Large payouts strain state pension system

Staff WriterJune 13, 2010 

Charles R. Franklin Jr.

  • North Carolina's public pension plan gets its money from employees, taxpayers and investment gains. Here's a look at contributions for the past 10 years:

    Calendar year

    Employer Contribution (in millions)

    Employee Contribution (in millions)

    2000

    $630.5

    $580

    2001

    $224.7

    $607

    2002

    $108.9

    $667.5

    2003

    $28.1

    $663.1

    2004

    $161.2

    $672

    2005

    $274.3

    $705.5

    2006

    $363.6

    $745.2

    2007

    $388.5

    $797.7

    2008

    $502.7

    $843.4

    2009

    $491.8

    $846

    Source: Department of State Treasurer

  • This is a list of the 10 highest pensions being paid to retirees of state and local government in North Carolina:

    1. Charles R. Franklin Jr. $211,373

    The former area program director for the Albemarle Mental Health Center was fired last year. His $319,000 in annual salary and benefits drew statewide attention in 2007.

    2. Bernadette Gray-Little

    $209,337

    She was UNC-Chapel Hill's provost (the chief academic officer) until last year, when she became chancellor at the University of Kansas, where she draws a $425,000 annual salary.

    3. Dean Smith $199,953

    The former UNC basketball coach retired as coach in 1997 but continues with the team as a part-time special assistant, making $11,600 annually.

    4. Frank C. Wilson$196,731

    Wilson has served in several roles at UNC-Chapel Hill's medical school, including a stint as acting dean for graduate medical education. He now works part time as a distinguished professor and chief emeritus, making $16,530 a year from non-state funds.

    5. Billy Williams$194,858

    The former Alcoholic Beverage Control administrator for New Hanover County. His high salary and benefits prompted calls to reform the ABC.

    6. Dr. Timothy Taft$184,865

    The former director of sports medicine at UNC-CH's medical school, he now works part time as a distinguished orthopedics professor making $182,930 a year from non-state funds.

    7. James G. Turcotte$173,654

    The former manager of the Pitt-Greenville Airport retired last year. The small regional airport has two gates and one commercial carrier, U.S. Airways, providing five flights to Charlotte daily. Officials declined to provide Turcotte's salary in his final year of employment, saying it was not public information under the state's personnel law.

    8. Dr. Colin G. Thomas$168,959

    Another UNC-CH medical school retiree, Thomas was the longtime chairman of the Department of Surgery. He now works part time as a distinguished professor and chair emeritus making $18,311 annually.

    9. Dr. Wesley C. Fowler$168,900

    The former director of UNC-CH medical school's gynecologic oncology division, Fowler continues to work at the school part time as a distinguished professor. He makes $211,507; all but $14,500 comes from non-state funds.

    10. Dr. William E. Easterling$168,193

    A former associate dean for continuing medical education and alumni affairs at UNC-CH medical school.

    State law allows retirees to return to work part time at up to half of their final salaries and still collect a full pension. State retirees can also collect a full pension while working a full-time job outside of state government.

    Sources: Department of State Treasurer, University of North Carolina, Pitt-Greenville Airport Authority, news reports

  • Because of declining investment returns for the pension system, local governments will have to raise their contributions in the coming fiscal year. Here are the additional payments due from Triangle governments:

    City of Raleigh$2.9 million

    Wake County$2.7 million

    City of Durham$1.8 million

    Durham County$1.3 million

    Town of Cary$921,000

    Johnston County$590,000

    Orange County$625,000

    Town of Chapel Hill$517,000

    Source: Department of State Treasurer

In 2005, Charles R. Franklin Jr . filed for retirement after running the Albemarle Mental Health Center for 34 years. The first and only director of the public agency serving northeastern North Carolina - one of the state's poorest areas - started collecting an annual pension of $145,000.

But Franklin didn't really retire. He returned to the center as a contract employee, with pay and perks totaling $289,000 one year and $319,000 the next. When the state Treasurer's Office learned of the arrangement, it said the contract violated state law; he was forced to return the pension funds he had received.

The lucrative deal caught the attention of news reporters and the state auditor, and suddenly everyone knew about the free spending and mediocre service of Franklin's center. By early 2009 he had been fired. The center was shuttered, a victim of mismanagement, lavish benefits and financial conflicts of interest.

But for taxpayers, that's not where the story ends. Today, Franklin is receiving an annual pension of $211,373, a 46 percent increase from what he would have gotten if he had really retired five years earlier. State records show he is the top-paid pensioner in all of state and local government, one of just two retirees receiving more than $200,000 a year.

Payouts such as Franklin's come at a difficult time for pension funds, in North Carolina and the nation. Illinois and Louisiana, for example, are struggling to meet obligations, according to a recent study at Northwestern University.

North Carolina's $68 billion pension system is in better shape than most. But state Treasurer Janet Cowell, whose office administers the fund for state and local governments, has notified the agencies that they must soon come up with $440 million to rebuild the fund after investment losses.

Franklin, meanwhile, is collecting an additional $65,000 in pension funds each year because of his work after his first retirement, which ended with the messy closure of the Albemarle center.

Franklin, 68, of Greenville, saw little issue with his pension. "Your point?" he asked a reporter. He declined further comment.

Former State Auditor Les Merritt's 2007 audit helped persuade the center's board to reduce Franklin's salary by nearly $60,000 before he was fired. Merritt said it's an outrage that Franklin's outsize salaries appear to have helped boost his pension.

