Folwell: NC Has Nearly $40 Billion in Unfunded Liabilities

RALEIGH – While North Carolina has been under relatively conservative fiscal leadership for the past several years, it doesn’t change the fact that promises made to state employees via pensions and healthcare coverage add up to tens of billions of dollars. Only about five percent of those liabilities have been funded, and Republican State Treasurer Dale Folwell has been sounding the alarm on this darkening cloud ever since his campaign began in 2016.

Folwell hit the ground running once assuming office, renegotiating fees paid to investment managers and driving operational reforms to realize millions in savings for taxpayers. But even those changes are drops in the bucket compared to the massive financial obligations created by state employee pensions and healthcare plans, as well as the billions in bonds the State has financed for infrastructure projects.

As State Treasurer, Folwell chairs the Debt Affordability Advisory Committee, which goes over all of the State’s financial obligations with a fine tooth comb to assess just how ‘affordable’ they are. The 2019 report was just issued, and it’s worrying.

It provides analysis of the impact of future debt issuance on the state’s fiscal position. A secondary purpose of the report is to provide a methodology for measuring, monitoring and managing the State’s debt levels, in order to protect North Carolina’s bond ratings of AAA/Aaa/AAA.

Mind you, Speaker Tim Moore has been spearheading a push to approve billions more in debt this legislative session.

In a press release, Folwell stated:

“The Committee reiterated its recommendation that the State recognize the magnitude of its unfunded pension and other post-employment obligations (OPEB) that cover retiree healthcare costs and to begin to fund these liabilities using principles of gradualism that are appropriate for a State with a long history of good fiscal management and high financial ratings. It was also noted that during 2018 that the State’s pension liability increased by more than $2 billion.”

The ‘principles of gradualism’ are certainly in play considering the State has run revenue surpluses in the hundreds of millions each of the last several years. Incrementally dedicating money to reserve vehicles to fund these pension and healthcare liabilities would be prudent.

Otherwise, as Folwell asserts:

“This is not political or emotional, but mathematical. We have almost $40 billion in unfunded pension and health care liabilities. That bill will come due much sooner than people realize. We’re doing what’s necessary at this point in the state’s history because others didn’t.[…]”

Recently, Folwell has submitted plans to help reduce healthcare cost liabilities by reducing the rates state employees pay healthcare providers (hospitals, doctors).

Although the long term savings the plan would achieve help mitigate future liabilities, the plan has run into stiff opposition by providers because it balances the desire for savings on the backs of providers and hospitals. In moving to Medicare-based reference rates, it essentially asks providers to accept lower payment rates for all state employees. Such rates would threaten the solvency of some small hospitals and treat doctors as if they’re morally obligated to treat government employees for less money.

Here, too, it is not emotional or political, but mathematical. The profit margin from Medicare is zero; Medicaid costs providers money; and uninsured patients cost them even more money, naturally.  The private insurance, such as the state plan, is what subsidizes the rest of it.  If the state plan, the largest purchaser of healthcare services in North Carolina, moves closer to Medicare rates, then hospitals and providers are less able to financially handle the rest of it.

A more substantive reform, that better recognizes that healthcare providers are not charities, could be to meaningfully reform the subsidized healthcare benefits state employees receive. Lawmakers would be loathed to reduce the value of benefits state employees receive, but it would go a long way toward reducing liabilities while also respecting taxpayers.

Either way, as this report points out in clear terms, thoughtful fiscal planning is going to be required of lawmakers, and soon. If nothing is done, these unfunded liabilities will begin taking bigger and bigger bites out of the budget until a fiscal crisis is at our doorstep.

You can access the whole debt advisory report here.