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Joint Legislative Program Evaluation Oversight Committee March 19, 2014 Department of State Treasurer Should Strengthen Its Oversight of the Firefighters and Rescue Squad Workers Pension Fund A presentation to the Joint Legislative

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Fire and Rescue Pension Fund 1

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

Department of State Treasurer Should Strengthen Its Oversight of the Firefighters’ and Rescue Squad Workers’ Pension Fund

A presentation to the Joint Legislative Program Evaluation Oversight Committee March 19, 2014 Kiernan McGorty, Principal Program Evaluator

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Program Evaluation Division North Carolina General Assembly

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Handouts

The Full Report Today’s Slides

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Fire and Rescue Pension Fund 2

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

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Study Direction

Report p. 2

  • 2013–15 JLPEOC work plan directed PED

to examine six state-administered funds related to fire, rescue, and emergency medical services

  • 3rd report in four-part series evaluates

– Firefighters’ and Rescue Squad Workers’ Pension Fund

Program Evaluation Division North Carolina General Assembly

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Evaluation Team

Kiernan McGorty, Evaluation Lead Jim Horne, Senior Program Evaluator Meg Kunde, Program Evaluator Sara Nienow, Senior Program Evaluator David Vanderweide, Fiscal Research Division

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Fire and Rescue Pension Fund 3

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

  • Stakeholder: Department of State Treasurer
  • Research Questions

– What are the eligibility criteria and benefits

  • f the Fund?

– What is the financial status of the Fund? – How is the Fund administered, and what are the oversight mechanisms for the Fund?

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Evaluation

Report p. 3

Program Evaluation Division North Carolina General Assembly

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Overview: Findings

1. State’s annual required contribution now exceeds amount of premium tax proceeds going to General Fund 2. Department’s failure to question overly conservative actuarial assumptions has resulted in overstated appropriation requests 3. Department’s failure to enforce timely payment of member contributions has cost Pension Fund at least $500,000 4. Department minimally enforced prohibition against paying pension benefits to members still working 5. Department is taking action to resolve the administrative issues identified

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Fire and Rescue Pension Fund 4

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

Overview: Recommendation

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  • General Assembly should require the

department to report on its progress toward

– building appropriate lapse assumptions into the State’s annual required contribution – collecting timely member contributions – enforcing the prohibition against in-service distributions

Program Evaluation Division North Carolina General Assembly

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Background

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Fire and Rescue Pension Fund 5

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

  • In 1959, General Assembly created

Fund to encourage participation in fire protection services by financially assisting firefighters in retirement

  • In 1982, rescue workers were added to

the Pension Fund

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History of Pension Fund

Report p. 3

Program Evaluation Division North Carolina General Assembly

  • Eligibility

– Must be volunteer or paid personnel listed on department roster – Must attend 36 hours of training a year – Must contribute $10 a month during 20 years of service (for a total of $2,400 total)

  • Benefit

– $170 a month starting at age 55

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Pension Fund

Report pp. 3-4

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Fire and Rescue Pension Fund 6

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

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Revenues and Expenditures, FY 2012–13

Pension Fund

Investment income State contribution Member contributions $15.4 million Member benefits Member refunds Plan administration $798,780

Report p. 6

Program Evaluation Division North Carolina General Assembly

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Funded Ratio Above 80% Threshold

60% 65% 70% 75% 80% 85% 90% 95% 100% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Threshold for Acceptable Funded Ratio = 80% Funded Ratio Funded Ratio = Actuarial Value of Assets Actuarial Accrued Liability 96% 84% Fiscal Year

Report p. 8

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Fire and Rescue Pension Fund 7

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

Findings

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Program Evaluation Division North Carolina General Assembly

State’s annual required contribution now exceeds amount of premium tax proceeds going to General Fund

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Finding 1.

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Fire and Rescue Pension Fund 8

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

  • State’s annual required contribution (ARC) –

amount an actuary calculates the State needs to contribute during the current year for benefits to be fully funded in the future

  • State pays its contribution from the General

Fund

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State Contribution

Report pp. 9-10

Program Evaluation Division North Carolina General Assembly

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Funding Mechanism

Report p. 2

Insurance companies pay taxes on gross premiums from property insurance

General Fund Firefighters’ Relief Fund Volunteer Safety Workers’ Comp Fund Volunteer Fire Dept Fund Pension Fund

20% Up to 20% 25% Remaining goes to Tax not earmarked for Pension Fund

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Fire and Rescue Pension Fund 9

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

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State Contribution Exceeds Tax Proceeds

State’s annual required contribution (ARC) Fiscal Year Millions

$- $2 $4 $6 $8 $10 $12 $14 $16 $18 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Amount of insurance premium tax proceeds going to the General Fund $2 million gap

Report p. 10

Program Evaluation Division North Carolina General Assembly

Department’s failure to question

  • verly conservative actuarial

assumptions has resulted in

  • verstated appropriation requests

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Finding 2.

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Fire and Rescue Pension Fund 10

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

  • Lapse assumption – likelihood that some

number of current members have stopped serving and will not vest

  • Actuary assumed all current members,

regardless of how long it had been since they made their last contribution, will contribute in the future and receive benefits

  • Department overstated its appropriation

requests

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Overly Conservative Lapse Assumption

Report pp. 11-12

Program Evaluation Division North Carolina General Assembly

Department’s failure to enforce timely payment of member contributions has cost the Pension Fund at least $500,000

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Finding 3.

