New ECU, UNC Health retirement plans set for Jan. 1. How they’ll impact state workers.

North Carolina State Treasurer Dale Folwell slammed the requirement approved by lawmakers that the state-owned hospital systems run by the University of North Carolina and East Carolina University provide their employees with retirement benefits, separate from those offered by the state’s pension plan.

This change, Folwell said, could pass more than $1 billion in costs on to taxpayers, and harm the State Health Plan and retirement system’s stability.

The law under fire from the Republican state treasurer, passed as part of the state budget passed by the GOP-controlled state legislature, requires the two university health systems to create their own new retirement plans.

Anyone hired after Jan 1. would have to join these new plans — with details not yet released publicly by either organization — or be forced to join the UNC Optional Retirement Program, an alternative to the state pension plan used much less by retirees. New hires would be barred from joining the state’s pension plan.

Existing employees can stay on the state’s retirement system, but they may also — if allowed by the university health systems — get a one-time, irrevocable chance to leave the state pension plan and join a new plan. Any employees who leave ECU or UNC Health after Jan. 1 and are rehired would be treated as new hires, according to the budget language.

Folwell said during a press call on Tuesday that “concerns are growing not mathematically but exponentially” about the ECU and UNC Health retirement system change.

“This is a direct attack on the state pension system and the state health care system that UNC Healthcare and East Carolina University have been married to for over half a century,” he said.

Leaders within the state employees’ association and the retired employees’ association also fear the plan will pass along cost. Spokespersons for ECU Health did not provide comment prior to publication of this story.

In an email statement, UNC Health spokesman Alan Wolf said system officials “disagree that these changes will have negative implications.”

He said that the new benefits allowed to be offered in the state budget “will mirror what other similarly sized health care systems in the state offer their employees. That will allow UNC Health to better compete with the private sector on hiring and retaining employees by allowing for new retirement benefits, outside the ones normally offered by the state.”

As for providing current UNC Health employees the option to make a one-time choice to switch plans, Wolf said it was “a new policy we could consider offering, but we are not obligated to do so and there are no current plans to do so.”

Effect on state employees

According to Folwell, the coming changes are little known by employees of these systems, who will be directly impacted. New hires and returning hires in particular will be significantly affected, he said.

“What if you have somebody who is working at UNC Health Care who has been there eight years, they’re vested in the pension system, they decide to go out on maternity leave or some other leave for a few years and then they want to come back into the system?” Folwell questioned.

“They will not be allowed to earn service credit inside the pension system,” he said.

Folwell said every attempt his office made to get this language affecting returning hires out has failed.

The treasurer’s office, through its Retirement Systems Division, administers employee pension plans for more than 1.1 million members. Retirement benefits in the state’s pension plan are fully vested, or protected, after five years of work. But If a UNC or ECU hospital system employee left and returned, under the new arrangement, they would no longer be able to add further funds to their retirement pot.

According to Folwell, 91% of the people who make less than $40,000 a year opt into the state’s retirement system instead of the optional retirement system, in which members choose investments, similar to a 401(k) — largely because of the certainty of the benefits, he said. So the change, which he said seems to be a way for these hospital systems to no longer be classified as governmental agencies,“is probably going to be to the benefit of people who don’t make less than $40,000 a year but probably make $400,000 a year,” he said.

Tim O’Connell, the director of the North Carolina Retired Governmental Employees’ Association, echoed this, saying that “the majority of folks that this is going to take dollars away from is low-income, hard-working North Carolinians that are just trying to make a living.”

A retirement plan “for somebody who is low income means the difference between maybe keeping your house or taking your medicine versus somebody who’s – if you’re a higher paid executive with other funding options – for your retirement, you kind of bounce through that, through a dip in the market,” he said.

O’Connell also pointed out that many nurses or health care employees opt to stay with the state hospitals and not move to other hospitals because of the retirement benefits. This change could affect the state’s hiring of its health care workforce, which it has already been struggling to do. It could also affect state employees considering jobs at ECU or ECU hospitals.

$1 billion liability

Folwell also said that by “divorcing” from the state pension plan, UNC Health and the health care operations of East Carolina University will leave their liabilities behind for everyone else to pay.

What this will eventually do “is raise the cost of running community colleges, It’s going to raise the cost of the Department of Transportation, It’s going to raise the cost of corrections, It’s going to raise the cost of public education. It’s going to raise the employer contribution rate and the cost of everyone else,” he said Tuesday.

State employees contribute 6% of their paycheck toward their retirement. The treasurer’s office then invests these funds, which are then used to pay retired state workers.

O’Connell said the loss of thousands of ECU and UNC Health employees would lead to a smaller funding pool, which could affect not only the pension plan but also health care. The State Health Plan has an over $23 billion liability for retiree health benefits, which means taxpayers today are paying for medical care and prescription drugs for retirees.

Wolf said this depiction is inaccurate, saying UNC Health believes “this offering will eventually reduce the long-term liabilities on the state pension and health plans, as there will be fewer state employees added to these plans.“

He also said the “State Treasurer is making unrealistic assumptions on the number of state employees likely to transfer out of the existing pension program. His calculations assume that all employees eligible to move WILL move. That is far from likely. No 30-year employee will switch. It’s unlikely even five-year employees will transfer out of the system.”

According to a news release and a letter sent to UNC Health and ECU Health by the treasurer’s office in October, the departure of UNC and ECU hospitals could lead to taxpayers being on the hook for more than $1 billion in UNC Health retirees’ eventual health care liabilities and more than $40 million for ECU retirees’ health liabilities.

“UNC Health Care and ECU want to leave taxpayers the check while they go make some sweetheart retirement deals for their executives,” said Folwell, in the news release.

Ardis Watkins, executive director of the State Employees Association of North Carolina, said “allowing different entities within state government to leave their liabilities in the system and create new benefits moving forward for employees” just “absolutely decimates the existing (state’s) plan.”

Employees currently on the state’s retirement plan “are counting on that retirement when they get to the end of their career,” Watkins said, “and they’ve worked for less than private sector wages because the benefits were supposed to be strong,” but now, this change will weaken the stability of the plan.

“When they become retirees, they will never see the cost of living adjustments,” she said, also questioning how this change may affect the actual payout of retirement funds for future retirees.

And Watkins said losing tax exemptions could lead to premiums going up in the State Health Plan.

Watkins also expressed concern with the lack of communication on the new retirement plans, saying news on this change is “trickling around the university system,” and “that’s causing a growing panic over exactly what it means.” She said it did not seem there was any “meaningful communication” going out on this change.

Folwell’s office in the news release also warned the change could undermine the tax-exempt status of the state’s pension system and potentially create “an untenable situation where members of the pension system could owe billions in back taxes to the IRS.”

Asked about the possibility of lawsuits, Watkins and O’Connell both said in separate interviews with The News & Observer that they were looking at all options.

Origins of bill

The retirement system changes were originally proposed in a bill that passed the Senate unanimously but was not heard in the House. When the bill was first proposed, leaders of the UNC System praised the plan, saying it would expand the reach of the state’s two major public university-affiliated health care systems and offer a rare chance to vastly improve medical care for people across the state — especially in rural areas, as previously reported by The N&O.

The bill also would have originally exempted the two health care systems from state and federal antitrust laws, which led to federal regulators issuing a letter criticizing the plan.

After the bill failed in the House, its language resurfaced in the budget, passed into law in October. While the budget cut much of the language expanding the merging power of these systems, Folwell’s office, in the letter, said it still “appears to expand the conditions under which mergers with nonprofit corporations, or sales or leases of hospital facilities, can occur.”