How A New State Law Could Impact Pensions
by Paul Woolverton, Jan-April 2024 Living Power
A new state law related to the pensions of two of North Carolina’s largest health systems has stirred up controversy among stakeholders across the region.
The new law, called the Transformational Investments in NC Health, was created for UNC Health and ECU Health. UNC Health and ECU Health are the regional healthcare systems based at The University of North Carolina at Chapel Hill and East Carolina University in Greenville. Both are state agencies.
The law prohibits new employees at UNC Health and ECU Health from participating in the traditional state retirement program—a system that guarantees retired state employees an income for the rest of their lives after they retire. Instead, new employees at UNC Health and ECU Health would enroll in an investment program to save for retirement, but that program doesn’t guarantee a post-retirement lifetime income.
The Transformational Investments in NC Health law was part of the state’s 2023–2025 biennial budget, which the General Assembly approved in September. The law allocates $420 million to UNC Health and ECU Health for the NC Care initiative. The initiative is for health clinic and hospital construction and other medical services for rural areas of eastern North Carolina.
According to the office of State Senate President Pro Tem Phil Berger, some of the $420 million for NC Care is coming from the $1.6 billion “sign-on bonus” that North Carolina is getting from the federal government for expanding Medicaid health insurance to several hundred thousand uninsured lower-income North Carolinians. Funding for NC Care also comes from the State Capital and Infrastructure Fund, a fund the legislature established to pay for public infrastructure and facilities.
But State Treasurer Dale Folwell says this law threatens the stability and long-term health of the pension plan for retired state employees and future retirees. “This is a torpedo to the pension system,” he says. He believes the law also would drive up the price of providing health insurance benefits for state employees, and the costs could be transferred to the employees through their premiums or to North Carolina taxpayers.
Folwell estimated the liabilities to the pension and state health benefits systems could exceed $1.5 billion. The new law could have the collateral damage of putting increased income taxes on state employees by canceling the tax-deferred status of their retirement contributions, according to Folwell. His office oversees the state pension system and the state health plan medical insurance benefits system.
Critical Choices
The normal pension offered to state employees is the Teachers’ and State Employees’ Retirement System. But there also is an optional retirement program for employees of the University of North Carolina System, which includes all the state universities and UNC Health and ECU Health hospital systems. While the state treasurer’s office oversees the traditional pension program, the UNC System manages the optional retirement program. Employees of those health systems may participate in either retirement program.
In the Teachers’ and State Employees’ Retirement System, employees put in 6% of their salaries (and this money is tax-deferred, so it reduces the employee’s taxable income). The employing agency also contributes. The treasurer’s office invests the money, and when the employee retires, he or she will get a monthly payment based on how long they worked and the average of their highest four years of salary, a state retirement document says. Approximately 85% of a retiree’s benefits from the pension are derived from their own contributions and earnings.
“More than 90% of those who make less than $40,000 a year choose the retirement plan because it provides them with the certainty that they need when they don’t have the income to be retirement-ready on their own,” Folwell says. Among university employees earning more than $100,000, 58% choose the pension plan, and 42% choose the investment plan, says Patrick Kinlaw, the director of policy, planning, and compliance for the Retirement Systems Division at the treasurer’s office.
People who would like more control of their retirement planning can use the Optional Retirement Program, according to a guide published by the UNC System. As with the normal plan, employees put in 6% of their income (tax-deferred). Employees can direct the money to various mutual funds and other investment tools.
Folwell says the optional retirement program can be more attractive to employees with higher incomes. Regardless of whether the employees choose the standard or the optional retirement program, the state already offers all of them supplemental investment options to help increase their retirement nest eggs.
According to the Retirement Systems Division at the treasurer’s office, as of December 2022 there were 298,000 state employees contributing to the Teachers’ and State Employees’ Retirement System, and 21,000 in the UNC optional retirement program.
The treasurer’s office says that if UNC Health or ECU Health produce a new retirement program that allows employees to put in an amount other than 6% of their income (for example, 4%), the Internal Revenue Service could cancel the tax break that the employees receive on their retirement contributions.
The tax break on the retirement contribution reduces the employees’ taxable income. If an employee had a $50,000 salary, the 6% contribution is $3,000 and lowers the taxable income to $47,000.