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Fire and Rescue Pension Fund 11

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

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Department Accepted Delinquent Payments

Report p. 13

State Law Department of State Treasurer Action 2005: General Assembly repealed mandatory forfeiture provision 2005-2009: Department applied members’ contributions to their last missing payment, regardless of how many years had passed 2009: General Assembly enacted statutory deadline requiring members to make contributions no later than 90 days after calendar year in which service occurred 2009-2012: Department applied members’ contributions to their last missing payment, regardless of how many years had passed

Program Evaluation Division North Carolina General Assembly

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$500,000 Funding Gap Due to Inadequate Member Contributions

Actual Member Contributions Fiscal Year Millions

$2.3 $2.4 $2.5 $2.6 $2.7 $2.8 $2.9 2006 2007 2008 2009 2010 2011 2012

Contributions + Lost Interest

Report p. 15

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Fire and Rescue Pension Fund 12

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

Department minimally enforced the prohibition against paying pension benefits to members still working as firefighters and rescue workers

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Finding 4.

Program Evaluation Division North Carolina General Assembly

  • According to statute, members are not

entitled to benefits until they have retired from performing any official duties as paid firefighters or rescue workers

  • 2013 Session – Department asked for the

introduction of an agency bill including a provision that removed the prohibition against in-service distributions

  • Session Law 2013-284 – retained the

prohibition against in-service distributions

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Statute Prohibits In-Service Distributions

Report pp. 16-18

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Fire and Rescue Pension Fund 13

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

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Department Only Used First Mechanism to Enforce Statute

Report p. 17

Mechanisms for Enforcing Prohibition Against In-Service Distribution Implementation Status until 2013

  • 1. Members and chiefs attest that member not still

working

  • 2. Compare Pension Fund retiree data to LGERS

active members

  • 3. Compare Pension Fund retiree data to fire and

rescue department rosters collected by NCSFA and NCAREMS

  • 4. Compare Pension Fund retiree data to the

Department of Revenue’s tax records for active employees at fire and rescue departments

Program Evaluation Division North Carolina General Assembly

Department is taking action to resolve the administrative issues identified in our report

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Finding 5.

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Fire and Rescue Pension Fund 14

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

  • Department contracted actuary to examine

the work history of 1,000 members to develop a more probable lapse assumption

  • Preliminary results suggest 20% lapse

assumption = $2.2 million reduction in State’s annual required contribution

  • State’s annual required contribution still

projected to exceed the amount of insurance premium tax proceeds going to the General Fund

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Department Developing a Lapse Assumption

Report pp. 19-20

Program Evaluation Division North Carolina General Assembly

  • Currently, staff manually match service

time to member contributions because ORBIT still automatically applies contributions to the last delinquent payment

  • Department contracted a business analyst

to determine the components needed to automate the process

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Department Manually Tying Contributions to Service Time

Report pp. 20-21

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Fire and Rescue Pension Fund 15

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

  • Department is comparing the claims of

prospective retirees and their department chiefs on the retirement application form with member data in the Local Governmental Employees’ Retirement System (LGERS)

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Department Corroborating Employment Status of Members

Report p. 21

Program Evaluation Division North Carolina General Assembly

Recommendation

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Fire and Rescue Pension Fund 16

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

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General Assembly should require the department to report on its progress toward

  • building appropriate lapse assumptions
  • collecting timely member contributions
  • enforcing the prohibition against

in-service distributions

Recommendation

Program Evaluation Division North Carolina General Assembly

Additional Legislative Action

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  • General Assembly should request the

Fiscal Research Division provide it with the difference between the State’s annual required contribution (ARC) and the amount of premium tax proceeds going to the General Fund each year

Report p. 23

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Fire and Rescue Pension Fund 17

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

Technical Corrections

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  • General Assembly should amend state law

to conform with practice

– members who earn service exclusively as volunteers do not violate the prohibition against in-service distributions – members who earn service exclusively as firefighters do not violate the prohibition against in- service distributions by being paid rescue workers and vice versa – one-month separation of service is required

Report p. 23

Program Evaluation Division North Carolina General Assembly

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Summary: Findings

1. State’s annual required contribution now exceeds amount of premium tax proceeds going to General Fund 2. Department’s failure to question overly conservative actuarial assumptions has resulted in overstated appropriation requests 3. Department’s failure to enforce timely payment of member contributions has cost Pension Fund at least $500,000 4. Department minimally enforced prohibition against paying pension benefits to members still working 5. Department is taking action to resolve the administrative issues identified

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Fire and Rescue Pension Fund 18

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

Summary: Recommendation

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  • General Assembly should require the

department to report on its progress toward

– building appropriate lapse assumptions into the State’s annual required contribution – collecting timely member contributions – enforcing the prohibition against in-service distributions

Program Evaluation Division North Carolina General Assembly

Legislative Options

  • Accept the report
  • Refer it to any appropriate committees
  • Instruct staff to draft legislation based
  • n the report’s recommendation

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Fire and Rescue Pension Fund 19

Joint Legislative Program Evaluation Oversight Committee March 19, 2014

Program Evaluation Division North Carolina General Assembly

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Report available online at

www.ncleg.net/PED/Reports/reports.html

Kiernan McGorty Kiernan.McGorty@ncleg.net