When a North Carolina state agency reduces its workforce, who decides whether an affected employee gets discontinued service retirement (DSR) or severance pay: the State Budget Officer or the agency head?

Plain-English summary

State Budget Officer David McCoy wrote on October 24, 2001 asking a sharply-framed question: assuming state funds are available and a state employee meets the age and service requirements in N.C. Gen. Stat. § 143-27.2, can the State Budget Officer grant Discontinued Service Retirement (DSR) to a RIF'd employee when the agency head has not recommended (and approved) DSR?

Senior Deputy AG Ann Reed and Special Deputy AG John Corne said no. The statute requires the agency head's approval for DSR specifically. The Budget Officer has discretion to choose between DSR and severance wages, and is required to consider but not bound by the agency head's and State Personnel Director's recommendations. But the second paragraph of § 143-27.2(a) imposes a separate approval requirement for DSR: an affected employee may be entitled to DSR "subject to the approval of the employing agency and the availability of agency funds." The two paragraphs work together. The Budget Officer can pick severance wages over agency objection. The Budget Officer cannot pick DSR over agency objection.

The opinion confirmed two related points. First, an employee facing a RIF must receive one or the other (DSR or severance wages). Neither is optional. The Director of the Budget "shall pay either" once the conditions are met. So an agency cannot effectively block all benefits by refusing to approve DSR; the Budget Officer still has authority to award severance wages without agency approval. Second, severance wages are not subject to retirement-system contributions and are paid under State Personnel Commission policies.

The practical effect is that the agency head has veto power over DSR but not over severance wages. DSR is generally more valuable to long-service employees because it triggers retirement-allowance payments and continues retirement benefit accrual under the Teachers' and State Employees' Retirement System or the Law-Enforcement Officers' Retirement System. Severance wages are a lump-sum cash payment that does not feed the retirement system. So the agency head's DSR approval matters most to employees close to retirement eligibility.

Currency note

This opinion was issued in 2001. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. N.C.G.S. § 143-27.2 has been amended over the years and the broader RIF and severance framework has evolved. Anyone facing a current RIF decision should consult current § 143-27.2, current State Human Resources Commission policies, and recent appellate decisions before relying on this analysis.

Background and statutory framework

Why DSR exists. The Discontinued Service Retirement allowance is a benefit designed to soften the impact of involuntary termination on state employees who are old enough and have enough service to be reasonably close to retirement. Rather than facing the labor market with no income or pension, the employee receives an early retirement allowance from the retirement system. The statute provides DSR as one of two alternatives the Director of the Budget must offer when a closing or RIF is determined to accomplish economies in the State Budget.

Why agency approval matters. DSR triggers retirement-system payouts. Those payouts come ultimately from system funds, but the agency's payroll line also bears costs. Subjecting DSR to agency approval gives the agency head a checkpoint to ensure the budget impact is one the agency can support. Severance wages, by contrast, are funded from agency funds but do not have the same retirement-system implications, and the Budget Officer can authorize them unilaterally.

The two-paragraph structure. The first paragraph of § 143-27.2(a) sets out the Budget Officer's general authority to pay DSR or severance wages. It requires consideration of (but not deference to) the agency head's and State Personnel Director's recommendations. The second paragraph specifically addresses DSR for retirement-system members and adds the agency-approval requirement. Reading the two together gives the Budget Officer discretion overall, with one specific exception: DSR requires agency sign-off.

Severance wages mechanics. The statute clarifies that severance wages are not subject to retirement contributions and are paid under State Personnel Commission policies. An employee selecting DSR forfeits severance wages. So the Budget Officer's choice is binary, not cumulative.

Why an employee cannot be cut off entirely. The statute uses "shall pay either," not "may pay." Affected employees who meet the conditions are entitled to one of the two benefits. The agency cannot zero out an employee's benefits by withholding DSR approval, because the Budget Officer can still pay severance wages.

Common questions

Q: If the agency head wants DSR but the Budget Officer prefers severance wages, who wins?

