State law imposes certain salary restrictions on teachers and state employees who retire and later return to government work.

In a budget bill approved in late 1998, the General Assembly made special provision for retired public-school teachers who returned to work. Starting in 1999, some of these teachers would be exempt from the salary cap. The exemption applied to retirees filling in for other teachers, or retirees taking teaching jobs at underperforming schools or schools with a teacher shortage.

A retired teacher would have to take a 12-month break from teaching, or else work only as a substitute teacher, before being allowed to return to regular work and simultaneously draw a salary. The teacher exemption took effect in 1999.
The exemption was expanded in 2000 to let retirees be hired as permanent employees at any school, regardless of whether the school is low-performing or understaffed.

Another broadening of the exemption took place in 2001, when the waiting period between retirement and re-employment was shortened from 12 months to six. There is a sunset clause in the exemption that has been extended from year to year. The exemption is currently scheduled to sunset June 30, 2005.

Teachers lost to other states

Linda Suggs, legislative director of the State Board of Education, sees a need for the exemption. She said that counties bordering on Virginia, Tennessee, South Carolina, and Georgia are losing veteran teachers to the public-school systems in those other states. Suggs said “we have a long border” with neighboring states that offer more attractive packages to veteran teachers.

A teacher from a county bordering Virginia recently emailed Suggs to say she can get a better deal in Virginia than in this state. Addressing the teacher shortage in the public schools includes getting veteran teachers to stay on, Suggs says. She said that teachers nearing retirement age could be induced to stay in the school system for a few more years “if we sweeten the pot enough.”

Ellen C. Greaves, executive director of the Professional Educators of North Carolina, said many veteran teachers “feel like they’d be fools to continue” after becoming eligible for retirement after 30 years. She said the state continues to “lose teachers who retire at the age of 52.”

Rep. Douglas Yongue, D-Laurinburg, himself a retired educator, is chairman of the Appropriations Committee’s Education Committee, and speaks of a shortage of teachers in the state. Re-employing retired teachers without subjecting them to the salary cap is “kind of a bonus thing” that could persuade long-serving teachers to continue in their posts. Yongue is a cosponsor of a bill (H247) that would extend the expiration date for the teacher exemption from June 30, 2005 to June 30, 2007.

Legislation for teachers

Another bill in the legislative hopper, H59, would extend the teacher exemption another year — to June 2006 — and broaden its scope so as to include “guidance counselors and media specialists.”

The budget bill in 2004 imposed a Reemployed Teacher Contribution Rate on school districts that hired retired teachers. School boards must pay 11.7 percent of any rehired teacher’s salary.

By the time in late July, 2004, when the budget bill containing the 11.7 percent salary contribution was approved, school districts had already made agreements with teachers for the upcoming school year, said Ellen Greaves of the Professional Educators of North Carolina.

Many school districts responded to the passage of the Reemployed Teacher Contribution Rate by imposing pay cuts on re-employed teachers so as to make up for the 11.7 percent charge. This is “certainly a disincentive” for veteran teachers who are considering returning to work after retirement.

The bill to extend the teachers’ exemption would also repeal the Reemployed Teacher Contribution Rate. Yongue would like to get rid of the 11.7 percent charge, but if it’s going to be paid he said he thinks it should be paid by the school boards, not by deductions from teachers’ income.

Linda Suggs said the Reemployed Teacher Contribution Rate has led to “disappointment” and “misunderstanding.” Suggs reports getting calls from re-employed teachers who complained about having the rules changed to their detriment.

Greaves said she doesn’t like the fact that retired teachers have to wait six months before returning to work. Greaves would like to see the legislature reduce it to two months. Yongue would also like to reduce the waiting period from six months to two.

Sen. John Garwood, R-N. Wilkesboro, has in the past introduced legislation to reduce the retirement waiting period by two months, but questions have arisen as to whether the federal Internal Revenue Service would accept this. Pension plans have to meet federal requirements in order to avoid tax penalties, and the “powers that be,” as Garwood expresses it, haven’t been able to get the IRS to rule on the issue. Without IRS guidance, Garwood said he’s “afraid to fool with it.”

Teachers and IRS tax code

There has been no shortage of effort by North Carolina to get the IRS to give some guidance. In 2002, the General Assembly called on the state treasurer’s office to get a private letter ruling from the IRS on how to allow for the re-employment of retired state employees and teachers without running afoul of the federal tax code.

The legislature was specifically interested in what constituted a “bona fide separation from service,” and in how long a retiree would have to wait before returning to work. In the 2004 budget bill, in addition to giving the Treasury’s Retirement Systems Division greater flexibility in seeking an IRS ruling, the legislature mandated that the division conduct a thorough study of the whole issue of postretirement employment and recommend “an efficient and fiscally sound policy.”

The resulting report of the Retirement Systems Division, released in February, said that the purpose of the state’s pension system is “to provide income security for old and incapacitated state employees.” Going beyond that purpose in order to supplement the income of veteran teachers who are working full time might not only raise problems with the IRS, but could lead to extra expenses, according to the report.

The report finds that the salary cap is consistent with the state retirement system’s purpose of providing retirees with a replacement for their former income, not an addition to it.

The cap ensures that retirees who return to work won’t get paid more than they were paid before retirement, counting both their pension and salary as income.

Teachers’ exemption from the salary cap is the sole existing exemption, the report said. When retired teachers are rehired at their previous salary while still drawing a pension, it could entail a de facto rate of pay that is about 150 percent.

“It is reasonable to expect,” the report dryly notes, “that the average employee offered an opportunity to increase his or her income by fifty percent (50%) would probably do so.”

Longley is a contributing editor of Carolina Journal.