Why Medicaid, Pensions and Retiree Health Benefits Are So Important to the Budget

This Wall Street Journal article discusses how Medicaid and public pensions are two of the primary factors squeezing state budgets.

These days, they (pensions and Medicaid) consume about one out of every five tax dollars collected by state and local governments. That is the highest share since Medicaid was created in 1965. Post retirement health benefits, which are harder to quantify, add to that burden and have cumulatively cost states more than $100 billion since 2008, according to government financial disclosures compiled by Merritt Research Services.

Those costs are outpacing growth in tax revenue year after year.

How have these items impacted North Carolina’s state budget? Looking at state General Fund expenditures, Medicaid spending has increased from $2.2 billion in FY 2002-03 to $3.69 billion this year – a 67% increase in 15 years. In 2002-03, Medicaid spending consumed 15.36% of the General Fund budget, a share that has grown to 16% this year.

Compared to other states, a modest increase in the share of budget going to Medicaid – thanks in no small part to the legislature’s decision not to expand Medicaid.

On the pension side, the latest reports show an unfunded liability of $7.9 billion. This figure is likely highly understated, however, given the overly optimistic discount rate being used to calculate the liability. At any rate, the $7.9 B liability is a dramatic reversal from just 2005, when the pension plan actually had a $3 B surplus.

Supporting annual pension payments has gotten far more expensive. Just five years ago, the cost to taxpayers to contribute to the pension plan was $811 million. This year it is more than double that – $1.7 billion.

Left out of the WSJ article, however, was unfunded liabilities for state retiree health benefits. This is perhaps North Carolina’s largest fiscal challenge, currently at about $33 billion – up by $9 billion compared to 2005. The annual taxpayer support just to keep up with yearly benefit payouts has grown to about $871 million. This is up by a whopping 68% in just five years, and a stunning ten-fold since FY 2000-01.

Between the three items: Medicaid, pensions and retiree health benefits, state taxpayers are paying nearly $6.3 billion – that consumes 27% of the state’s $23 billion General Fund budget.