The IRS requires the retirement contributions offered to the employees to all be the same percentage, according to the treasurer’s office. If UNC Health offers existing employees both the current 6% program plus a new 4% contribution program, the IRS could revoke the tax break for everyone.
The Big Picture
Dan Doonan of the National Institute on Retirement Security says employers in the public and private sector sometimes withdraw from their pension plans, and there are three concerns when that happens.
First, when UNC Health and ECU Health reduce their participation in the retirement system by excluding new employees, the agencies’ share of payments going into the retirement system will decline more quickly than the amount retirees drawing pensions from the plan are paid.
“What that means is, with any unfunded liabilities, there’s going to be a cost shift to the rest of the employers still in the system,” Doonan says. In this case, the other tax-funded state agencies.
Second, after the employer departs from a pension program, the risks involved in running the pension plan will be more concentrated on the remaining employers and employees. “If you have a Great Recession-type event, the employers who leave aren’t going to be there to help get things back on track,” Doonan says.
The third concern, according to Doonan, is ending up with a pension fund with more retirees and fewer workers.
“And when you look at private sector multi-employer plans that have struggled—and particularly coming out of the Great Recession—they tend to be the ones that had a lot of retirees and few workers,” he says. “Because there’s no way to get back on track if you start to get really retiree-heavy.”
When an employer or state agency exits a pension plan, it normally makes a payment to the pension plan to cover the financial liabilities it leaves behind for its employees who have been in the system.
That’s not happening with UNC Health and ECU Health, according to Folwell. “It’s a divorce where one party leaves the family and doesn’t pay the liabilities and debts they’ve left behind,” he says. Fowell estimates the health systems would have to pay more than $1 billion to make the state health plan whole, and more than $500 million to make the pension plan whole.
A study that Doonan and Tyler Bond of the National Institute on Retirement Security published in 2019 looked at what happened when pensions were shut down for state workers in several states.
When Alaska shut down its pension for state employees and teachers in 2005, it still owed pensions to workers who had already been in the system, the report found. Those costs grew into the billions. Meanwhile, after the pensions were eliminated, the state had trouble recruiting teachers, state troopers and other public employees. And people retiring without a traditional pension were more likely to suffer financial hardship.
The Alaska Beacon reported this past February that Alaska was considering reviving its pensions for state employees. It said a state study found that Alaskan government retirees relying on investment-based retirement programs were getting significantly less income than they would have if Alaska had not done away with its pensions.
Elsewhere, Michigan cut off new employees from pension eligibility in 1997. The burden on taxpayers grew to pay the retirements to the workers that had been in the system. And workers in the new, non-pension 401(k) were projected to receive only $300 per month on average, vs. $1,849 under the old pension plan, the study found.
Differing Opinions
But the two health systems say Folwell’s dire predictions for the retirement system and state health plan are wrong.
“ECU Health does not anticipate these changes will negatively impact the state of North Carolina,” ECU Health says in a statement. As of early November, details about the new retirement programs for UNC Health and ECU Health were unavailable.
In a statement to Living Power, UNC Health also defended the Transformational Investments in NC health law.
“These new benefits will mirror what other similarly sized health care systems in the state offer their employees,” says Alan Wolf, a spokesman for UNC Health. “That will allow UNC Health to better compete with the private sector on hiring and retaining employees by allowing for new retirement benefits, outside the ones normally offered by the state.”
The law also allows UNC Health to let existing employees switch to the new benefits plans, although there are no current plans to do so. “That is a new policy we could consider offering, but we are not obligated to do so,” Wolf says.
ECU Health says it “does not anticipate any impacts to existing state employees” based on its participation in the new law’s benefits programs. Of the 14,000 people at ECU Health, only 1,200 are state employees. The rest are private-sector employees operating under ECU Health and do not participate in the State Health Plan or state retirement system.
UNC Health has 30,000 people, with 13,500 state employees and 16,500 private sector employees, according to Wolf.
But NCRGEA executive director Tim O’Connell shares concern with this new law. He believes it will increase costs over time to these healthcare entities, those seeking healthcare, and even the taxpayers.
