State Treasurer Dale Folwell isn’t known to mince words and in a recent NC SPIN interview he reported North Carolina has made promises to present and retired state employees we are presently unable to pay. By the Treasurer’s calculations, and this CPA is pretty good with numbers, we owe $10-14 billion in underfunding to our Teachers and State Employee Retirement Systems and $32 billion to the State Health Plan.
To better understand the problem, some history is instructive. For many years there has been an implicit (and sometimes stated) understanding that the state would not pay its employees market wages. To compensate for this fact state employees were promised benefit plans better than most found in the private sector, benefits that included retirement and health insurance packages.
Retirement plans receive funding from three sources. State Employees contribute 6 percent of their earnings, the agencies they work for contribute an equal or greater percentage and the Treasurer invests those combined sums. The largest contributor to the underfunding is that instead of earning the 7.25 percent targeted rate of return on investments, the actual yield is about 6 percent over the past five years. The state has been increasing its contribution levels in recent years to help offset the projected investment shortfalls, however the retirement plans are only about 85 percent funded. Folwell is quick to add that our state’s retirement plans have been and remain among the soundest of any public retirement plans in the nation, but to reach 100 percent funding we must adjust investment goals to more realistic levels, improve investment results and need to further increase state contributions.
The $32 billion underfunding of the State Health Plan is more serious. Until 2006, state employees were promised that after completing 5 years of service their personal health insurance premiums would be fully paid by the state upon reaching age 65. Recognizing this was unrealistic the state altered the system so that those newly hired would receive a sliding scale of insurance premiums paid based on the employee’s number of years or service. Coupled with the tremendous escalation in health care costs, our pay-as-you-go method of funding health plans has incurred increasingly larger future liabilities.
You and I, as taxpayers, are ultimately responsible for these unfunded liabilities. Some have suggested that the beneficiaries (employees and retirees) should be responsible for making up the differences but this is patently unfair on several levels. For starters, public employees didn’t create the benefits systems, our legislators did. We continue paying public employees below-market wages, even as health insurance deductibles and co-pays to them are raised and benefits adjusted. Making up the deficits on the backs of current and retired public employees is breaking our promises to them and is sure to spawn lawsuits and cause an exodus of experienced people we depend on to maintain our roads, guard our prisons, enforce our laws, teach our children and administer other programs.
These unfunded liabilities dwarf many other problems our state faces. We cannot continue neglecting them without finding solutions now. We must adopt an attitude of fairness and common sense, recognizing fixes won’t occur overnight. Everyone must come to the table in changing systems for newly hired employees because, at the end of the day, one guiding principle remains: promises made, promises kept.
Tom Campbell is the executive producer and moderator of NC Spin.