State employees would be given alternative investment options and greater control of their retirement plans under cost-saving pension reform strategies that are gaining support as the upcoming General Assembly session looms, key legislators say.
The most likely reform would be to add a defined contribution plan option to the existing defined benefit model, or melding the two into a hybrid system. Defined contribution plans are growing in popularity among millennial generation workers and in the states. But any changes in the current defined benefit system would face staunch opposition from state employee groups that insist on the guaranteed returns such pensions promise.
“I think there’s a number of people interested in looking at [a defined contribution option or a hybrid system] from conversations I’ve had. I think it’s something that at least will have some impetus going into the long session,” said state Rep. Jeff Collins, R-Nash, chairman of the House State Personnel Committee.
“I’ve got a feeling there’s going to be some start-up costs, but long-term it would wind up saving us quite a bit of money, so I’m interested in seeing if we can’t pursue it,” Collins said.
“We’re being told by a number of departments that it would be a recruiting tool for them because a lot of the young, bright people they would like to recruit don’t see themselves being 30-year employees with just one employer,” Collins said.
Those younger workers more likely would prefer a defined contribution plan that’s portable, and could be taken with them when they go to their next employer, Collins said.
A defined contribution plan allows the employee more flexibility to determine how much, and where, to invest in retirement plans. The employee owns the plan.
Defined contribution has higher individual risk because there is no taxpayer bailout if the employee’s investment choices don’t perform as well as hoped. But it can earn more money if investments outperform expectations.
By contrast, the employer chooses a defined benefit plan, which remains locked with the employer after an employee leaves. It pays a guaranteed monthly amount for as long as a retiree survives. North Carolina state employees contribute 6 percent of their income to the plan. It is more costly for the state because taxpayers must close the gap when investment earnings don’t meet necessary levels to fund future payouts.
The state treasurer’s office administers the $87 billion state pension plan.
“I don’t know if the treasurer’s office is as excited about this as they are about some of the things we’ve already done, [limiting] pension spiking and some of those things,” Collins said.
“We have not finalized our legislative agenda for the 2015 session and do not see this issue coming up, but are ready to work with lawmakers on any public employee retirement issues that arise,” said Schorr Johnson, treasurer’s office communications manager.
Johnson said the treasurer’s office has “one of the most solid defined benefit pensions in the country, and an excellent offering of optional defined contribution plans as well.”
Various sources have ranked North Carolina’s pension plan as high as the second-best-funded in the nation, though there are differences of opinion over whether it is underfunded by $15 billion or has assets of $1.1 billion above its liabilities.
It is uncertain whether the Senate might make pension plan reform a priority.
“Senate Republicans are still discussing their policy goals for 2015, so at this stage it is premature to speculate on legislation that may come up in the long session,” said Shelly Carver, a spokeswoman in Senate leader Phil Berger’s office.
One vocal opponent of adding a defined contribution plan to the pension mix is the 55,000-member State Employees Association of North Carolina.
“Of course we like the defined benefit concept, and we want to stay with the defined benefit concept,” said SEANC lobbyist Mitch Leonard. “A defined benefit plan to us is just a better type of plan, more security for the employee, and that’s where our interest lies.”
SEANC members oppose diluting the current pension structure with a defined contribution plan because that would shift investments away from the longstanding defined benefit plans and could jeopardize future payouts of that plan, Leonard said.
The UNC system is the only place in state government that offers its employees the option of choosing a defined contribution or a defined benefit plan, he said. Legislation creating the dual options was passed in the 2011-12 session.
Some SEANC members in the university system “have chosen a defined contribution plan, not understanding fully what they were doing,” Leonard said. When they decided to switch back to defined benefit plan they learned that is not allowable under the university structure.
“That’s not surprising” that SEANC opposes creating more choices for employees, Collins said. He has not heard backlash from state employees to making such structural change.
“I don’t think it’s progressed enough to where the rank and file have really gotten involved in it,” Collins said.
Empowering employees to choose a plan voluntarily that best suits their needs would be unlikely to create pushback “unless they get stirred up by someone who leads them to believe that it will cause the defined benefit plan to be underfunded,” Collins said. “That would be the only scare tactic.”
State Rep. Stephen Ross, R-Alamance, chairman of the House Committee on Treasurer Investment Targets and State Employee Retirement Options, and a member of the State Personnel Committee, supports creation of a dual-option retirement structure by adding a defined contribution alternative.
“The problem that you run into is that mathematically it’s something that you have to do on a gradual basis, it’s something that you have to work out a lot of logistics … where you’re not torching the other plan, so to speak,” Ross said.
While many unanswered questions remain, “I do think that ultimately we will see some form of defined contribution plan,” Ross said.
“One of the things that we have talked about is having a hybrid” that would allow employees an opportunity at some point to move money they accumulated in one plan to the other as their priorities change, he said.
According to a report released earlier this year by the Center for State and Local Government Excellence, 48 states offer at least a supplemental defined contribution plan. About 11 percent of public sector workers now have a primary defined contribution plan, and that is expected to rise to 19 percent by 2042.
Dan Way (@danway_carolina) is an associate editor of Carolina Journal.