Taking the Field: Keeping Up with Pension System Demands

Rose Vaughn Williams, NCLM Executive Director

It may largely fly under the public radar, but cities and towns have been paying significantly more into the Local Government Employees’ Retirement System (LGERS) these past years and the increases do not seem to be ending anytime soon. The system is under stress.

The state and local pension system and its defined benefit structure plays an important role in the ability of local and state governments to attract qualified municipal employees. Once employed, those benefits help provide an incentive to remain with municipal, county, or state government employers.

Unlike defined contribution plans, like 401Ks, that are so prevalent in the private sector, LGERs and its defined benefit plan means that municipal employees are guaranteed a benefit upon retirement based on age, years of service, and salary.

In many ways, it is a very successful system, and unlike some pension systems in other states, North Carolina’s has been well-funded and well-run for a half century or more.

Still, the state and local government retirement system has been under stress since the 2008 financial collapse and recession. The primary reason is that investment returns on the roughly $110 billion (yes, billion, with a “b”) invested have not kept pace with the needs of the system, even as more Baby Boomers retire, life expectancy has increased and government workforces have grown to keep up with the service needs of a growing state.

The stress on the system is playing out practically in two ways: municipal employers—cities and towns supported by local taxpayers—are having to make larger contributions into the system to keep it financially sound; and, retirees are not seeing cost-of-living adjustments, largely because the actuaries who measure risk to the system say they cannot be supported by the investment returns.

It’s important to understand that for many years, employers and employees contributed 6% each of the employee’s pre-tax salary to help create the LGERs fund principal that could then be invested and produce the investment returns.

That employee contribution rate remains the same.

The employer rate has been rising.

In 2019, municipal employers were paying 7.75% of salary in contribution rates for general employees to keep LGERs sound. In response to an unexpected funded shortfall, mostly caused by poor investment returns in 2018 and a lowering of the expected rate of return on investments, a policy was adopted by the LGERs Board of Trustees to raise the employer contribution rate further over a three-year period though the 2021–2022 fiscal year, eventually to 11.35%.

In each of those years, the annual increase for all local government employers across the state totaled $80 million. Once compounded, the total cost over those three years equaled $480 million. Moving forward, the additional annual costs in 2022 and future years will be $240 million.

Obviously, this is a substantial increase in cost that is ultimately paid by local taxpayers.

Quite often, NCLM finds itself fighting against proposals at the General Assembly that would create unfunded state mandates for additional employee retirement and other benefits. It’s not because cities and towns do not recognize the value of all municipal employees, or the incredible service that they provide to the public. Rather, it’s because keeping the pension system viable and financially sound moving forward has to be the top priority when it comes to employee benefits.

As much as the fickleness of markets may pose risk to the system and the retirees that it supports, there is a bigger risk: a lack of confidence by the taxpayers who foot the bill.

Pursuing prudent polices that keep benefit costs affordable and lead to returns that adequately support benefits is the best way to maintain that confidence. NCLM member cities and towns appreciate state legislators, the State Treasurer, and the LGERs Board of Directors considering their concerns as they take up these critical issues.