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 Keeping our retirement promises to state employees
by Tom Campbell
June 17, 2010
North Carolina is making promises to state employees we cannot keep and the sooner our leaders address these problems the better it will be for both public employees and the citizens of our state.
For many years North Carolina provided enough state contributions so that, coupled with reasonable investment returns, our retirement system was considered fully funded, meaning we could pay the retirement benefits promised public employees.
Two things changed. Budget problems prompted our legislature to reduce funding to the retirement system at the same time the recession dramatically reduced annual returns from investments. Treasurer Janet Cowell says to return to fully funded status will require the state to contribute more than 400 million dollars and increase annual contributions going forward. No one believes that is going to happen soon. The gap between what we promised and what we can pay future retirees will become a widening chasm, resulting in a major unfunded liability.
Corporate America has already been forced to face the dilemma, making a deliberate switch from employers promising employees a defined benefit upon retirement to employers promising the employee a defined annual contribution to individual pension accounts, with the employee having investment options that will help determine ultimate retirement benefits. For more than twenty years North Carolina leaders have known our state needed to consider this option but they shied away from making the move because the pension fund was fully funded, a change would be complicated to implement and state employees would not embrace the idea.
Our leaders have refused to acknowledge or fix the problem of promises made state employees regarding health insurance. Until recently, every state employee was promised that after five years of work their health insurance premiums would be fully paid by the state upon reaching age 65. Actuaries say our liability from those promises currently exceeds 30 billion dollars and North Carolina has no idea how to fund this looming crisis. Our state can ill afford another unfunded liability in our pension system.
We can fix the retirement system problem through several steps. First, we promise current employees that North Carolina will not renege on its promises to them in the current defined benefit plan. We can make a few changes to prevent current abuses of the system, such as perhaps increasing the number of years used to calculate the average income of an employee, penalizing governments that provide dramatic employee pay increases in the last two or three years prior to retirement or perhaps even establishing a maximum percentage of annual salary the state will pay in retirement. At the same time we must change to a defined contribution system for all employees hired after a certain date. North Carolina will likely experience cost increases resulting from running two retirement systems concurrently but the short term pain will be minimal compared to the longer term crisis for not making the change in a timely manner.
Former Treasurer Harlan Boyles frequently boasted of our retirement system saying, “Promises made, promises kept.” Change in our pension plans is inevitable if we are to continue to boast of kept promises. |
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