surprising that, over the last two years, twenty of NC’s 115 school systems have received bills from the Treasurer for pension spiking.

Here in Hickory City a school system retiree made the list by retiring on August 1, 2015 while generating a pension spiking charge of $151,000. The school board gave him retirement plan with an investment value of around $4 million.

On July 1, 2015 a retiree in the Alexander County Schools made the list as well – when the Treasurer sent those local taxpayers a bill for $65,000 to pay for its pension spiking so he could retire with benefits approaching $3 million.

As I explained, gaming the pension system is a hard temptation to resist. But there’s a clear bottom line: The more spiking drives up the cost of pensions, the more money it takes out of classrooms.

A Silver Lining

Along with dropping temperatures, fall brings newspaper stories about shortages of school supplies and teachers paying for classroom supplies out of their own pockets.

But this fall the headlines also brought a different kind of story.

Not long ago the State Treasurer sent bills to four counties claiming they owed the State Pension Fund money for ‘pension spiking.’ Johnston County – which received an invoice from the Treasurer for $435,000 – is an example.

Here’s what happened: When state employees retire their pensions are based on their salaries. Just before Johnston County’s school superintendent retired the local school board increased his salary by a whopping $130,000. How the Board did that was interesting: It converted $44,000 in fringe benefits to salary, made $50,000 in special payments to the Superintendent, and paid the Superintendent $36,000 for unused vacation and bonus days.

Then the Superintendent retired at age 50 with a state pension of $143,436 a year.

The State Treasurer decided the Superintendent’s $130,000 salary increase was ‘pension spiking’ – and sent Johnston County a bill for $435,000. In effect, the Treasurer said to Johnston County, You have to pay for the pension spike not us. 

Johnston County promptly sued. And lost. But may appeal.

It’s worth noting that the State Superintendent for Public Instruction (who serves all 100 North Carolina counties) makes $127,561 – so the retired 50-year-old Johnston County School Superintendent will be paid nearly $16,000 more for not working than the State Superintendent will be paid for working.

Does that make sense?

We hear a lot about the challenges facing teachers in the classroom. And I believe that. We have lost focus on where education actually takes place. We lavishly fund pensions for bureaucrats and administrators instead of spending money in classrooms.

That’s a lot of less than happy news – but there is a silver lining in every dark cloud: At least, now, the next time a school needs classroom supplies, we know where to find the money.

Stop Digging

The story goes that when asked to name the most powerful force on earth, Albert Einstein replied, ‘Compound interest.’ I’m not arguing.

If you’re an investor and understand how to harness it that force works well.

But if you find yourself on the wrong side of that force it can feel like the scene at the end of the movie Thelma and Louise – where you’re sitting in a ’66 Thunderbird heading straight for a cliff.

And when it comes to the State Retirement Fund that’s where taxpayers are headed.

For decades, politicians have promised state employees and teachers they’ll receive fixed monthly pension checks and free medical insurance when they retire. Each year the state put cash in the Retirement Fund, invested the money, figured it would earn 7.25% a year, and that would pay the bills.

It worked fine until it didn’t.

In fact, the State Retirement Fund hasn’t earned a 7.25% return in 15 years – so instead of compounding interest it’s been compounding debt. But nobody seemed to notice.

One Wednesday morning a couple of weeks ago I started the day in Raleigh listening to a report about the Retirement Fund’s unfunded debt – which is $80 billion. This year state taxpayers paid $1.5 billion into the fund towards covering that debt. Within a decade that payment is projected to grow by $3 billion – to a total of $4.5 billion a year. And when that happens we face two hard facts: 1) We either cut spending, or 2) raise taxes.

Let’s put a spending cut that big in perspective: $3 billion a year is the approximate amount the state spends to pay for the entire UNC system.

It’s not a pleasant picture. But the debt is there. It exists. And there’s no avoiding it. So tax increases, spending cuts, or some combination of the two are going to happen.

But that’s not the whole story. The State Retirement Fund’s debt isn’t sitting there frozen. It’s compounding. And growing. The debt’s getting bigger every day. So isn’t the first step to stop incurring more debt?

Unless it’s ‘Not Possible’

When you take on a $80 billion debt you’d better keep an eye on whether it’s going up or down.

And $80 billion is roughly how much the State Retirement Funds are in the red.

The Pension Fund is run by the State Treasurer, who collects incoming payments from the General Assembly and current state workers, invests the money, and then, hopefully, earns a 7.25% return. And that’s how the Treasurer gets the cash to send pension checks each month to state retirees.

This system rolled along fine for years, until a seismic shift in markets and interest rates sent out a tremor that rocked the edifice. To stay in the black, the Retirement Funds need to earn a return on investments of 7.25% each year – but that hasn’t happened for the last 15 years.

