Then-Rep. Dale Folwell filed legislation in 2006 to set aside $200 million to prepare for the unfunded future health care expenses of retired North Carolina state employees, an amount calculated in the tens of billions of dollars.
The Forsyth County Republican proposed something much more modest the following year – $100 – to keep the issue alive.
The proposals didn’t get much traction. But his zeal sounding the alarm over the unfunded retiree health care liability – an issue nearly all states are grappling with – has resurfaced with his November election as state treasurer.
Folwell persuaded enough people last week on the state’s debt affordability panel he leads as treasurer to recommend the General Assembly begin making annual contributions to a trust fund. The money would address the health care liability and the smaller current shortfall between what the state is obligated to pay current and future retiree pensions and pension funds it’s got today.
If the recommendation became law, the first transfer could be at least $140 million toward a combined unfunded liability of at least $37.8 billion, the panel’s report said. The amounts compare to an annual state government budget of more than $22 billion.
“It’s not enough just to say that something needs to be fixed. Somebody actually has to fix it,” Folwell said in an interview, adding people “have been listening to me talk about this for over a decade.”
Folwell still must convince enough state officials the issue is important enough to forfeit the ability to bypass some immediate spending on improving government services deemed crucial such as schools, prisons and courts.
The committee’s proposal, calculated based on self-imposed borrowing limits and anticipated revenue growth, could become harder to meet over time. A 10-year projection initially keeps annual payments mostly static, then rise in the early 2020s, reaching $683 million in 2026.
“This is a bold approach that says off the top we’re going to take a certain amount of money each year to put it toward this liability,” said Charlie Perusse, Democratic Gov. Roy Cooper’s budget director and a committee member who voted against Folwell’s recommendation. “That concerns me, not because I don’t think this liability is important, but we’re basically saying this trumps all of those other things.”
The costs of these and other future post-retirement benefits for all the states totaled $627 billion in 2013, according to The Pew Charitable Trusts. North Carolina pays for health care expenses when a retiree incurs them, rather than funding them ahead of time while the retiree is working. Without finances to pay for the benefits, states could be forced to reduce or eliminate some.
Folwell and his staff say action also is needed because bond-rating agencies are looking closely at them when grading states before they issue debt. North Carolina is one of 12 states with the highest grades from all three rating agencies, which keeps interest expenses low.
Democratic State Auditor Beth Wood, who supported Folwell’s recommendation, said the state couldn’t kick the issue down the road anymore. “You’re gambling against losing your triple-A bond rating,” she said.
Cooper is under no obligation to insert the recommendation into his budget proposal. With Republicans holding veto-proof majorities in the House and Senate, the future of Folwell’s proposal rests with the Legislature, in which he served through 2012.
A bill filed early this session would create a committee to study options to reduce the liability. Sen. Andy Wells, a Catawba County Republican and co-chairman of the Senate pensions and benefits committee, shares Folwell’s passion for addressing the liabilities. Wells said additional funding and reducing expenses must be considered. One cut could be to simply stop offering retiree health benefits to new hires.
“It is my belief that this unfunded retiree benefit obligation is the biggest issue facing the taxpayers of North Carolina,” Wells said.