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By Rose Hoban
State retirees are celebrating the inclusion of a 1 percent cost-of-living adjustment, the first such COLA in several years. But another group of retirees will lose out – those people who don’t work for the state yet.
Tucked deep into the 438-page state budget released late Monday evening is a provision stating that state employees hired four years from now will not receive health benefits from the state once they retire after decades of service.
The provision on page 406, not obvious at first, changes the definition in an old law to redefine an eligible retiree as someone who “earned contributory retirement service… prior to January 1, 2021 and did not withdraw that service.”
The only way to know what that means is to dig into the old law being changed, and realize this small change makes anyone hired after that date ineligible for retiree health benefits.
It doesn’t matter for anyone now, but it could matter when it comes time to recruit future workers.
“Retirement benefits are the cornerstone to recruitment and retention of good employees and it has been for many, many years,” said Richard Rogers from the N.C. Retired Governmental Employees’ Association. “It’s not competitive with the benefits that are offered.”
Right now, state employees are eligible to retire after 30 years of work, or after they reach 60 years of age and have 25 years of service under their belts. If that happens, the state pays for those retirees health insurance until they time they turn 65 and become eligible for Medicare.
Then, once a retiree qualifies for Medicare, the state pays the 20 percent copay that the federal program doesn’t cover. In addition, the state pays the Medicare 20 percent copay for all state employees who have had at least five years of service, for folks hired before 2006 (it takes longer for employees hired after then).
All told, Medicare payments cost North Carolina around $64 million a year.
“Everyone knows that people who go into state employment do so with the expectation of having a benefit package that makes up for pay that’s not competitive with the private sector,” Meyer said. “So if you take away retirement health benefits you’re taking away a major incentive for people to even enter the state workforce.”
But Republican Sen. Andy Wells of Hickory said there’s too much money that North Carolina has promised to current and former workers in the form of pension and health benefits, even as legislators have failed to put aside the funds to fulfill those promises.
“There’s a $43 billion unfunded liability, that’s 2 years of [state] budgets,” Wells said. “That’s $43 billion that we’ve handed state employees and handed them an IOU, and said we’ll pay you but we’re not going to put the money aside.”
Wells also argued that the workers of the future won’t care so much about a benefit they won’t see for decades.
“If you’ve got a millennial with $35,000 in student debt, would they rather have cash?” he asked. “I’ve got three millennial sons they’re more here-and-now than maybe I was.”
Wells also argued that the state is giving away too much value and that employees are paying too little into the retiree system to cover costs.
When asked if removing the benefits would hamstring the state’s recruiting efforts, Wells responded the state needs to compete in the marketplace for workers.
“We’ll have to do what we have to do to hire,” he said. “If the compensation is not high enough, we’ll have to raise compensation.”
Tom Bennett, who heads N.C. Retired School Personnel said he doesn’t believe millennials, while present-focused, might discount future benefits as they start their careers.
“I would like you to produce a millennial who says I would want less benefits to go into teaching,” he said.
“Everyone knows state service is not a way to get rich, but you can make a living and have a good retirement,” Bennett said. “This is a step backwards from a good retirement.”
North Carolina is one of many states that has outstanding retiree obligations that loom large. While the numbers, $42 billion, appear insurmountable at first glance, those sums are estimates of what will need to be paid over the course of decades.
State Treasurer Dale Folwell has expressed his concern over this liability in phone calls and interviews with the media. Nonetheless, Folwell’s office confirmed he did not ask legislators to add the provision to the state budget.
However, Folwell’s office did ask legislators to file bills to address the solvency of the state’s retiree benefits. During a reporter phone call in February, Folwell said he had a 10-year plan to address the liabilities created by retiree health and benefits.
“We’re excited about possibly being the first state about incorporating these liabilities into an affordability study,” he said at the time.
“We’re also looking for the opportunity for when the state refinances debt and is able to do so at a lower rate of interest, that we take the interest savings and then put it toward a solvency fund that would be set up in his bills,” Folwell said, noting that any of those savings should be divided with 85 percent going to cover retiree health liabilities and 15 percent to cover pension shortfalls.
In March, Wells introduced a bill that would have eliminated both retiree health insurance and the defined benefit contributions that state employees currently receive.
That bill hasn’t progressed, but parts of it have been incorporated into the budget in the form of that study of retiree benefits and how the state can reduce those long-term liabilities they create.
Rogers said that provides some time to find some answers before the sunset of retiree health benefits in 2021.
“I think that’s something that needs to happen and hopefully, we’ll get a good solid report out of that,” he said.
In the meantime, lawmakers have delayed socking away money to cover those long-term debts, something which frustrates Meyer.
“We have enough money to pay for retiree health benefits,” he said. “If we would choose to.”
This story has been corrected to note changes in retirement benefits that went into effect in 2006.