{"id":51064,"date":"2023-11-28T18:20:52","date_gmt":"2023-11-28T18:20:52","guid":{"rendered":"https:\/\/prosfunds.com\/finance\/north-carolina-taxpayers-could-be-liable-for-billions-if-lawmakers-fail-to-remedy-provisions-of-the-24-budget\/"},"modified":"2023-11-28T18:20:53","modified_gmt":"2023-11-28T18:20:53","slug":"north-carolina-taxpayers-could-be-liable-for-billions-if-lawmakers-fail-to-remedy-provisions-of-the-24-budget","status":"publish","type":"post","link":"https:\/\/prosfunds.com\/?p=51064","title":{"rendered":"North Carolina Taxpayers Could Be Liable For Billions If Lawmakers Fail To Remedy Provisions Of The \u201924 Budget"},"content":{"rendered":"
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North Carolina has a long track record for managing one of the best public pension plans in the U.S. Moody\u2019s Investors Services recently reported that North Carolina has one of the top pension plans in the nation when looking at its Adjusted Net Pension Liability. And CEM Benchmarking ranked North Carolina’s pension system as the most efficient in North America.<\/p>\n

But the financial stability of the Teachers’ and State Employees’ Retirement System (TSERS) and State Health Plan could take a dramatic turn for the worse if the legislature doesn\u2019t quickly take action to remedy a provision in the recently enacted $30 billion state budget.<\/p>\n

A provision in the new budget will make new UNC Health Care (UNCHC) and East Carolina University Health (ECU) employees ineligible for the state pension plan. Instead the new employees will have health and retirement benefits outside of the traditional options offered to other state employees and teachers. To date, it\u2019s not clear how those plans would be structured.<\/p>\n

Republican State Treasurer Dale Folwell said these changes are a \u201cdirect attack on the state pension system and the state health care system\u201d and would allow \u201cUNC and ECU to leave their liabilities behind for everybody else to pay.\u201d Moreover, a State Treasurer\u2019s new release says the changes \u201cwill negatively affect workers at both organizations,\u201d and \u201cthe potential impact on the rest of the system could cost teachers, state employees, and taxpayers billions in unfunded liabilities and taxes.\u201d<\/p>\n

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Governmental Plan IRS Tax Status Could Be At Risk<\/strong><\/p>\n

Equally troubling, the universities could be at risk of violating federal tax laws, exposing themselves, the state pension plan, and workers to scrutiny and penalties from the Internal Revenue Service (IRS).<\/p>\n

According to the Office of the State Treasurer, providing a choice of a new retirement plan at UNCHC and ECU could constitute an impermissible arrangement. If the IRS decides that the new plan does not meet its requirements for a governmental plan, \u201cthe entire system\u2019s tax qualification status could be put in jeopardy, forcing state employees to pay taxes on the 6% they have contributed and, potentially, back taxes going to the beginning of their participation\u201d in the pension plan. This could mean \u201cbillions in back taxes having to be paid by teachers and state employees.\u201d<\/p>\n

And some question whether TSERS would even remain a governmental plan if UNC Health were to merge or otherwise engage with nongovernmental entities.<\/p>\n

The Pension Changes Will Mean Big Cost Shifts to TSERS Employers<\/strong><\/p>\n

A pension plan is funded in part by future payroll contributions to the retirement system. Generally, pension plans assume that payroll will grow over time. However, if there is a halt to employees entering the plan \u2013 as is planned for UNC Health Care and ECU Health employees \u2013 the plan\u2019s payroll trajectory looks dramatically different as depicted in the chart below.<\/p>\n

For example, if a pension plan requires eight percent of payroll to fund future liabilities, but then projects a decline in future payroll contributions, there will be a funding shortfall. This means current employers and employees must pick up that slack because the lower total projected payroll will mean a rate higher than the eight percent that initially was required to properly fund the pension plan.<\/p>\n

This represents a cost shift in the plan, with the scale dependent on the size of the withdrawn employees relative to the total plan. This clearly is unfair to the workers and employers currently participating in the pensions plan that will absorb the costs for UNC Health workers\u2019 benefits.<\/p>\n

