Big DOT raises will bring pension costs that NC agencies and school systems must pay
Big pay raises for state transportation workers that were recently criticized by the state auditor will soon have big ramifications for the state pension plan, State Treasurer Dale Folwell said.
In late 2018, the North Carolina Department of Transportation began raising pay for more than 7,000 employees as part of market-based salary adjustments. Most of them received a double-digit pay increase; the highest raise was 65%.
The pay raises cost roughly $58.5 million a year. But they will also boost pensions when those employees retire. Folwell said in a recent news release the raises will eventually mean the pension system will have to add $176 million over the next 12 years to cover those costs.
Nearly all of the $176 million will come from contributions put in by other state agencies and school systems across the state.
“My responsibility is to protect the plan on behalf of ALL employees who teach, protect or otherwise serve the state or local communities,” Folwell said in an emailed statement to The News & Observer. “The NCDOT knew exactly what they were doing with taxpayer money during a time when they are broke.”
NCDOT spokesman Steve Abbott defended the raises, and said Folwell had not shared the projected pension system impact with the department before issuing his news release.
“The General Assembly created the program to address high vacancy rates across NCDOT,” he said in a statement. “Those efforts had a positive impact, allowing the Department to compete with the private sector to attract and maintain the highest caliber of employees who design, build and maintain our transportation infrastructure.”
The retirement fund’s actuary estimated the added cost for the pension system will begin next year with a $7 million increase, followed by $23 million for each of the fiscal years ending 2022 through 2032, and $15 million for 2033.
Who covers the costs?
When state and local employees receive big pay raises in their final years of service, the amount they and their employer put into the pension system plus the return on the investment of that money can’t catch up to the cost. Pensions are based in part on the average of an employee’s four highest consecutive years of pay.
That’s typically at the end of someone’s career. If the pay rises dramatically during those four years, the pension system can end up subsidizing the pension checks.
In 2013, The News & Observer showed how this could lead to big jumps in pensions for some that were paid for by everyone else. Some community college presidents received pension boosts as they neared retirement when their boards converted perks such as travel and housing allowances into pay.
The following year, state lawmakers passed a law that prevented the system from having to cover those costs for those who retired making more than $100,000. The state and local agencies those employees worked for have to make up the difference.
The law has sparked a long-running battle in state courts between the state treasurer and some local agencies that saw the cap as unfair. But as of last month, state records show state and local agencies have been charged a combined $30.7 million to cover those expenses. All but roughly $5 million has been paid.
Since the NCDOT raises were enacted, the agency has been billed $355,000 to cover seven retirees. One of those seven retirees accounts for the bulk of that money — $203,000 billed at the beginning of this year. The treasurer’s office has not determined whether those retirees were among those who were included in the pay-raise plan.
But since many of the NCDOT employees receiving raises do not make $100,000 or more, the pension cap law doesn’t come into play. The impact those raises have on the system will largely be borne by all the other state agencies and school districts in the system, Folwell said, forcing lawmakers to increase the amount those agencies will have to contribute so the pension fund can pay its obligations in future years.
The NCDOT raises drew ire from legislative budget writers. They said the provision they put into the 2018 budget was intended to allow NCDOT to use up to 2% of its payroll costs for the raises, but the department interpreted the provision to mean 2% of its total budget.
That translates to NCDOT thinking it had $152 million available instead of roughly $35 million.
The state audit said the department should have gone with the lower number, adding that extra pay was only for employees who agreed to forgo special payments for longevity and to give up “career status,” which provides some employment security.
“As a result, the Department gave its employees an unfair advantage over other state employees who were compensated in accordance with state compensation rules,” the audit said. “The Department also demonstrated to all other state agencies that noncompliance with state laws, whether intentionally or through lack of appropriate due diligence, has no consequences for the agency or management.”
The N&O first disclosed the pay raises in March 2019. State budget writers later sought to rein them in, but their colleagues — led by Rep. John Torbett, a Gaston County Republican — wouldn’t go along. In the end, the state Senate struck what one called a “gentleman’s agreement” that there’d be no more raises without informing lawmakers.
That left the NC Division of Motor Vehicles employees on the outside looking in. The NCDOT was conducting a review of their pay at that time, but then lawmakers became aware of huge budget shortfalls within the department caused by a combination of hurricane recovery expenses, legal costs from a long-running dispute over land takings and poor budgeting.
Lawmakers provided a $220 million bailout.
Abbott said the pay raise provision was only good for two years, and that period has ended. He said the department has been in a hiring freeze since April. The only positions being filled are “mission-critical or safety-related.”
Folwell, a Forsyth County Republican and former state lawmaker, did not propose the NCDOT rescind all or part of the raises.
“It’s not our place to tell any state or local employer what to pay employees,” he said. “It’s our job to protect others in the plan when the cost of their actions are paid for on the backs of others.”
This story was originally published August 3, 2020 at 12:08 PM.