Consultant: Treasurer needs more staff to guard against pension fraud

dkane@newsobserver.comNovember 19, 2013 

The state pension system has little fraud, waste or abuse, but it lacks the staff and policies to keep waste under control, a new consultant’s report states.

Buck Consultants, a human resources firm based in Dallas, said the state treasurer has a good system and a dedicated staff, but that’s not enough to avoid abuses such as pension spiking, the practice of raising pensions through system loopholes.

The consultants found, for example, that the treasurer’s staff does not investigate pay for possible spiking unless it immediately grows by more than 250 percent from the average of the previous year. In cases where pensions are incorrectly calculated, the treasurer’s office can reduce them.

That threshold for checking should be much lower, the report states, but it’s at that level because the office lacks staff.

The system also relies on state agencies and local governments to accurately report employees’ pay, resulting sometimes in pension overpayments that have to be recouped, the report states. A News & Observer review of data provided by state and local agencies found examples of misreported pay.

The office also acknowledged to the N&O that information on employee positions is lacking, which could make it difficult to identify undeserved pay increases that could later boost pensions.

“I don’t think we have widespread problems,” State Treasurer Janet Cowell, a Raleigh Democrat, said after the report’s release last month. “I would say that we need to modernize our operations.”

The review was partly driven by reports in the N&O and elsewhere of high pensions for officials in lesser-known areas of government that turned out to have been boosted by questionable pay.

Steve Toole, the Retirement Systems Division director for the state treasurer, said the relatively few cases of pension spiking mostly involve officials who persuaded their boards to boost their pay as they neared retirement.

Another issue for the pension system is sick leave. The report states that some state and local agencies have generous policies that allow large amounts of leave to carry over for pension purposes. That can drive up pensions because the sick leave extends someone’s years of service, adding value. Buck found many retirees with more than two years of accumulated sick leave, and at least one with nearly seven.

“Without limits on sick leave, local agencies with more generous sick leave policies are being subsidized by local agencies with less generous ... policies,” the report states. It recommended a cap on the amount of sick leave that can be carried over each year to 12 days. That means someone with 10 years of service could claim no more than 120 sick days toward retirement.

The report recommends increasing staff, partly through hiring contract employees during high-demand periods. A recommended reorganization of duties is underway to place more emphasis on making sure pensions are properly earned.

Toole said he and Cowell are advocating for legislation that would base pensions on the amount employees and employers contributed to the system. Called a “contribution benefits cap,” it would serve as a check on the long-standing practice of basing pensions on the highest four consecutive years of pay, which can expose the system to abuse because someone’s pay can be inflated for a relatively short period of time to boost their pension.

The treasurer’s office sought to get the cap passed in the last legislative session, but lawmakers did not take up the bill. Toole said he will try again next session. The office so far has an estimate of $375,000 to hire seven full-time staff members plus temporary hires during peak periods of pension work. They say that cost would be offset by savings of about $500,000 a year.

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