Tag: north carolina pension reform

North Carolina Ends Pension Spiking By High-Paid Officials

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As of January 1, 2015, highly paid government workers in North Carolina will no longer be able to “spike” their pensions, thanks to a law signed yesterday by North Carolina Gov. Pat McCrory.

Pension spiking happens when public workers accumulate sick leave, vacation time, bonuses and other benefits until the year before they retire. In their final year on the job, they cash out all those benefits—inflating their final year salary.

Since final year salaries play a big role in calculating a worker’s pension benefits, spiking can increase a retiree’s annual pension by thousands of dollars per year. The practice is currently legal in most states.

But the practice is now outlawed in North Carolina for all state and local workers who make $100,000 or more annually. From the News & Observer:

The new law, which takes effect Jan. 1, comes after The News & Observer in November reported how four community college presidents and their boards converted tens of thousands of dollars in perks to pay as they neared retirement age, creating pension boosts the retirement system will have to subsidize. The retirement system is funded by contributions from employees, taxpayers through employer contributions, and investment returns.

“This law prevents North Carolina state employees from having to subsidize artificially inflated pensions of high earners at the end of their careers,” McCrory said in a statement. “It protects the retirement system from abuse and ensures state employees are rewarded for their important investments in our state.”

State Treasurer Janet Cowell has claimed in the past that pension spiking in the state is limited to only the highest-paid state workers. Thus, the current legislation outlaws spiking for those workers by creating a “contributions cap”. The News & Observer explains:

The law creates a new method of identifying pension spiking through a contributions cap that is based on the actual amount of money state and local employees and employers put into the retirement system. Those hired before Jan. 1 would continue to receive the difference created through the pension spiking, but it would have to be paid for by that unit of government, not the retirement system. Those hired after Jan. 1, would have the choice of the employer paying, the employee paying or a reduced benefit.

The law also returns the pension vesting period for state and local employees to five years. Three years ago it was doubled to 10 years as a cost saving measure, but Cowell’s staff said the savings were minor, roughly $1 million a year, while making the state less competitive in the job market.

“Returning to a five-year vesting period is critical step in North Carolina becoming more competitive in recruitment and retention relative to other public and private employers,” Cowell said in the release.

North Carolina Nears Pension Spiking Ban For Top State Officials

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The practice of pension spiking has garnered more media attention than ever over the past few years, and that is leading to the practice being examined in the halls of numerous state-level legislatures.

Pension spiking happens when public workers accumulate sick leave, vacation time, bonuses and other benefits until the year before they retire. In their final year on the job, they cash out all those benefits—inflating their final year salary.

Since final year salaries play a big role in calculating a worker’s pension benefits, spiking can increase a retiree’s annual pension by thousands of dollars per year. The practice is currently legal in most states.

Pension360 previously covered the outlawing of spiking in Phoenix, Arizona. Now, lawmakers in North Carolina are on the brink of prohibiting the practice in their state as well. From the Raleigh News and Observer:

The state Senate tentatively approved legislation Monday night that would prevent state agencies and local governments from using the state retirement system to boost the pensions of top officials when they finish their careers.

The bill, approved 44-4, requires the agencies, local governments or the top officials themselves to put the money into the retirement system to pay for the pension spiking. The legislation cleared the House last month with no votes in opposition, making it likely a second approval from the Senate would make it law.

The legislation followed a report in The News & Observer that four community colleges in recent years converted tens of thousands of dollars in perks such as car and housing allowances into salaries for their presidents as they neared retirement.

In November, the N&O’s Checks Without Balances series reported on four community college presidents whose boards allowed for as much as $92,000 in perks to be converted into salary. The colleges are Cape Fear, Central Piedmont, Sandhills and Wilkes.

Their boards used the removal of a state salary cap on the local share of community college presidents’ salaries to convert the perks to salary. As perks, the pay was not eligible for pension purposes, and no contributions had been made out of them to the state retirement system. But when the perks were converted into salary, they became pension-eligible compensation.

Taxpayers support the retirement system through contributions made by state and local governments on behalf of their employees. The employees are also required to contribute a small percentage of their pay.

Two of the four community college presidents – Eric McKeithan at Cape Fear and Gordon Burns at Wilkes – have since retired. Burns, whose $80,000 in perks converted to pay before he stepped down in June, could see his pension bumped up as much as $52,000 a year.

The other two presidents are Central Piedmont’s Tony Zeiss and Sandhill’s John Dempsey. Their boards each converted roughly $40,000 in perks to pay.

There are, however, some worker-friendly provisions in the bill to make it more palatable. From the Raleigh News and Observer:

• It would return the vesting period to become eligible for a pension to five years. Three years ago, lawmakers raised it to 10 years, thinking it would save the state money. But the treasurer’s office found it wasn’t saving much money and was making the state less competitive for job candidates.

• It allows all state and local employees who leave their jobs within five years to recoup their pension contributions plus accumulated interest, which currently is set at 4 percent. Currently, only fired employees can receive the interest. The treasurer’s office says North Carolina is the only state retirement system in the country that does not pay interest in returning the pension contributions to all employees who leave before five years of service.

If officially passed, the law wouldn’t take effect until January 1, 2015. It wouldn’t affect employees who make less than $100,000 a year.