Instead of interest compounding to help pay the Fund’s bills, it’s had debt compounding. This year state taxpayers paid $1.5 billion into the Pension and Medical Insurance Funds to cover debts. That payment is projected to triple to $4.5 billion over the next ten years.

Where will that additional $3 billion come from? Taxes.

Which brings us to the State Treasurer’s race. And the NC Retired Government Employees Association’s newsletter, reporting Republican Dale Folwell’s and Democrat Dan Blue’s views on how to fix the problem.

Dan Blue III is an eminently qualified candidate. His studies at Duke earned him a BS in Engineering, a J.D. and an MBA. And as a former investment banker, he surely understands the problems the Pension Fund faces.

But no one figures the best way to get elected State Treasurer is to announce you’ll ask the General Assembly to raise taxes $3 billion to keep the Retirement Funds afloat.

Nor, at the same time, does anyone figure it’s a good idea to tell 900,000 state retirees they won’t be getting more money in their retirement checks (say for cost of living increases) because the Retirement Funds are in the red.

So, Mr. Blue didn’t exactly grab the bull by the horns.

Instead, he told retirees what they wanted to hear: He said he’s all for giving state retirees more money and higher pensions and COLA increases – then he added, Unless it’s ‘not possible.’

It was like watching Santa Claus telling a child he’d bring him every gift he wanted for Christmas – then adding, Unless it’s not possible.

What’s the Number?

It’s a dry subject, but a storm is forming offshore that could cost taxpayers billions.

Here’s how the NC’s pension plan works: Say the state hires 25-year old man and promises to pay him a pension. That amount, when he retires in 30 years, will be determined by a formula- but let’s say his pension will be $50,000 a year.

For the next thirty years, both the employee and the state each pays a fraction of his salary into the state pension fund. The Pension Fund, itself, which is managed by a Board of political appointees, invests the money.

In theory, when the worker retires, the money he has paid in, plus the money the state has paid in, plus the money the Pension Fund has earned on its investments – like Treasury bonds – will be enough to pay his $50,000 a year pension.

But what if it’s not? What if – 30 years from now – the money in the fund will only pay him a $35,000 a year pension? If that happens the state steps in and pays him the additional $15,000 each year.

It’s what’s called a Defined Benefit Pension Plan. And it’s great for workers. No matter what happens to the economy – dips, recessions, stock market meltdowns – state retirees face no uncertainty.

At one time these defined benefit plans were commonplace. But with all the ups and downs in the economy over the past decade governments are now about the only ones still offering them.

Most private companies long ago changed plans – where they say to their employees, You invest part of your salary in a pension plan, we’ll match part of your salary, then whatever the plan earns over the years will determine how much pension you receive.

Now, NC is obligated to pay state retirees nearly $69 billion in pensions. But the latest projections show the pension fund will only have the money to pay out $65 billion. So there’s a $4 billion shortfall (or unfunded liability) taxpayers will pay. That’s a problem. But given the size of the state budget it’s not an end of the world problem.

Except there’s another hitch.

To end up with only a $4 billion deficit the Pension Fund will have to earn a 7.25% return on its investments each year.

But can it?

Once upon a time earning a 7.25% return on investments – like Treasury Bonds – was simple. But then the world changed: Markets collapsed and interest rates turned upside down.

Today, the 30-year return on U.S. Treasury bonds isn’t 7.25% – it’s 2.5%.

That creates a massive problem for the state Pension Fund – which the political appointees on the Board ignore.

When the Board met in January it chose, even in the face of overwhelming evidence, to not adjust the retirement fund’s projected returns. It voted overwhelmingly to stick with the 7.25%.

Now surely the Board Members know, just as average citizens know, that a return on investment of 7.25% in today’s world is a dream. But in government decisions about spending money aren’t always rational.

So what’s the difference between a return of 7.25% and a return of 2.5%?

The result is shocking: Instead of a $4 billion deficit (or unfunded liability) the Pension Fund’s deficit soars to $47 billion – and taxpayers will be on the hook to pay every penny of that money.

By their nature, politicians aren’t inclined to face a multi-billion-dollar crisis that’s years away. Plus, state workers want bigger pensions – which isn’t likely to happen if the Pension Board projects a $47 billion hole in the budget. So ignoring the problem will work out fine for the politicians and for the political appointed board. By the time the storm makes landfall they will have long since retired. And paying those unfunded liabilities will be someone else’s problem.

By ignoring this problem and dreaming of 7.25% returns the Pension Board has us heading straight for a fiscal cliff. But it may also be true that using today’s Treasury rate of 2.5% is too low. The actual return may well fall somewhere between 2.5% and 7.25%. The problem is figuring out where.

So here’s the billion dollar question: What’s the number?