Senate Republicans are again pushing State Treasurer Dale Folwell’s request to limit risk in the underfunded state pension plan by narrowing the number of retirement options.
The Repeal Risky Retirement Payments Act, as Senate Bill 374 is titled, divides Republicans against Democrats, and pits the N.C. Association of Educators against the State Employees Association of North Carolina.
The Senate Pensions, Retirement, and Aging Committee S.B. 374 Thursday, April 11. The Senate Rules Committee is scheduled to take it up Tuesday.
The bill would repeal two unpredictable retirement payment methods after July 1, 2020. Bill sponsors say those complicated alternatives make it difficult for the Treasurer’s Office and General Assembly to determine how much money to set aside each year to cover the retirement system’s future costs. Opponents say courts consider the benefits a property right and the benefits offer an incentive for people to work for the government.
North Carolina’s $94.2 billion public employees retirement system is one of the best funded in the nation. But it lost $4.1 billion in 2018, and has $17 billion in unfunded liabilities. National bond rating agencies increasingly frown on state pension deficits. Left unresolved, they could lower a state’s bond rating, causing higher interests rates when borrowing money for projects.
“The current path we are on is unsustainable, and if we don’t make these changes then the entire pension plan is at risk,” said Sen. Andy Wells, R-Catawba. He and Senate Majority Leader Harry Brown, R-Onslow, are primary sponsors of the bill.
“We owe it to our hard-working teachers and state employees to guarantee that everyone will continue to receive the pension benefits promised to them,” Wells said.
Under the bill, Social Security leveling would be dropped. It provides higher initial pension payouts to those choosing early retirement. Pension payments are reduced when the retiree collects Social Security benefits. The object is to keep the early retiree’s income stable before and after receiving Social Security.
Sam Watts, Treasurer’s Office legislative liaison, said Social Security leveling has complex administrative challenges. He cited recent audited accounts of 41 retirees who received $6.1 million in collective overpayments due to administrative errors.
State Treasurer Dale Folwell said the pension’s assumed rate of return is unrealistically high. The rate has failed to hit its target over the past two decades, and won’t achieve it in the next 20 years. Repealing two “pop-up” retirement options would help stabilize the pension.
Pop-ups allow pensioners to designate a spouse or child to receive some or all of their retirement benefits. If the designee dies before the retiree, the retiree reclaims full benefits. Folwell supported a similar reform last session in Senate Bill 117, but the measure didn’t pass.
“This is not about taking anyone’s rights,” Folwell said. “This is about keeping this plan intact, preserving it, strengthening it, and figuring out a way to sustain it for the next generation of public service workers.”
Committee Democrats said the changes would be unconstitutional. They would lead to court challenges similar to earlier ones which said defined pension benefits were a property right. Democrats also noted Gov. Roy Cooper vetoed House Bill 1055 last year over concerns about constitutionality and costs. That omnibus bill contained a provision similar to S.B. 374.
Sen. Joyce Waddell, D-Mecklenburg, said it would be a mistake to take away the early retirement option from teachers. They aren’t paid well, and that option is an incentive for them to enter the profession, she said.
Teachers lobbyist Marge Foreman said it is unfair to penalize educators for lawmakers’ failure to fund the retirement system, and for treasurers making bad investment decisions.
But SEANC lobbyist Suzanne Beasley said the employees association leadership diligently studied S.B. 374, and supports it. Making compromises to keep the pension plan sustainable may be necessary, Beasley said.
Editor’s note: This story was corrected after publication. Sam Watts of the Treasurer’s Office was mistakenly introduced by the committee chair as “Sam Watson.” We apologize for the misunderstanding.