The State Health Plan is “on life support” and will require more state and employee contributions to meet massive unfunded obligations, state Treasurer Dale Folwell said Monday in his first Ask Me Anything monthly teleconference call with reporters.
Since taking office in January, Folwell said, he has been churning out calls to investment fund managers as part of his campaign promise to find and save up to $100 million in excess management fees for some of the state’s investment accounts.
The goal is to help attack the underfunded state pension and health plans.
“I’m on my 138th phone call. These phone calls have taken place at either 14- or eight-minute intervals,” Folwell said. “I ask these money managers, ‘Who are you, where are you, how good are you, and how much are we paying you?”
Folwell, North Carolina’s first Republican state treasurer since 1876, has been making the case that the state has accumulated $38 billion in unfunded liabilities in the health and pension plans, affecting the state’s debt affordability, and potentially jeopardizing its AAA bond rating that keeps interest rates low on borrowing.
Throughout Monday’s nearly hourlong question-and-answer event, Folwell emphasized a theme: “We’re going to reduce complexity and build value” while bolstering both the state’s reserves and state employees’ confidence in its financial infrastructure.
The state pension plan is funded by contributions from employees and the agency that employs them.
“That system was not set up for the State Health Plan, which has put us in this situation where we have these unfunded liabilities, and are producing pay-go appropriations of close to $3 billion this year,” Folwell said.
“We’re meeting with stakeholders to determine how we’re going to preserve and strengthen these plans, and not go off another financial cliff,” he said.
The State Health Plan this year will see 9 percent to 10 percent growth in prescription drug costs, and an 8 percent increase in medical care costs. The initial proposal recommended to him in early January a 3 percent to 4 percent employee premium increase that wouldn’t have covered rising costs without dipping $680 million out of reserves in the next 24 months.
“And that’s what’s been happening for a decade,” Folwell said. “We would have virtually no reserves … about three years from now.”
Many of his plans and new policies dovetail with a debt affordability study his office prepared and sent to the governor and General Assembly.
Folwell said his report is the first to include a pension and health-care liabilities analysis, with a plan to solve the shortfalls. Aside from whittling down the unfunded liabilities by increasing the money going to those trust funds, he plans to raise the state’s current debt limit ratio from 4 percent of general tax revenue to 4 ½ percent. The statutory cap is 4 ¾ percent.
That would give the state $1.268 billion in the current fiscal year general fund debt capacity, or more than $180 million annually for the next 10 years.
He is seeking state appropriations to go into an interest-bearing solvency fund, which the General Assembly would designate. As the state refinances its debt at lower interest rates, the savings would be added to the solvency fund — 85 percent of which would go toward the State Health Plan, and 15 percent to the pension liability.
Folwell said his goal is to pump about $140 million each year into the solvency fund for the present biennium, “and a little bit higher than that for the next two years.” That number “scales up” over the next 10 years.
Given the ailing fiscal health of the State Health Plan, Folwell said, he would be cautious in expanding it to local cities and counties that have expressed interest.
“I cannot be reasonably sure that the state is not losing money,” Folwell said. “I’ve got to make sure that we’re not bringing people onto the health plan, and pricing a product, that is underpriced before we look at all the numbers that are associated with that.”
Folwell plans to fulfill his campaign pledge to cut $100 million in investment manager fees to freeze and lower family premiums “in an effort to save our State Health Plan, and to bring more transparency to the office.” The State Employees Association of North Carolina has filed a whistleblower complaint with the Securities and Exchange Commission over the state’s secretive investment practices.
“What I’m learning is there was a big move over the last several years to go towards alternative investments,” which drove up fees the state paid and reduced liquidity in being able to withdraw from those deals, Folwell said.
“There’s contractual obligations that prevent us from getting that money back, and reallocating it somewhere else. In addition to those contractual obligations, in many cases the investments that have been made inside of these funds are not easily sellable or liquid. It’s not IBM or Coca Cola stock.”
In general, those riskier alternative investments didn’t perform as well as what the state could have achieved by putting the money in indexed mutual funds with much lower fees, he said, although the fund managers made out well.
He expects his chief investment officer to present him with a plan this week to reach that $100 million in savings, which would include low-cost alternatives and putting money into index funds.
In other areas, Folwell said:
- He is reviewing how much of the state’s investments would remain in stocks, and which ones.
- Billions of dollars are invested in foreign stocks that generate big fees for portfolio advisers, “but when we expatriate the money back into dollars we don’t really make anything.” He would prefer U.S. investments or dollar-denominated securities if diversifying in foreign markets.
- He plans to bring more sunshine to the state’s dealings with Blue Cross and Blue Shield and use the leverage as the state’s largest single consumer of health insurance to get better deals.