Other than Dale Folwell, North Carolina’s new state treasurer, no state politician made a big campaign issue last fall of the condition of the health plan for teachers and state employees. Did you hear candidates for governor or legislature talk about the state’s past promise to provide retiree health benefits, and the fact that the state has no money to pay for those benefits?
I doubt it. But this unfunded promise, worth tens of billions of dollars to North Carolina teachers and state employees, is about to become a big political issue in 2017 — even though none of the options on the table is likely to make anyone particularly happy.
The promise of relatively generous non-wage benefits has long been a recruiting device for government agencies who couldn’t offer competitive wages to workers. You might not take home as much pay as you would in a private-sector job, the pitch went, but if you stick around long enough, you’ll have much better pension and health benefits.
When it comes to retiree health benefits, at least, this pitch has sadly become a bit of a flimflam. Today’s retirees do, indeed, get the supplemental coverage. But it is paid almost completely out of current revenues. Unlike the pension plan, the retiree health benefit does not rest on a diverse portfolio of financial investments accumulated over time. There is no piggy bank to break open.
By 2020, the unfunded liability for retiree health benefits is projected to reach nearly $38 billion. That’s real money, even in government-speak. Past governors and legislatures have done next to nothing about this big hole in the state’s finances. Some likely weren’t even aware of it, despite the fact that it has been dutifully reported in the state’s audited financial statements for years.
Such dilatory or ignorant behavior is no longer an option. Baby Boomers are retiring from government jobs in increasing numbers. They are getting coverage and making medical claims. This is not a future fiscal emergency in the making. It is unfolding now.
There are basically three ways state policymakers can respond to the problem. One is to save more money, lots of it, every year. Another is to change the terms of the employment deal for new hires, so that we aren’t promising future benefits we can’t afford. The third alternative is to reduce the cost of services for those already in the system, up to and including at least a partial repudiation of the benefit.
Expect lots of discussion about all three options. One panel, led by Folwell, has already endorsed a plan to put an initial $153 million into a fund for retiree health benefits, with annual contributions escalating to an estimated $683 million by 2026. State lawmakers are also talking about changing the vesting period for eligibility, introducing premiums or savings requirements, expanding deductibles and copayments to deter wasteful medical consumption, creating health savings accounts as a positive inducement for retirees to spend more wisely, and encouraging more recipients to enroll in Medicare Advantage and exchange plans (which would basically shift some of the medical costs off the state’s books).
At this point, eliminating the entire unfunded liability for retiree health benefits through additional state savings is unlikely. Can you imagine the General Assembly setting aside a billion dollars or more every year, rather than spending that money on schools, universities, and other current operations? Neither can I. But simply stiffing state retirees isn’t feasible, either — or ethical.
Dale Folwell, Sen. Andy Wells, Sen. Joyce Krawiec, and other leaders on this issue should be commended for taking on what may prove to be a thankless task. They didn’t create the fiscal mess now confronting North Carolina. That was the handiwork of many former politicians whose reputations, alas, won’t be harmed by their irresponsible actions. They took the easy way out. Like Popeye’s friend Wimpy, they promised to pay government workers on some far-distant Tuesday for a service delivered today.
Electing wimps to office is never a good idea.
John Hood is chairman of the John Locke Foundation and appears on the talk show “NC SPIN.” You can follow him @JohnHoodNC.