This article originally appeared in the Greensboro News & Record on December 2, 2007.
Hey buddy, can you spare 11 grand? That’s the question state lawmakers are asking of North Carolina families in order to help support hundreds of thousands of retired state bureaucrats.
Data recently released by the state government reveal that future costs to finance North Carolina’s state health benefits for retired employees amount to roughly $24 billion. Unfortunately for taxpayers, lawmakers have set aside virtually no money for this liability, which means we will someday be forced to pay an enormous tab. The total? Just under $11,000 per family of four. What’s worse is that this figure grows every day.
Standards established by the Governmental Accounting Standards Board in 2005 called for states to calculate and disclose the total costs — in today’s dollars — of financing the accrued health benefits to current and future state retirees. Commonly referred to as an unfunded liability, North Carolina has accumulated $23.8 billion in retiree health insurance premium obligations, with no way of paying for it.
According to state policy since 1978, tax dollars pay 100 percent of premium costs for current state employees and retirees to enroll in the state health plan. This group includes employees of state agencies and universities, local public schools and local community colleges.
North Carolina’s massive unfunded liability has accrued so rapidly in large part because of the state’s incredibly lax eligibility requirements. Up until the passage of new legislation last year, state workers needed only five years of state service in order to receive free enrollment in the state health plan when they retired.
In short, people could work for the state for five years, then work in private industry the rest of their career and still enroll in the state health plan fully financed with taxpayer dollars upon retiring.
Compare this policy to neighboring Virginia and South Carolina, which have longer eligibility requirements (10 and 15 years, respectively) while also requiring retirees to pay a portion of the premiums themselves.
North Carolina’s new law now requires that future retirees have 20 years or more of service to be eligible for fully subsidized health insurance premiums. State employees retiring with 10 to 20 years of service will be eligible for having half of their health insurance premiums paid for by the state. State workers retiring with between five and 10 years of service will still be able to enroll in the state health insurance plan, but will have to fully finance the premium payments themselves.
North Carolina finances state retiree health premiums on a pay-as-you-go basis, which means that each year the state allocates funds sufficient only to pay the premiums for currently enrolled retirees. So far state lawmakers have not made any attempt to set aside monies for the massive oncoming financial burden as more and more state employees enter retirement age.
The pay-as-you-go system is the norm for states. But the recent mandates from the Governmental Accounting Standards Board have forced states to confront their unfunded liability — most for the first time. Twelve states (including Georgia, Alabama and Virginia) took action this year, passing legislation creating a fund or account in which money is to be set aside to pay for future retiree health care costs. Alabama has been the most proactive; by placing $417 million into the fund it has reduced its unfunded liability from $14.6 billion to $12.5 billion. (The amount of liability shrinks more than the amount set aside because the fund will be invested and see returns.)
It is tough to tell if North Carolina is worse off than most states, although a report by N.C. Rep. Dale Folwell, R-Forsyth, revealed that North Carolina’s liability is 113 percent of the most recent state budget while Texas’s unfunded liability is only 18 percent of its state budget.
Folwell also introduced a bill last May that would have begun to address this issue. It would have increased the rate used to calculate the amount of money to be set aside for retiree health benefits. It also would have appropriated $100 to establish a reserve fund from which money would be allocated to state agencies to help offset the increased contribution rates. It was a symbolic move designed to encourage a more proactive approach to the issue.
A March 2007 report by the N.C. General Assembly’s Fiscal Research Division reveals that in order to fully pre-fund its retiree health benefit obligations, North Carolina would have to dedicate $2.39 billion annually toward this end. To put this in perspective, $2.39 billion would be more than the entire Department of Justice and Public Safety budget for 2007, and more than twice the current highway trust fund. Furthermore, $2.39 billion is five times the $477 million actually spent in the pay-as-you-go system in fiscal year 2005.
The $24 billion in unfunded liability — calculated based on accumulated obligations as of Dec. 31, 2005 — will no doubt be significantly larger when the new assessment is calculated at the end of this year. Keep this in mind in light of the more than 25,000 new state employees added since Gov. Mike Easley’s first year as governor — most of whom will be enjoying subsidized health insurance in their retirement at the taxpayers’ expense. Moreover, the $24 billion figure does not even include the countless county and municipal unfunded retiree health benefit liabilities across the state.
Gov. Easley praised the current budget, which increases spending by 20 percent over the last two years, and lauded those who crafted it for their "courage and foresight" to "stand up for the future of our state." Unfortunately, their courage and foresight did not involve addressing a growing financial burden that already amounts to nearly $11,000 for each family of four.
The 2006 law establishing more sensible eligibility requirements was a step in the right direction, but it will not reverse the already accumulated obligations. If such shortsighted neglect of a liability already larger than the state’s entire budget is how the governor intends to "stand up for the future of our state," then one might suggest he sit down.
In spite of four straight years of budget surpluses totaling roughly $3.5 billion, our state’s retiree health benefit liability continues to grow with seemingly no end in sight. It won’t be long before taxpayers will be forced to pony up for another self-induced "crisis" in Raleigh.