Fortunately, the TSERS pension is mostly pre-funded. However, retiree health benefits are managed on a pay-as-you-go basis. By withdrawing from the system, UNC Health employees will continue to be owed significant benefits, but the costs of those benefits will be shifted to taxpayers as noted in the fiscal note:<\/p>\n

\u201cThe State currently funds retiree medical benefits primarily on a pay-as-you-go basis, so contributions on behalf of current employees are in fact used largely to pay for healthcare for current retirees. The loss of these future contributions will mean that other employing entities and the tax revenue or other resources used to support those entities will bear some of the burden of paying for retiree medical benefits for the existing UNCHCS employees and retirees. As of June 30, 2022, the Net OPEB Liability related to UNCHCS was $1.1 billion.<\/em>\u201d<\/p>\n

Indiana Has Been Down this Path, But Course Corrected<\/strong><\/p>\n

In 2015, both Indiana and Purdue Universities wanted to leave the Public Employees\u2019 Retirement Fund (PERF). The departure plan came to the attention of legislators because it would mean an unfair cost-shifting to employers and employees participating in the retirement plan.<\/p>\n

This cost shift was recognized in a fiscal note:<\/p>\n

\u201cConsequently, when these entities froze enrollment into PERF, they shifted some of the liabilities for their current and former employees in PERF to the other PERF employers. This is due to the fact that the affected entities are paying a contribution rate based on a gradually shrinking affected payroll (since the contribution rate is only paid on the portion of the employer\u2019s payroll that is covered in PERF).\u201d<\/em><\/p>\n

Legislators wisely responded by creating a withdraw liability policy that would freeze the unfunded accrued liability (UAL) to ensure the universities paid their share of liabilities over time via House Bill 1466. The legislature was controlled by Republicans, but the bill enjoyed bipartisan support, passing both the Indiana House and Senate unanimously and signed into law by then-Governor Mike Pence.<\/p>\n

The bill, however, did not require the calculation of the withdrawal liability on a more cautious financial basis, as some plans use to insulate the on-going plan from risk. As a result, some future market risks could result in cost shifting.<\/p>\n

Risk Also is Shifted To Current Employees and Employers<\/strong><\/p>\n

Given that a withdrawing employer\u2019s payroll (as a share of plan payroll) will decline much more quickly than the liabilities owed to that employer\u2019s workers, there likely will be a risk shift even if an employer pays its current share of existing unfunded liabilities. The change in the share of a withdrawing employer\u2019s payroll and liabilities is illustrated in the chart below.<\/p>\n

For instance, if one assumes a withdrawing an employer\u2019s employees accounts for 20 percent of plan payroll and liabilities at the time of departure, those liabilities will be paid over many decades. However, the plan payroll would start dropping quickly once future worker enrollments in the plan are halted.<\/p>\n

Thus, if a pension plan experiences another Great Recession-like market event 15 years down the road, the impact on legacy costs would be significant. However, plan payroll of the withdrawing employers would have fallen to the point where other employers would be forced to make up the difference for their employees\u2019 benefits. Again, an unfair risk shift.<\/p>\n

Plan Demographics Worsen, Too<\/strong><\/p>\n

There is good reason why pension funds track demographic changes over time. Running a plan successfully with mature demographics (that is, more retirees and few workers) is more challenging.<\/p>\n

Among private sector multi-employer plans that experienced difficulties rebounding from the Great Recession, plan demographics proved a much better predictor of financial problems than investment returns or the willingness to increase contribution rates.<\/p>\n

In fact, the average plan in \u201cdeclining status\u201d in 2020 had 7.2 retirees per worker. The healthiest plans, in contrast, had 1.4 retirees per worker. Accordingly, it is important to avoid becoming a provider of legacy benefits that enrolls few new workers, even if the only goal is to meet current obligations. TSERS could find itself in the unfortunate position as a provider of legacy benefits under the current law rather than the thriving system it has been for more than 80 years.<\/p>\n

North Carolinians Deserve a More Thorough Analysis <\/strong><\/p>\n

To avoid leaving state employees and taxpayers with a billion dollar bill, lawmakers must take a deeper dive into UNC and ECU future plans and cost projections. In addition to probing about the share of obligations for UNC and ECU health employees, lawmakers must determine:<\/p>\n