North Carolina should avoid borrowing billions, even though the state’s “credit card limit,” a recent study says, is more than $11 billion over the next decade, said State Treasurer Dale Folwell.
The state is on the hook for $42 billion in unfunded pension, health care, and other retirement benefit liabilities for state employees. Folwell is worried about promises the state has made to its teachers and employees. He addressed those concerns Tuesday, Feb. 4, in his monthly “Ask Me Anything” teleconference.
North Carolina can afford to borrow $11 billion over the next 10 years, according to the 2020 Debt Affordability Study. Gov. Roy Cooper wants to begin using that credit by borrowing $3.9 billion to build and restore schools and sewer systems.
North Carolina’s public schools need an estimated $8 billion in renovations and construction. Its aging sewer systems will require between $17 billion and $26 billion in the next two decades, according to a 2017 water infrastructure report.
“We must build schools to get our children out of trailers and reduce class sizes, and a bond now at extremely low interest rates is affordable and necessary,” Cooper said in a news release.
But the state’s $42 billion in unfunded liabilities could cost state employees some of their benefits, or the state its ability to affordably borrow money, says Joseph Coletti, John Locke Foundation senior fellow.
Traditionally, the lion’s share of the $42 billion shortfall doesn’t get calculated into the state’s “credit score.” Only pensions are considered iron-clad — other promises, such as health care, are considered a “legally softer obligation” — so the rest of the liabilities don’t fully make it into the equation.
That’s part of the reason North Carolina has maintained its premiere AAA bond rating. The state has the sixth-strongest pension in the country, according to Public Plans Data. Its $10.4 billion shortfall pales in comparison to Kentucky, which is only 33.9% funded, and California, which has a $190.4 billion total pension shortfall, according to The Pew Charitable Trusts.
But the state’s other liabilities — including a Retiree Health Benefit Fund that is only 4.4% funded — total $31.6 billion. And those liabilities could start affecting the state’s AAA bond rating, making it more expensive to borrow money.
Rating agencies are beginning to account for those billions. The global rating agency Standard & Poor’s is cracking down on what it has now identified as a “growing risk for state’s credit quality,” as of a December 2019 report.
“I can tell you that there are whole departments being formed at the rating agencies to specifically look at the unfunded liabilities,” Folwell said. “This is a serious matter, and that’s why we have been driving so hard for clear pricing. One of the biggest components of our $32 billion unfunded health care liability is the growth rate in hospital and prescription drug costs over the last 20 years. … It’s absolutely frightening.”
Folwell tried to avoid future benefit cuts by reining in the cost of the State Health Plan. Allied with the State Employees Association of North Carolina, he spent the past year fighting the state’s eight major health care systems over his Clear Pricing Project. The health care systems sunk the reform in 2019, but Folwell says the fight isn’t over.
The state has already begun to narrow the scope of its liabilities. Future state employees won’t get state health insurance during their retirement, starting with workers hired after January 2021.
“As you continue to earn less than you expect to receive, it increases the risk of a benefit cut,” Coletti said. “You cut money on retirees, you cut spending on everything but retirement, or you raise taxes. Those become the three very real choices that impact everybody, either state employees and teachers, and everybody else.”