A: The Budget Officer. The statute makes clear the Budget Officer's discretion governs the choice between the two. The Budget Officer "shall consider" the agency head's recommendation but is not bound by it. Picking severance wages over an agency head's DSR recommendation is within the Budget Officer's authority.

Q: Could an agency head delay DSR approval to push the employee into severance wages instead?

A: The statute did not address delay tactics, but functionally yes: if the agency head withholds approval, the Budget Officer cannot grant DSR. The Budget Officer would then pay severance wages. The employee would lose the DSR option.

Q: What if state funds are not available?

A: The first paragraph of the statute conditions DSR or severance wages on the Director of the Budget's determination that the closing or RIF accomplishes economies in the State Budget. The second paragraph conditions DSR on "the availability of agency funds." Both conditions must be met for the relevant benefit. An employee at an agency with no funds could be left with neither option.

Q: Is severance wages subject to retirement contributions?

A: No. The statute expressly excludes severance wages from employer and employee retirement contributions. This is part of why severance wages are cheaper to administer than DSR.

Citations

Statutes:
- N.C. Gen. Stat. § 143-27.2 (Discontinued Service Retirement allowance and severance wages on RIF; agency head approval for DSR; State Personnel Commission policies for severance wages)

Source

• Landing page: https://ncdoj.gov/opinions/approval-of-discontinuedservice-retirement-allowance-and-severance-wages/

Original opinion text

RE: Advisory Opinion; N.C. Gen. Stat. § 143-27.2; Approval Of Discontinued Service Retirement Allowance And Severance Wages By The State Budget Officer

Dear Mr. McCoy:

By letter dated October 24, 2001, you have asked the following question:

Provided State funds are available and a State employee meets the age and length of service requirements set forth in N.C. Gen. Stat. § 143-27.2, can the State Budget Officer approve discontinued service retirement allowance ("DSR") when the agency head of the employing agency does not recommend (and approve) DSR?

Stated simply, the answer to your question is no.

N.C. Gen. Stat. § 143-27.2(a) states, in pertinent part:

When the Director of the Budget determines that the closing of a State institution or a reduction in force will accomplish economies in the State Budget, he shall pay either a discontinued service retirement allowance or severance wages to any affected State employee, provided reemployment is not available. . . . In determining whether to pay a discontinued service retirement allowance or severance wages, the Director of the Budget shall consider the recommendation of the department head involved and any recommendation of the State Personnel Director. Severance wages shall not be paid to an employee who chooses a discontinued service retirement. Severance wages shall not be subject to employer or employee retirement contributions. Severance wages shall be paid according to the policies adopted by the State Personnel Commission.

Notwithstanding any other provisions of the State's retirement laws, any employee of the State who is a member of the Teachers' and State Employees' Retirement System or the Law-Enforcement Officers' Retirement System and who has his job involuntarily terminated as a result of economies in the State Budget may be entitled to a discontinued service retirement allowance, subject to the approval of the employing agency and the availability of agency funds. . . . .

The first paragraph quoted above requires the State Budget Officer to consider the payment recommendation of the employing agency head and the State Personnel Director, but does not require the State Budget Officer to accept the recommendations of either. However, the second paragraph provides that the State Budget Officer cannot select DSR without the express approval of the employing agency. Notwithstanding the discretionary selection language, N.C. Gen. Stat. § 143-27.2(a) clearly requires that a State employee subject to a reduction in force ("RIF") receive either DSR or severance wages upon termination.

Therefore, while the State Budget Officer has the discretion to accept or reject the recommendations and select which type of payment a State employee subject to a RIF will receive upon his or her termination from employment, the DSR selection requires the approval of the employing agency head.

In summary, the State Budget Officer cannot select DSR unless the employing agency head has approved the payment of DSR. The State Budget Officer may select severance wages even if the employing agency recommends and approves DSR.

Should you have additional questions concerning this advisory opinion, please give us a call.

Sincerely,

Ann Reed
Senior Deputy Attorney General

John R. Corne
Special Deputy Attorney General