The state of North Carolina promises lifetime pension benefits for state workers and teachers if they’ve worked in their jobs long enough to qualify. State Treasurer Janet Cowell appointed a group this year to study whether the state pension system needs any changes for the future. The group meets again Aug. 23. Chairman Robert Clark is a professor of management innovation and entrepreneurship and professor of economics at N.C. State University. Earlier this year, Clark discussed the group’s goals with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Kokai: First of all, how does North Carolina’s system of pensions for state workers and for teachers compare to what other states do? Other states have their pension plans. How does ours stack up?
Clark: Well, North Carolina has a defined-benefit pension plan for its public-sector workers. It is what most states have. It’s the norm among the states. The generosity of North Carolina’s pension plan is consistent with sort of the average of other states — a little on the low side in terms of the generosity parameters. To calculate the benefit for North Carolina, they take the high of four years of earnings. They use that as a final average salary. They multiply that by a generosity parameter that’s 1.82 percent per year of service. So you multiply 1.82 percent times the number of years and then multiply that times your final average salary.
Each of those two parameters — the final average salary and the generosity parameter — are choice variables of the state, and they can change those for future employees. If you look at what other states are doing, 1.82 percent per year of service is a little bit below the average of all the states. Not too far below, but a little bit below. The averaging period is probably, again, right about the norm. So, in general, I’d say that the pension system is competitive but not as generous as the average of other states.
Kokai: You are participating and, in fact, chairing a group that is looking at North Carolina’s pension system and what ought to be done differently, if anything, in the future. What kinds of things is this group going to be looking at?
Clark: Well, our charge is to look at the entire pension system and make recommendations. The basic idea is that we’ve had a successful pension plan for a number of years — 50 or so — and it’s worked well. People have gotten good retirement benefits. The question is, now, is that still the right system for the next 50 years? And our charge is to look at the benefit formula, the structure of the plan. Is it generous enough? Is it too generous? How might one change it to appeal to different kinds of workers? Do we have the right mix of benefits that go to short-career workers versus long-career workers? Do we have the right retirement age? Just a whole set of things that one could look at.
The treasurer charged us with a comprehensive assessment of the pension plan. She did not put any particular restrictions on us in terms of scope, or didn’t say, you know, we need to make the plan more generous or less generous. And so we are operating, trying to assess the system, its cost and its benefits, and how we could alter that. Obviously, we can’t alter it, but we can make recommendations to the legislature to alter the system, to make it better in the future.
Kokai: Going forward, how much of the study is going to be looking at the long-term costs? Is that a key issue that North Carolina needs to address, no matter what it does?
Clark: Certainly, you have to be cognizant of the cost of a program, and you want to think about it in terms of the total compensation of workers and also how it affects the state budget and other services the state provides. So, yes, one ought to be thinking about that. The North Carolina system is reasonably well-funded, certainly relative to the other states. In terms of its funding ratio, North Carolina would be at the top there. So we have been consistently contributing money into the system, both from the employer and the employee. The money has been managed in such a way that the funding ratio is about at 100 percent. [Editor’s note: Clark offered these comments before the General Assembly decided this year not to make the full annual required contribution to the pension fund. This is the first year in the history of the pension fund that North Carolina has not made that full contribution.]
The way they measure it, one can argue with some of the assumptions, if you like. But relative to the other states, using the same assumptions, North Carolina would be an outlier at the top in terms of the funding status being well-funded. But that doesn’t mean that you wouldn’t want to continue to look at this, from a cost standpoint, because it’s still requiring annual contributions of the state and the workers. But whether or not we’re putting the right level in and who’s paying that level, I mean one could consider, are the contributions that are imposed on workers competitive with other states? There we tend to be a little on the high side, but again, not much out of line there. And so you could look at that and say, look at the whole funding process of the system, and think about should there be changes there. But there’s no immediate crisis in North Carolina, as we see in other states, such as California or Illinois or a few others.
Kokai: One of the things that you mentioned in a presentation to the John Locke Foundation Shaftesbury Society, though, speaking of crisis, is that along with the pension fund, there’s also a retiree health plan in which there is an unfunded liability. You said that not only in North Carolina, but nowhere it seems, have these been considered in tandem. Is that something that needs to be done?
Clark: I would argue that we ought to consider the total compensation that we pay employees and that you ought to think about retirement benefits in a unified sense and see what makes sense from both the pension side and the health side. North Carolina has a relatively large unfunded liability associated with retiree health — one of the largest in the country. And we’ve had very recent change that restricted the benefits a bit for future workers, but [it] will take a while for that to work through the system.
I think a big issue that ultimately will have to be addressed is, do we ever want to fund that or do we want to continue to pay for retiree health on a cash-flow basis or pay-as-you-go basis. A number of states have thought about this, but relatively few states actually have built up any … fund to support their retiree health plans.
Kokai: Looking forward and planning out what your group has to look at before you turn in a report in the fall, what are the key decisions that ought to be made about this pension system? What has to be checked off your list that we need to decide to do — X or Y, A or B?
Clark: Well, the commission is moving forward by first trying to look at all the factors that should influence those decisions. … One question is, are we competitive so that we are attracting the right kinds of workers? We could look at other states nearby. We’re going to talk to some human resource folks in the public sector to see what their concerns are. And so learning about the system and learning about how the system affects workers and learning about how the system affects the state budget is what the commission needs to do first, before it can make any recommendations.