“There is some great empirical research highlighting the fact that defined benefit plans like a pension are nearly twice as efficient as defined contribution plans,” O’Connell says. “Pensions plans have distinct advantages by design with longevity pooling, portfolio diversification, and lower management fees. If these two state healthcare systems do away with the current pension and health benefits, they will either need to absorb these higher personnel costs that are then passed on to patients or reduce the employee benefits. Neither are great options.”
State loses their latest fight against Lake Case
In June of 2023, the State of North Carolina, including the State Health Plan for Teachers and State Employees and State Treasurer Dale Folwell, filed a Writ of Prohibition with the North Carolina Supreme Court seeking to overturn and prohibit the March 2022 Supreme Court decision on Lake v. NC State Health Plan from moving forward at the trial court level. The North Carolina Supreme Court’s March 2022 decision determined that eligible State employees have a contractually vested right in a noncontributory health plan for life, equivalent to the plan in place when a class member’s rights are vested.
On October 20, 2023, the North Carolina Supreme Court denied the Writ of Prohibition, allowing the case to continue to be adjudicated in the Gaston County, North Carolina Superior Court.
Use this link for more official NCRGEA information about the Lake Case: Lake Class Case – Gray Layton Kersh.
2023 Legislative Goals Update
LivingPower September/October 2023
Representing our state’s more than 357,000 state and local retirees, your NCRGEA board of directors, executive director, and government relations team create a series of legislative goals that best addresses the quality of life for North Carolina’s government retirees. These goals are developed to align with the legislative biennium, a two-year session consisting of one long and one short session, beginning in each odd-number year.
When the COVID-19 pandemic hit our country, there was a dramatic shift in the quality of life for everyone, including our members and all in retirement. NCRGEA worked to address this with more holistic and expansive legislative goals focusing on healthcare, telehealth, and broadband.
Our focus to keep our state’s pension system healthy and productive for you and generations of retirees remains steadfast. In this new age, job vacancies in all industries have increased substantially. This is especially true in government, where roughly 30 percent of public sector openings remain unfilled. Why does this matter to you? All public sector employees contribute to their respective pension systems. When vacancies are high, less employee and employer revenue is contributed to the pension systems.
Here’s a status report of 2023-2024 biennium legislative goals:
- Advocate for annual cost of living adjustments for all government retirees.
While the budget remains unfinished at press time, your NCRGEA government relations team has tirelessly pursued additional money for state and local retirees. Local retirees can only receive a bonus or COLA with approval by the Local Government Retirement System Board of Trustees. Such a vote will likely occur in January 2024. On our website, you can learn more about the Local Government Trustees and statutes relating to Local Government COLA processes. For state government retirees and retired teachers, bonus or COLA money is expected in the final state budget. We will send a legislative update to all members by email when the biennium budget is approved. - Strengthen the state’s defined benefit plan to attract and retain the best and brightest public servants.
Efforts to increase salaries for teachers and state government professionals are well underway, and such raises will be released when the state house and senate agree on a tax package as well as salary pay for active employees. - Ensure the State of North Carolina will continue to fulfill its constitutional requirement to fully fund North Carolina Retirement Systems and the State Health Plan.
The State of North Carolina is bound by the North Carolina Constitution and case law to guarantee pensioners’ benefits. The state will fully fund both the pension system and State Health Plan this biennium. - Increase in-person and telehealth access, improving health outcomes for retirees.
Healthcare for all North Carolinians has been a battleground in the General Assembly. The largest has been a shift in legislative opinion regarding Medicaid expansion. At the same time, significant legislation on how hospitals are approved and managed, along with bills focused on improving health outcomes for the elderly and children, have been debated. - Expand first, middle, and last-mile broadband opportunities to provide increased, dependable, affordable access to broadband.
Six broadband bills were introduced for the 2023 long session, many including expanded access in rural areas. An existing effort, the GREAT grant act, has included stepped-up funding since the pandemic. - Expand the Bailey tax exemption for state and local retirees and pursue other tax exemption opportunities.
Tax exemption bills for government retirees were filed in both the House and Senate. It appears future discussion of this type of legislation may roll into next year’s short session.
More details on the status of bills related to NCRGEA legislative’s agenda can be found on NCRGEA’s FastDemocracy Bill Tracker, that is available to you on our website.