State lawmakers have enacted changes to the pension system that will allow some highly paid employees to continue working without the threat of losing a portion of their retirement income.
The changes could also deflate a growing battle between public employers and the state retirement system over who should pay the cost of pension bills for highly paid employees whose impending retirements were triggering two pension caps.
Earlier this year, the UNC Health Care system was staring at a bill for one employee for more than $1 million, a cost triggered by those pension caps.
The new law permanently extends what is called the Qualified Excess Benefit Arrangement program. Money in the fund was used to pay the portion of retirees’ pension that exceeded a federal cap. Money for the fund came from government agencies that pay into the state retirement system.
That arrangement rubbed some state employees the wrong way because the state’s rank-and-file employees were essentially subsidizing a portion of the retirement payments of high-salaried workers. Many of those lower-level employees would never qualify for an excess-benefit payment in retirement because their pension payments are not that large.
Some of those retirees currently drawing from the excess-benefit fund boosted their pensions by converting benefits into salary as they neared retirement. That meant they and their employers’ contributions to the pension system were less than what the retirees were expected to draw from it, and everyone else in the system would end up subsidizing those pensions.
“I think these end-of-career big jumps in retirement really do negatively impact the total pension funds and could impact those employees that contributed at a regular rate,” said Richard Rodgers, the executive director for the North Carolina Retired Governmental Employees’ Association. “I agree that these folks have earned it, but I think they haven’t been putting it into the system over the long haul. And I don’t think the pension system should have to bear the burden.”
Under the new law, the excess-benefit money will remain available to high-income pensioners who continue to work past Aug. 1, when the fund would have expired. But the agencies they work for will have to pay more into the system to offset the higher costs of their pensions once they do retire.
Who should pay?
The federal cap limits how big a pension a public employee could receive. The excess-benefits fund pays the amount above the federal cap.
Some employees across the state retired early to access the fund before it expired. But in a kind of domino effect, the early retirements triggered a state cap that sought to discourage pension spiking – the sudden increase in salary to employees in the latter stages of their career designed specifically to boost their pension payouts.
The UNC Health Care System wasn’t alone in getting big bills from the state retirement system. Nearly 50 state and local entities had been billed in the tens to hundreds of thousands of dollars to cover pension costs. Those billings have prompted four school districts, including Johnston County, to sue the state retirement system, saying they didn’t get proper notice about that part of the law.
While every employer will still contribute to the excess-benefits fund, their money will no longer go toward individual retirees who have triggered the federal cap and who retire after July 31. The State Retirement System will now send the retiree’s last employer an invoice. Those monthly payments tend to be thousands of dollars.
Rep. Nelson Dollar, a Cary Republican and top budget writer in the House, said lawmakers thought “the pension fund should not pick up the extra expense.”
Only employees hired before Jan. 1, 2015, will benefit from the excess-benefit payments.
The excess-benefits law was originally set to expire on Jan. 1, 2015.
However, numerous officials, including former Johnston County Schools Superintendent Ed Croom and officials at the UNC Health Care System, lobbied state officials in 2015 to get rid of that expiration date.
Lawmakers didn’t make the special fund permanent then. They extended it until Aug. 1 of this year. That just put off the problem for several more months, and as that date drew closer, more employees around the state began announcing they would retire early.
At UNC Health Care, a small number of university employees, mostly high-ranking, were among those announcing their retirements.
“The employees who would have been immediately affected included several clinical chairs of departments, as well as several nationally renowned physicians who are long-time employees,” Joni Worthington, a spokeswoman for UNC, said in an email. “Having to replace these physicians/leaders (particularly all at one time) with individuals of comparable specialized expertise and experience would have been extraordinarily difficult and extremely costly for the University and the state.”
In Johnston County Schools’ case, Croom decided to retire at age 50, which helped trigger a state cap on what the State Retirement System can pay.
His age and salary weren’t the only reasons his pension exceeded the cap. Croom’s contract allowed him to convert roughly $44,000 in benefits into salary. Some lawmakers were upset to learn about the impact his benefit conversion had on his pension. Legislation was filed in the House and Senate to prevent that sort of maneuver but didn’t pass.
The retirement system so far has sent out 53 bills to state and local public employers, a number that rose significantly after the temporary extension of the fund to Aug. 1. Those employers have paid all but 15 of those bills in part or in full.
While most of the bills were in the tens of thousands of dollars, a few surpassed $500,000. The UNC Health Care System received multiple bills, but its largest was $1 million.
But now that the special retirement fund is permanent, those UNC Health Care officials who were on the verge of retirement have rescinded those plans, Worthington said.
Brad Young, a spokesman for the State Treasurer’s Office, said one invoice sent to UNC Health Care has been canceled. That invoice appears to be the million-dollar bill.
When that employee does retire, UNC is likely to get another, smaller, bill, depending on how long much longer that employee works.