Treasurer Dale R. Folwell, CPA, will ask the Boards of Trustees of the Teachers’ and State Employees’ Retirement System (TSERS), Local Governmental Employees’ Retirement System (LGERS) and the State Health Plan (Plan) to discuss concerns that the Retirement Systems Division (RSD) has regarding changes to UNC Health Care (UNCHC) and East Carolina University’s (ECU) participation in the state’s pension and health care plans. The changes were made as part of the recently enacted 2023 Appropriations Act. The TSERS, LGERS and State Health Plan boards will meet tomorrow, Thursday, Oct. 26.
“We have deep concerns that the provisions passed in the budget related to UNC Health Care and ECU creating their own pension and health care plans will leave state employees and other taxpayers on the hook for billions in liabilities,” Treasurer Folwell said. “In addition, we are strongly concerned that if UNC Health and ECU go forward with these proposals it could jeopardize the entire tax-exempt status of the systems, creating an untenable situation where members of the pension system could owe billions in back taxes to the IRS. We tried to warn UNC Health and the General Assembly, but they refused to discuss.”
The changes were originally proposed in S743, which passed the Senate 48-0 but received no vote or hearing in the House. The language was subsequently put in the budget and passed by both chambers.
The language included in the budget (Sections 4.10.(a)-(dd)) states that any individuals that are hired by UNCHC or the identified areas of ECU on or after Jan. 1, 2024, will not be allowed to join TSERS but will, instead, be forced to join the UNC Optional Retirement Program (ORP) or a “similar plan” that has not been specified by either organization. Current employees will be given a one-time option of either staying in their current plan or joining the not yet defined “similar plan” once it is created. However, any current member of TSERS who leaves employment and later returns to UNCHC or the identified areas of ECU will not be able to accrue TSERS service credit.
While this will negatively affect workers at both organizations, the potential impact on the rest of the system could cost teachers, state employees, and taxpayers billions in unfunded liabilities and taxes.
Providing a choice of a new retirement plan at UNCHC and ECU could constitute an impermissible cash-or-deferred arrangement (CODA) as defined by the Internal Revenue Service (IRS). Currently, teachers and state employees contribute 6% to their retirement (pre-tax). If the IRS decides that the new “similar plan” does not meet its requirements for a “governmental plan,” the entire system’s 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 in the TSERS plan. This could amount to billions in back taxes having to be paid by teachers and state employees.
Additionally, actuaries for the plan have stated that if UNCHC were allowed to avoid making contributions to the Retiree Health Benefit Trust Fund (if its employees are no longer in the category for which employers are required to make contributions), the liability for their eventual retirees’ health care potentially exceeds $1 billion for UNCHC and more than $40 million for ECU. These costs would be borne or paid for by state agencies that did not incur the liability.
“UNC Health Care and ECU want to leave taxpayers the check while they go make some sweetheart retirement deals for their executives,” said Treasurer Folwell. “Those of moderate and lower income are always hurt the most in these deals. They want everyone else to pay. Increased gas taxes, college tuition and home insurance fees are just a few examples of things taxpayers could have to pay more for.”
The legislation also appears to expand the conditions under which mergers with nonprofit corporations, or sales or leases of hospital facilities, can occur. Regardless of this new latitude, an employer must be a governmental entity to be part of TSERS. This is a facts-and-circumstances evaluation of many criteria based on IRS guidance. If an employer ceases to be a governmental entity based on IRS guidance, then it can no longer participate in TSERS. The employing entity would be required to go through the applicable procedure to cease participation in TSERS, including paying a withdrawal liability that has typically been equal to multiple years’ worth of employee payroll. For an organization the size of UNCHC, this liability could be more than $1 billion.
“We tried to warn them about these problems but were ignored and not even allowed a seat at the table,” said Treasurer Folwell. “I promised to preserve and protect the pension and health care plans for current and future employees. I am bringing this to the attention of the Boards of TSERS and the Plan so they understand the potential disaster that is facing these plans and teachers and state employees. Shining light on this issue and, hopefully, resolving it could be the most important thing I do as State Treasurer.”
The Department of State Treasurer (DST), through its Retirement Systems Division, administers employee pension plans for more than 1.1 million members. DST distributes, every month, an average of $600 million to more than 360,000 benefit recipients. The total number of active and former public employees who are or have contributed to the pension system is over 650,000. Those that teach, protect or otherwise serve the citizens of North Carolina are members of one of the best-funded public retirement pensions in the United States, and DST’s Investment Management Division manages the pension plans’ investments currently totaling over $109 billion. DST also manages the NC 401(k) and NC 457 Plans, which are supplemental retirement savings available to public servants in North Carolina.
The State Health Plan, a division of the Department of State Treasurer, provides health care coverage to more than 740,000 teachers, state employees, retirees, current and former lawmakers, state university and community college personnel, and their dependents.