North Carolina is a model for states looking to diffuse a looming debt crisis over unfunded health care benefits for state retirees, the Manhattan Institute says in a report.
State and local governments have a $1.1 trillion hole in their promises to state employees, as of a 2015 Federal Reserve estimate. North Carolina alone bears $34.4 billion in unfunded liabilities for retirees’ health care.
But North Carolina has attacked its unfunded liabilities for “other post-employment benefits” by raising qualification thresholds for health care and cutting benefits for future retirees. The report prescribes North Carolina’s “tough medicine” approach to other states with big liabilities and small public sector unions, such as Alabama, Georgia, and Texas.
“If you’re backloading more compensation for your public employees into retirement, that means you’re paying more for people who are done working,” Daniel DiSalvo, Manhattan Institute senior fellow, told Head Locke, a John Locke Foundation podcast. “There’s less money on an annual basis… [for other] priorities, whether that’s improving trash collection, offering more protection with police and firefighters, improving schools. … It just ties governments’ hands.”
North Carolina began targeting its unfunded liabilities in 2005. It stopped offering full state-funded retiree health care benefits to employees who worked for the state for five years and raised the threshold for full state-funded healthcare to 20 years.
But the legislature softened those measures by giving retirees with 10 to 20 years’ experience 50% premium subsidies, while retirees with five to 10 years could pay a full premium. The reform only projected $13 million savings over a decade.
Once the Republicans took control of the legislature, the reforms became more strict. The legislature introduced monthly premiums, and, in 2017, it decided to cut off future state employees from retiree health care benefits, starting for workers hired after 2021.
“It sounds draconian,” DiSalvo said. “But it was already a little bit of a false promise to lots of workers who might come and work for the state for 10, 15 years. If they’re not making the full 20, they’re not going to see the benefit anyway.”
The future cuts could narrow the divide between private and public sector retirees. Only 15% of private-sector workers access employer-provided retiree health benefits today, while 70% of state and local workers are eligible for employer-provided retiree health benefits.
When the legislature first decided to cut state retiree benefits, state employees protested that it would harm teachers and lower teacher retention. DiSalvo hopes the cuts could eventually give the state the ability to raise state employees’ wages.
“By getting rid of this benefit, it might do something that many public employees would actually prefer, which is giving the state more flexibility to raise pay in the here and now,” DiSalvo said.
North Carolina’s Debt Affordability Advisory Committee is pushing for the state to appropriate $100 million into the Unfunded Liability Solvency Reserve. North Carolina is also getting national attention for state Treasurer Dale Folwell’s attempt to battle the rising cost of health care to the State Health Plan with transparent pricing.
“We’re so focused on unfunded liabilities because mathematically we know that these issues are going to make the generational difference in the future of North Carolina,” Folwell said. “We’re trying to preserve, strengthen, and sustain these plans we have today. That word sustain is underlined because of our reforms with health care transparency.”