State lawmakers are trying to smooth a wrinkle in state and federal pension laws that could keep some highly paid and long-serving state and local employees who retired this year or plan to retire soon from receiving their full pensions.
For some high earners, this discrepancy could cost them tens of thousands of dollars each year when they retire because their state pensions would be above what they could receive under federal law. State officials say failing to meet that state pension obligation could trigger lawsuits.
The state Senate has put a provision in its budget proposal that would revive a special retirement fund so those who stand to make pensions above limits set by federal law would not see those pensions reduced. Known as a “qualified excess benefit arrangement,” it would protect employees who retire before Aug. 1, 2016.
State Sen. Tom Apodaca, a Hendersonville Republican and chairman of the committee overseeing pensions and retirement, put in the provision to give the UNC system more time to find a way to accommodate highly paid employees. The state’s universities are home to many of the state’s highest paid employees, from coaches and athletic directors to doctors and researchers.
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“Employees need notice of this issue and a fair opportunity to take steps to make sure that the benefits they earn are not reduced,” said Joni Worthington, a UNC system spokeswoman.
These employees have paid into the pension system what they were required to under state law to receive a pension that can be as much as 55 percent of their top salaries. But that pension pushes some top earners above a limit Congress put in place roughly 40 years ago, largely to prevent private companies from using pension contributions to shield their executives’ income from federal taxes.
The federal limit has been adjusted upward over the years. Last year, the limit was set at $210,000 for those retiring between the ages of 62 to 65.
Congress sought to help state and local governments by letting them create a qualified excess benefit arrangement, or QEBA. It’s a special retirement fund that pays out that part of the pension that would exceed the federal limit.
State officials didn’t see the need for such a fund for decades; no officials made enough money to exceed the federal limit. But that changed in recent years. In 2013, the state legislature created a temporary special retirement fund that ended in 2014.
Apodaca added the sunset, or mandated end to the law, so that state and local agencies could create other mechanisms for highly paid retirees that wouldn’t put the burden on the whole system. The special retirement fund is paid for by taking one hundredth of one percent of the contributions all employees make to the system. The fund spent $480,000 in 2014.
In October 2014, the UNC system’s Board of Governors took steps to create a special retirement fund that would only serve university employees, but university officials are still seeking help from lawmakers.
“I know the Board of Governors had passed their own QEBA, but apparently that’s not working for them,” Apodaca said in an interview.
UNC officials could not be reached for interviews about the issue. Worthington said in email responses that roughly 200 employees could face a problem with their pensions in the next several years.
“There are employees who are continuing to pay into the retirement system and will not be able to draw the amount of the benefits that they have earned with their contributions and service,” she said.
She said lawmakers could make the special benefit fund permanent, as have other state and local governments, or extend it long enough to help those employees as they retire. She said another possible fix would be to change state law to allow UNC employees in the pension system to move into an optional retirement plan that operates more like a 401K retirement investment account.
“We would hope that QEBA could be extended far enough in the future to enable alternative solutions to be adopted and implemented,” Worthington said.
Tackling pensions for high earners is a tricky matter because some employees have boosted pensions in controversial ways that have since led to reforms. In other cases, the pensions represent the continued pain taxpayers face when employees make too much money.
One of the 17 retirees benefiting from the temporary fund set up in 2013 is a community college president who had received a substantial pension boost when the college’s board converted housing, car and other allowances into salary shortly before he retired. Another is a former Alcoholic Beverage Control administrator whose pay was well above that of his peers across the state.
Apodaca said the State Treasurer’s Department is working on legislation that would eliminate the need for a special retirement fund in the future while making sure no employee is penalized on their retirement income. If that happens before the end of session, he said he would push to get it passed.
If that doesn’t happen and Apodaca’s provision doesn’t end up in the final budget legislation, he said state and local agencies will likely have to pay the difference between what the federal government allows and what the pension system provides for their retirees or face a lawsuit from them.
“Going forth, we’re not going to have this problem, but we’ve got to fix what’s already on the books, and it never seems to quite go away,” Apodaca said.
The pension problem
In 2013, state lawmakers created a temporary special retirement fund called a “qualified excess benefit arrangement” to help retirees keep the pensions promised to them under the state’s pension laws, which are based on a formula that uses the average of an employee’s highest four consecutive years of pay, plus the amount of time they worked.
Employees are required to kick in roughly 6 percent of their pay into the pension fund, while state and local employers kick in roughly 7 to 9 percent. State officials say those allotments, when invested properly by the state, are enough to pay for pensions when the employees retire.
The problem is that for some high earners, the state’s pension formula can lead to an annual pension that exceeds a federal limit. For example, John Kichak, the UNC Health Care vice president and chief information officer who retired in 2011, received a $186,917 pension in 2014, but $68,407 was above what the federal law allowed.
The special retirement fund has to pay that difference in order for the state pension fund to not run afoul of federal law.