North Carolina lawmakers are looking at changes they say will shore up important benefits for hundreds of thousands of state employees and teachers when approaching retirement.
Some public employee advocates worry the changes will create more uncertainty and erode incentives that attract and retain state workers.
The Senate budget approved last month contained a provision that would prevent retirees hired after 2015 from obtaining or buying health insurance for themselves or dependents through the State Health Plan. Another Senate budget item would automatically decrease a fixed rate of return on state pension fund investments that helps calculate the state’s annual contribution to that fund.
Neither provision was contained in the House budget. Whether the provisions survive will be settled in budget negotiations this summer.
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Senate Republicans say the insurance change would give the state better control over an unfunded liability of $25.5 billion in projected state medical expenses for current and future retirees. The liability has fallen by several billion dollars since 2010. The General Assembly’s government watchdog agency will examine the liability in a study being released Monday.
Still, “it is the largest unfunded liability we have in the state right now,” said Sen. Ralph Hise, R-Mitchell, a health budget-writer, and capping the future retirees covered creates a “fixed number we’re targeting and addressing over 30 years.”
Free or half-priced premiums for retiree coverage have been a perk of working in state government or in the schools. Future retirees have other insurance options today through the federally-run health insurance exchange, which offers subsidized premiums, Hise said.
Chuck Stone, a lobbyist for the 55,000-member State Employees Association of North Carolina, said premiums through the exchange still often won’t be lower than the State Health Plan offers. The provision would effectively reduce overall compensation compared to current workers and make state employment less attractive, Stone said.
Otherwise, Stone asked, “How is the state going to be competitive with local governments? How are we going to be competitive with other state governments?”
The investment return rate is among more than two dozen assumptions used by actuaries to determine how much the state needs to contribute annually to the roughly $90 billion pension fund to keep it fiscally sound. The current 7.25 percent rate hasn’t changed since 1997. The Senate wants to reduce it for two retirement programs to 7.2 percent and by an additional .05 of a percentage point with each valuation.
The reduction would mean state legislators would be asked to give more to the Teachers’ and State Employees’ Retirement System and a similar one for judges, which includes more than 650,000 employees and retirees. Each incremental reduction would mean increasing contributions another $45 million, according to a General Assembly fiscal analysis. Increasing contributions could mean less money appropriated in the long term than previously required by the state to cover pensions.
Trustee boards of the affected programs sent a letter to Senate budget leaders objecting to the interest rate provision in part because it would mandate reductions without a “data-driven review” to determine whether it’s warranted.
State Treasurer Janet Cowell, a Democrat who oversees pension investments, is chair of the boards and supported last week’s letter, spokesman Schorr Johnson said. Cowell also is concerned about the retiree health changes, he said.
Stone said the State Employees Association is worried the state’s retirement contributions would become so high as the rate declines that lawmakers would phase out the current defined benefit plan.
Defined benefit retirement plans, which give fixed monetary payments to retirees, are falling out of favor for defined contribution plans, in which workers receive money to invest themselves.