RALEIGH — State agencies would have to reimburse the state retirement system for costs associated with allowing employees to pad their incomes to earn more lucrative pensions under legislation expected to get a House hearing this week.
House Bill 1195, Fiscal Integrity/Pension Spiking Prevention, has been assigned to the House State Personnel Committee, where chairman Jeff Collins, a Nash County Republican, said his staff is preparing it for discussion on Wednesday.
“We’ve known for some time that there have been a few episodes of pension spiking where people have had their salaries raised extravagantly in the last few years of their careers, either state or many times local government employees, to get their pension higher than it would be otherwise,” said Collins, a primary sponsor of the bill.
The bill “certainly should be a deterrent to continuing to carry on with the pension spiking behavior,” Collins said.
The anti-spiking law is just one of several efforts to inject more integrity into the $87 billion Teachers and State Employees Retirement Systems. Collins and state Rep. Stephen Ross, R-Alamance, also a primary sponsor of that bill, have introduced jointly other legislation for consideration in the short session.
House Bill 1079 would create a compliance unit in the state treasurer’s office to keep fraud, waste, and abuse in the retirement system in check.
House Bill 1209 requires an independent, third-party audit of financial statements prepared by the state treasurer for retirement system investment programs. It is an outgrowth of concernsraised by the State Employees Association of North Carolina over a lack of transparency regarding how the system’s funds are invested.
An independent examination of the retirement system performed for SEANC alleges that Treasurer Janet Cowell, who has sole fiduciary responsibility over the fund, swept $30 billion into secret investment accounts, lost $6.8 billion, and reported only half of the $1 billion in fees paid to Wall Street money managers and political insiders. Cowell’s office denies those findings.
Ardis Watkins, SEANC director of legislative affairs, said the association has no problem with the anti-spiking pension measure, but called it “a window-dressing bill” to give the impression reforms are taking place.
“There’s not one thing they could do that would be more meaningful to the system than to show exactly what fees we are paying,” Watkins said. “They don’t want to do that, so we’re seeing bills like anti-spiking.”
“Spiking … is not rampant. This is not something everybody in the system does. This is isolated to probably 200 incidents a year,” and typically involves high-paid positions, Ross said. For that reason only employees paid more than $100,000 annually are subject to the proposed law.
“But when [incidents of spiking] happen they’re usually large amounts of money, and it takes away from everybody else’s retirement benefit because it costs the system,” Ross said.
The bill is “only one of a number of issues that we’re tackling. I guess they would say everything we’ve done is window dressing,” Ross said.
One common method to spike a pension is for an employee to defer payments for items such as signing bonuses, unused sick leave and vacation time, and other money not considered direct compensation. Pensions are determined in a complex formula based on the last four years of work income, so inflating compensation in the final years boosts pension benefits.
When those accumulated dollars are lumped together at the time of retirement, they “grossly inflate” the last year’s compensation, Ross said. That, in turn, jacks up the calculation for the employee’s pension to a higher rate.
Collins said a simpler fix than the complicated formula that was devised in the anti-spiking bill would have been to use a longer period of time, such as eight or 10 years, to calculate average pay on which to base the pension annuity.
“I think we would have had agreement from a lot of the groups fall apart if we tried to extend the four-year average to a longer average. I don’t think any of the state employees groups would agree to that,” he said.
The bill also imposes a cap on how much an employee’s pension may be. Once a certain level of deferred income has accumulated that would spike the pension calculation, the employing agency would be notified. The agency then would decide whether to keep compensation at the capped level, or exceed the cap and pay the difference back to the retirement system.
H.B. 1079 would add two compliance officer positions to the treasurer’s office to recover an estimated $1 million in annual pension overpayments, Ross said.
The compliance officers also would collect fines and penalties that are assessed to plan participants, but generally are not recovered because of lack of existing staff, Ross said.
More substantive reforms, including a move to transfer Cowell’s sole fiduciary responsibility of the retirement system to an oversight board, are expected in the long session next year, Ross said. North Carolina is one of only four states that grant sole authority over state retirement investments to one person.
“I can’t speak for her, I can’t say that she’s on board or not,” Ross said. “They understand that that’s the direction we’re going. Can we get it done? I don’t know, but we’re certainly going to make the case for it.”
He said changing investment oversight of the system would require more work than could be accomplished in the short session. “In the long session you’re going to see much more oversight coming into the plan,” Ross said.
Also contemplated for the long session, Ross said, is creation of a defined contribution pension option in addition to the existing defined benefit model.
Under the current defined benefit pension the state guarantees a certain retirement income based on a set formula. The employer is responsible for administering it. In a defined contribution model, the employer pays into an employee account, and the employee decides how to invest it for retirement income.
“We’re not throwing out the defined benefit in lieu of the defined contribution,” Ross said. But exactly what shape the new plan would take is still very much a work in progress amid several options on the table, he said.
One possibility would be for new employees to be in a defined contribution plan.
“Defined contribution is preferred by younger employees because it’s portable,” and if they leave government service after a few years, they can take it with them, Ross said.
Those workers who remain employed with the state long-term may be offered a one-time option to convert to a defined benefit plan, Ross said.
Dan E. Way (@danway_carolina) is an associate editor of Carolina Journal.