"It's unconscionable that his pension would be based on his highest years' compensation," Merritt said. "Obviously, something's askew."

Checks until death

State and local governments in North Carolina use pensions as a recruiting tool, sometimes to overcome salaries that don't compete with private jobs. Employees contribute 6 percent of their pay, and the government matches with a percentage that fluctuates depending on the employee's department, investment returns and the condition of the state budget.

Employees are then rewarded until death with guaranteed annual payments of a percentage of their four highest earning consecutive years. An employee with 30 years' service can receive roughly 55 percent of that highest salary average. Judicial employees and state lawmakers can receive as much as 75 percent of their highest salary average.

Those payouts rely heavily on investment gains. Employees provide 29 percent of the pension fund's income, government accounts for 11 percent, and the remainder comes from earnings.

Taxpayers are the guarantors, periodically pumping in money through local and state governments when investments lag, such as during the past decade. Cowell, the state treasurer, told legislators last year that they needed to put in $359 million; she told local governments they needed to provide $82 million.

In this climate - and after recent government scandals - Gov. Bev Perdue and some lawmakers want to make it impossible for state employees convicted of corruption to receive their pensions. That would expand upon a 2007 state law that barred them for elected state and local officials who had not yet vested in the retirement system.

Former House Speaker Jim Black, now serving time in a federal prison, receives an annual pension of $42,860, even though legislating is considered a part-time job.

Former Durham District Attorney Mike Nifong, disbarred after misconduct in the Duke lacrosse case and held in contempt of court, gets $66,800.

Some other pensions attract attention just because of their size. Billy Williams recently retired as New Hanover's Alcoholic Beverage Control administrator after news reports about his $280,000 salary and benefits. Like Franklin, his pay was well beyond his peers'. His pension is the state's fifth-largest at $194,858.

Franklin was in charge of an agency with a $25 million budget that served 10 counties, providing mental health services and paying private contractors to provide care.

His management was so poor that the state Department of Health and Human Services took over the center's operations, which ultimately led to the center's closure. Health department officials were so troubled by what they encountered that they handed their findings to the local district attorney, Frank Parrish. Parrish said last week that he is meeting with an accountant to look through the findings to see if a criminal investigation is warranted.

"We have basically said you have failed in your whole reason for being," said Leza Wainwright, the state director for mental health services.

Joe Sinsheimer, a Democratic consultant turned government watchdog, said cases such as these show the pension system needs to be reformed.

"These guys get abusive salaries, and then the taxpayers pay for them, not just until it's uncovered, but until they die," Sinsheimer said.

Looking for spikes

The pension of Franklin - like Williams, a local employee - is No. 1. But there's little that treasurer officials will say about it because of the state's restrictive personnel law.

They did say it has been accurately calculated under state law, using the same formula for any local government retiree.

Michael Williamson, the director of the treasurer's Retirement Systems Division, said staff members look for unusual spikes in compensation to make sure employees about to retire aren't trying to artificially boost their pensions. Last year, state lawmakers, at the treasurer's request, passed a law requiring employers to notify the state treasurer of the pay arrangements for any retirees who return to work. Those employers who fail to do so can be hit with a financial penalty.

A recent three-part series in The News & Observer, "Keeping Secrets," found North Carolina's personnel law to be among the most secretive in the nation, providing little more than a public employee's current salary, position and most recent raise. The law makes it difficult for the public to understand how tax dollars are being spent for one of the biggest expenses in state and local government.

Other public records and news reports of the center's problems suggest that the Treasurer's Office, when it calculated Franklin's pension, factored in the high pay Franklin received as a contract employee. Treasurer officials said someone who was an employee-turned-contractor could have his or her compensation count toward the pension, so long as the employee or employer, or both, reimbursed the retirement system for the contributions that should have been paid during that period, plus interest.

Like nearly all state and local retirees, Franklin was required to put 6 percent of his pay toward his pension. But state and local governments are required to contribute as well. State government contributions are now generally running at 3.57 percent of pay, which Cowell wants boosted to 6.7 percent for the coming fiscal year. Local government contributions are scheduled to go up to 6.35 percent of pay on July 1.

There has been little talk about whether state officials should look at limiting pensions amid the budget tightening. But one legislator, Sen. R.C. Soles, a Columbus County Democrat, has sought to loosen the eligibility requirements further, to allow a local prosecutor who lost his re-election bid to immediately begin collecting his pension.

Big salary, big pension

Franklin's case shows the implications for pensions of abnormally high salaries. Even when the Albemarle center's board cut his pay to $225,000, he was still far and away the best-paid regional or local mental health director in the state, despite his center having one of the smallest clienteles.

The state audits also exposed that the Albemarle center paid the Social Security and Medicare taxes on behalf of Franklin and the rest of the employees. The center continued to pay the roughly $750,000 annual cost even as its budget woes caused it to turn away patients.

The state health and human services audit found that Franklin received $37,000 over two years as a board member of a bank that also had the center's business. The financial conflict was not disclosed in audits performed for the center.

Wainwright and DHHS, too, were denied an explanation from the Treasurer's Office as to how Franklin is now being rewarded with a $211,000 pension. Even the agency that primarily funded the center and Franklin's salary could not get past North Carolina's personnel law.

News researchers Peggy Neal, David Raynor and Brooke Cain contributed to this report.

dan.kane@newsobserver.com or 919-829-4861

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