An Explanation of the Special Fund That Lets North Carolina’s Highest-Paid Retirees Skirt Pension Limit Rules

North CarolinaOver a dozen of North Carolina’s highest-paid pensioners are drawing benefit checks that exceed limits set under federal law.

But there are no laws being broken here, because they are drawing part of their checks from a special fund set up by state lawmakers in 2013.

The News Observer explains:

Some of the state’s highest-paid government retirees are benefiting from a supplemental fund set up by state lawmakers in 2013 so the retirees can receive pensions that otherwise would be too high under federal law.

The pensions of 17 public retirees in North Carolina exceed the federal limits in 2014, in many cases by tens of thousands of dollars. The state’s top-paid retiree, former UNC Athletic Director Dick Baddour, received just over $64,000 of his $281,000 annual pension from the fund.

Other beneficiaries include former Wake County Manager David Cooke, who retired in 2013, and former Durham Schools Superintendent Carl Harris, who left in 2009 to join President Barack Obama’s administration.

In all cases, the retirees and their former employers met their obligations under state law by paying required contributions into the system during the retirees’ working years.

The supplemental fund, known as a qualified excess benefits arrangement, or QEBA, was created by state lawmakers last year to get around a potential problem the state could have fixed nearly 30 years ago, when Congress lowered the pension limits. But back then, no state or local employees in North Carolina were making the kind of money that would bring the limits into play.

“They probably looked and said, ‘It’s never going to apply to anyone,’ ” said Sam Watts, a policy development analyst for the State Retirement Systems Division, which is under State Treasurer Janet Cowell.

Retirement system officials realized about three years ago that some retirees were exceeding the federal limits, which are based on factors such as years of service and retirement age. The limits are typically adjusted upward annually. An employee who retired in 2014 at age 65, for example, was limited to a pension of no more than $210,000. Those who retire at a younger age have a lower pension limit.

Congress gave public pension systems the opportunity to make arrangements for excess retirement benefits in 1996, as those systems began finding some of their retiring employees bumping up against the pension limits. In 2013, officials with the state retirement system asked the legislature to set up a similar supplemental fund.

If lawmakers didn’t set up the supplemental fund, the state pension system could have lost its tax-exempt status, according to the News Observer.

North Carolina Pension Value Falls in 3rd Quarter On Weak Stock Performance

North carolinaNorth Carolina’s state-level pension funds, jointly managed by the state Treasurer, collectively declined 1 percent in the 3rd quarter after the funds’ stock portfolio turned in weak returns.

From the News Observer:

The slight decline was largely the result of losses in the fund’s stock portfolio.

Stock investments, which accounted for 43 percent of the portfolio, declined 2.9 percent in the third quarter and are up 10.9 percent over the past year. Returns are calculated after deducting fees paid to money managers hired by the state.

Fixed-income investments, which account for 30 percent of the portfolio, gained .4 percent in the quarter and have returned 5.9 percent over the past 12 months. Other 12-month returns for the portfolio: real estate, 17.9 percent; alternatives such as hedge funds, 17.5 percent.

The pension fund’s assets at the end of the third quarter were valued at 88.4 billion, down from $90.1 billion at the end of its fiscal year in June.

The pension fund provides retirement benefits for more than 900,000 workers, including teachers, state employees, firefighters and police officers.

The state Treasurer’s office manages assets for the Teachers’ and State Employees’ Retirement System, the Consolidated Judicial Retirement System, the Firemen’s and Rescue Workers’ Pension Fund, the Local Governmental Employees’ Retirement System, the Legislative Retirement System, and the North Carolina National Guard Pension Fund.

North Carolina Pension To Stick With Hedge Funds As Major Union Calls For Divestment

Janet Cowell

A few days after CalPERS pulled out of hedge funds, the State Employees Association of North Carolina (SEANC) called on North Carolina’s pension fund to do the same.

The pension fund, however, has shown no willingness to follow in CalPERS’ path, and recently doubled down on its support of hedge funds as part of its portfolio.

Originally, SEANC released this statement:

“Other institutional investors around the world could potentially follow CalPERS’ lead and finally dump these high-risk funds,” said SEANC Executive Director Dana Cope. “Those who wait to cash in may find the money’s gone. That’s not a risk state workers are willing to take. It’s time to pull out of these investments now before the cart starts going downhill too fast for us to jump off.”

Hedge funds are notorious for high fees. Pension funds and investors pay these fees in hopes that the payoff will be higher, but for the past decade, hedge fund performance has been lacking. Cowell has the power to invest of 35 percent of the $90 billion state retirement system in “alternative investments,” a term that includes hedge funds.

But North Carolina hasn’t budged, and pension officials have supported their hedge fund allocation. From the News & Observer:

Kevin SigRist, chief investment officer of North Carolina’s $90 billion fund, said that the state is by and large pleased with the performance of its hedge fund investments and plans to stay the course.

North Carolina’s hedge fund investments generated an 11.48 percent return for the fiscal year that ended June 30, as well as a three-year return of 6.86 percent and a five-year return of 7.59 percent. That 11.48 percent return bests the 7.1 percent return that CalPERS reported from its hedge fund portfolio and compares to the state’s 15.88 percent overall return for its latest fiscal year.

“We would expect to continue to evaluate (hedge funds) and use them where appropriate and where we think there are benefits to the trust fund,” SigRist said.


SigRist said that the fact that hedge fund investments cut across asset classes is at the heart of why North Carolina doesn’t disclose how much of its pension fund is allocated to hedge funds – a practice that has drawn SEANC’s ire. Although the pension fund has stipulated the allocation to hedge fund strategies, he added, that’s only a piece of the pie because it’s based on an antiquated concept of what a hedge fund is.

Currently, North Carolina’s pension system has $3.9 billion in hedge funds, or 4.3 percent of total assets. They paid $91 million in fees to those funds in 2013.

North Carolina Ends Pension Spiking By High-Paid Officials


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


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.