Retirement and health care benefits for future state employees could get an overhaul under a proposal now being considered in the General Assembly. Sen. Andy Wells (R-Catawba) has filed Senate Bill 467, “North Carolina Retirement Reform.” It proposes a dramatic overhaul of the benefits offered to new employees.
The proposed legislation is in response to the growing unfunded liability the state has regarding its future pension and health plan expenses. That figure now looms large at $60 billion, something that NC Treasurer Dale Folwell has been alerting lawmakers about even before he took office in January.
Wells’ bill was heard in the Senate Pension Committee on Wednesday, May 3 in a discussion-only format.
In an interview for this article, Wells said that this is a problem that he has been aware of for some time. He has been writing about it on his blog, and having conversations with Folwell about the issue.
Wells said, “We came at this from different points; we both are aware of the problem.”
Wells is quick to point out that his bill does not apply to any state employees hired before June 30, 2018. The reforms he proposes apply to state employees hired after that date.
One of the concerns raised about the bill has to do with how it might affect efforts to attract new employees. Wells said, “Our question is, ‘Are the new hires, new state employees, new teachers, putting a value on that retirement benefit that is equivalent to the cost of that benefit the taxpayers are funding?’”
They may not value such perks as much as past generations did. In an article by the Raleigh News & Observer on May 3, the point is related, “The legislature’s nonpartisan staff did research into what millennials care about when they look for jobs and found no evidence of people 20 to 35 years old being motivated by traditional pensions or retiree medical coverage.”
The issue of unfunded liabilities surrounding the State Retirement Plan and State Health Plan has been talked about for many years. Yet the General Assembly has not been willing to make radical changes or reforms.
Wells said, “I don’t think this is that radical. I don’t know of any private sector employers that provide free health insurance for life for employees that can retire at age 50.” Regarding retirement, he said, “In my district, most folks are content to have a 401(k) plan.”
The bill would change the current defined benefit state pension plan to a 401(k) plan for future state employees. Also, it would do away with the lifetime health care benefit for future state retirees.
The IRS defines a defined benefit plan as that provides a fixed, pre-established benefit for employees at retirement. It can become costly to the employer, in this case the state, as the guaranteed lifetime benefits typically are far greater than the employee contribution.
A 401(k) plan is instead funded by the employee’s pre-tax contribution, and sometimes a matching contribution by the employer. In Well’s bill, the state would contribute 6 percent the first year, with no specific matching contribution listed thereafter.
In the same News & Observer article about the bill, it is reported that during the committee meeting, Sen. Jay Chaudhuri (D-Wake) said, “We could eventually have a scenario where the General Assembly decides not to make a contribution going forward.”
Wells responded that predicting the future is impossible, saying, “A future General Assembly can do whatever it wants to do. There are no assurances about future General Assemblies.”
The article also quoted Mark Jewell, president of the NC Association of Educators, as having said, “Not offering retiree health care is a travesty that North Carolina should not accept.” Wells responded, “I wish some reporters would come out and talk to taxpayers in Hickory and ask how they feel about the $60 billion.”
Wells also said, “We’ve got to look at the reality. There’s a $60 billion unfunded liability, and it continues to grow.”
Wells noted that health insurance costs and the cost of medical care, combined with people living longer, will continue to drive up the cost to the state for providing free, lifetime health insurance for retirees.
Funding to the state’s pension plan has been dropping since 2001, when the Democrats were in the majority in the NC General Assembly. In addition, the actual returns have been lower than the projected assumed rate of return under Folwell’s predecessor, Democrat Janet Cowell.
Folwell has been working to make more accurate rate of return assumptions, including increased longevity among retirees.
Asked if he thinks his bill will pass, Wells said, “I try not to get in the business of predicting what the General Assembly is going to do. But, I think we are getting a fair hearing and having good conversations.”
Wells also mentioned that some of the state’s employee systems already have carved out for themselves 401(k) plans. For example, such a plan now covers 17,000 employees of the university system.