Judge’s ruling on State Health Plan could cost taxpayers at least $100 million

The N.C. Department of Justice is considering how to respond to a Superior Court judge’s ruling that the state unconstitutionally charged health insurance premiums to state retirees.

Already wracked by $42 billion in unfunded liabilities, the State Health Plan might have to absorb billions of dollars more in unanticipated costs, which could foil plans to restore solvency to the state-funded health insurance system.

The class-action suit involves 220,000 retirees. They say the state broke contractual obligations after 2011 by charging a premium for health-care coverage in retirement.

“Right now the North Carolina Department of Justice is reviewing the order, and considering next steps,” said department spokeswoman Laura Brewer.

She declined to say whether the department is considering an appeal of Rockingham County Superior Court Judge Edwin Wilson’s order. Gov. Mike Easley appointed Wilson in 2003. He was selected to hear the case, filed in Gaston County.

Wilson’s ruling was limited to the state’s so-called 80/20 enhanced plan. Under it, the state pays 80 percent for services and insured members pay the remaining 20 percent.

Both sides agreed to a separate proceeding to deal with the state’s 70/30 plan. Wilson gave parties in the case 15 days from his May 17 order to file motions, and possibly seek a trial.

“If this ruling stands, the costs to the State of North Carolina may exceed $100 million, which does not include the cost to the Plan of complying with the Plaintiffs’ demands going forward,” state Treasurer Dale Folwell wrote in a letter to state legislators dated May 19.

“Those demands could add billions to our unfunded liability for retiree health coverage. If the ruling stands, it would also considerably limit the State’s flexibility to reform the State Health Plan,” he wrote.

Should the plaintiffs prevail, Folwell cautioned, the unfunded liability could increase quickly to an unsustainable level.

Folwell also warned that the legislature immediately needs to set aside more money to reduce the unfunded liability.

In a legal motion filed in September, lawyers for the retirees argued that ample precedent exists for a damage award.

“The Retiree Health Benefits at issue in this case are no different than the disability, pension, severance, tenure, and other public employment benefits that North Carolina courts have been [sic] almost unanimously held to be protected from unilateral diminution and reduction” after a public employee becomes vested in the benefit, the lawyers wrote.

Wilson cited some of those prior cases in his order.

He said the state breached its contract in September 2011 when vested retirees were forced to start paying premiums for the 80/20 plan.

The State Health Plan was a contentious issue that year. Facing a half-billion-dollar shortfall in the retiree portion of the plan, the General Assembly attempted to move operation of the system to the state treasurer’s office. The bills also allowed the plan to require retirees to pay premiums.

Gov. Bev Perdue vetoed one bill but later passed House Bill 578 and allowed Senate Bill 323 to become law without her signature.

Wilson said the U.S. Constitution forbids states from passing laws impairing the obligation of contracts. The state’s action further failed a three-part test in place in North Carolina for determining when an unconstitutional impairment of a contract occurs. Wilson found the state’s actions neither reasonable nor necessary to serve an important public purpose.

The N.C. Constitution contains a “Law of the Land” clause, under which retirement health benefits are considered protected property, Wilson said. Therefore, imposing premiums on the 80/20 insurance plan constituted a taking of private property without just compensation.

Wilson ordered Folwell, the State Health Plan, and the state retirement system’s board of trustees to provide the 80/20 plan to retirees premium-free for the duration of their retirements.

Wilson gave the parties two months to agree on damages. If they cannot agree by then, the court would have one month to arrive at a figure, and by the end of the fourth month a final amount would be submitted.