State Employee Retirement Benefits at Risk

This article originally appeared in the Fayetteville Observer.

Concerned about the rising cost of health insurance? State employees aren’t. 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 colleges.

The policy means that many state employees can retire in their mid-50s not only with healthy pension payments, but free health care insurance as well – all at the expense of North Carolina taxpayers.

Such generosity comes at a heavy price, however. Data recently released by the state government revealed 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.

New standards established by the Governmental Accounting Standards Board (GASB) 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.

North Carolina continues to finance the 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. As of this point, North Carolina lawmakers have not made any attempt at setting aside monies for the massive oncoming financial burden as more and more state employees enter retirement age.

This massive unfunded liability has accrued so rapidly in large part due to the state’s incredibly lax eligibility requirements. Up until the passage of new legislation in 2006, state workers needed only five years of state service in order to receive free enrollment in the state health plan when they entered retirement. In short, someone could work for the state from age 25 to 30, work in private industry the rest of their career, and still enroll in the state health plan fully financed with taxpayer dollars upon retirement. State retirees receive the free health insurance until they become eligible for Medicare, at which point Medicare becomes their primary provider.

A March 2007 Fiscal Research report reveals that in order to fully pre-fund its retiree health benefit obligations, North Carolina would have to dedicate $2.39 billion annually towards this end. To put this in perspective, $2.39 billion would be more than the entire Justice & Public Safety budget for 2007, and more than twice the Highway Trust Fund in 2007. Furthermore, $2.39 billion is five times the $477 million actually spent in the pay-as-you-go system in FY2005.

The $24 billion in unfunded liability – calculated based on accumulated obligations as of December 31, 2005 – will no doubt be significantly larger when the new assessment is calculated using data from the end of 2007. Keep this in mind in light of the more than 25,000 new state employees added since Governor Easley’s first year – 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.

It is tough to tell if North Carolina is worse off than most states, although a report by State Representative 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. The bill 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 – a symbolic move designed to encourage a more proactive approach to this issue.

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.

Brian Balfour is a Policy Analyst at the Civitas Institute in Raleigh. (www.nccivitas.org)