- North Carolina Local Governments Face $7.6 Billion Shortfall in Retiree Health Care
- Department of State Treasurer Cooperating With Local Officials to Help Identify Solutions
RALEIGH – Ensuring public pensions are properly funded to avoid future payment shortfalls generally dominates policy and legislative discussions related to retirement benefits. But North Carolina counties and municipalities are on the hook for more than $7.6 billion in other, less-familiar liabilities, according to their fully reported and disclosed annual audits. In Johnston County, the shortfall now stands at more than $193 million.
That gap can be an indicator of potential long-term financial woes that the Department of State Treasurer’s State and Local Government Finance Division and the Local Government Commission closely monitor in cooperation with the local government units.
Known as Other Post-Employment Benefits (OPEBs), these retiree supports primarily refer to health care, but can include other, lesser non-income benefits such as dental care, vision and life insurance. In addition to the $7.6 billion amassed by local governments, the state of North Carolina has incurred a $25 billion shortfall.
According to an April 2022 report, the median OPEB liability among towns and counties is $5,251,338. However, 59 counties and 41 municipalities — 100 in all — have OPEB unfunded liabilities of $10 million or more, including Johnston County. Another 185 have OPEB liabilities below $10 million.
Charlotte has a $531,962,000 unfunded OPEB liability, and Mecklenburg County has an OPEB liability of $514,883,109. Raleigh has a $190,900,860 OPEB unfunded liability, and Wake County’s OPEB liabilities total $415,753,783.
“Those are jarring numbers to be sure. For far too many years local governments typically budgeted on a pay-as-they-go basis, covering only today’s costs with no plan for the future expenses. That is a risky, kick-the-can-down-the-road approach. Deferred liabilities increase liability costs,” Treasurer Folwell said. Since being elected in 2016 he has encouraged local governments to take necessary steps to correct the situation.
“The dedicated and hard-working teams in our State and Local Government Finance Division and Investment Management Division stand ready, willing and able to extend a helping hand to local governments as they evaluate their plans and search for cost-saving opportunities to ensure obligations are met and finances remain strong,” he said.
There are governing bodies employing best practices to address the OPEB challenge that need to be highlighted and praised, he said. The Raleigh Housing Authority, for example, is funded at greater than 100%. Winston-Salem’s OPEB liability of $72 million is funded at 89%.
But hard work remains to be done. At 89%, Winston-Salem is the only city among the state’s top 10 population centers whose OPEB liability is more than 25% funded. Four of those municipalities have a 0% funded rate. Of the top 10 counties by population, only Union (43%) and Forsyth (31%) are above 5% funded. Six had 0% fundedness.
Of 287 local government units that provide OPEB — nearly all of which are carrying unfunded liabilities — just 23 have set aside assets in a legally binding trust to begin whittling down their long-range shortfalls. Some other government units have set aside funds in an attempt to build reserves for OPEB and Law Enforcement Officers Special Separation Allowance funds, but did not place them in a binding trust, meaning they could still be used for other purposes.
Of the more than $7.6 billion in total OPEB liability held by North Carolina counties and municipalities, there is only about $399 million, or 5% of the unfunded total, set aside as actuarially determined assets. That leaves a net OPEB liability of almost $7.3 billion.
Public pension plans, on the other hand, generally accrue larger asset pools. They can then choose to invest those assets, aiming to increase their value with market gains. Because local governments usually have scant or no OPEB assets, it is much more difficult to make profit-producing investments that would help to decrease OPEB shortfalls.
“In combination with those challenges, demographic and inflationary pressures present stiff obstacles to getting a handle on OPEB obligations,” Treasurer Folwell said.
If a local government provides options for retirees to remain on its health plan, it might pay all of a retiree’s premium or a subsidy. Data show average life expectancies are going up. That means retirees covered under a local government health plan are receiving OPEB benefits for more years than predicted. Local governments also can offer the opportunity to retirees to buy into their health care plan at full cost to the retiree. But because older retiree populations experience more — and more costly — health care treatments than younger employees, adding them to the insurance pool can ratchet up the costs.
Medical inflation also takes a toll, Treasurer Folwell said. The cost of medical care typically outpaces other sectors of the economy, and local governments are saddled with higher expenses. The price of medical care has grown 110.3% since 2000, according to the Peterson-Kaiser Family Foundation Health System Tracker.
Treasurer Folwell has made OPEB liabilities a regular feature of an informational campaign at Local Government Commission (LGC) meetings. He regularly informs governmental borrowers who come before the commission about the level of OPEB and pension liabilities. The LGC, chaired by Treasurer Folwell and staffed by the Department of State Treasurer (DST), has a statutory duty to monitor the financial well-being of more than 1,100 local government units.
“Local governments need to appreciate that budgeting for current OPEB expenses is not the same as meeting long-term requirements,” Treasurer Folwell said. “There is no time like the present to begin tackling this problem to ensure that promises made to public servants are fulfilled when those employees reach their post-employment years.”
One way local governments are taking steps to control costs is to end health insurance participation when a retiree becomes eligible to shift to Medicare coverage. Others have ended the benefit for new employees so their liability eventually will start to drop.
Johnston County officials say they have been working for more than a decade to keep their costs under control. In January 2007, Johnston County Board of Commissioners took action to address the liabilities created by offering employee health insurance upon retirement by modifying the eligibility requirements. In January 2011, Commissioners discontinued offering employees health insurance upon retirement except for those who were hired prior to January 1, 2011. Retirees are also required to enroll in Medicare Part A and B once eligible.
Johnston County is also utilizing a “pay as we go system” and financial data regarding retiree health insurance is included in both the Annual Financial Comprehensive Report and year-end Financial Statements.
Local governments regularly come before the LGC when market conditions are favorable to refinance debt at lower interest rates to save money. One easy way they could help to shrink their OPEB liabilities is to dedicate those savings to their OPEB trust funds, Treasurer Folwell said.
“The more information we provide, and the more we emphasize the scale of this problem, the more we are seeing at least an awareness among local government officials that they could be running out of road to kick this can,” Treasurer Folwell said. “They owe it to their citizens, taxpayers and especially the retirees whose years of dedicated work kept their communities running to take immediate steps to strengthen and preserve these important funds for this and future generations of public servants.”
This country has drained and pillaged any funding for the older folks. I can’t help but wonder how Covid had such perfect timing. The only thing blocking people from the truth now is their own denial. Too late to be scared.
$25 billion shortfall in state funds? Just another farce in the fake great fiscal responsibility by the general assembly. Leaving the future retirement of state employees in question. I’m sure the GA has set it up for their benefits to be guaranteed. Makes you wonder, the members of the GA volunteered to run for office, volunteered to serve when they were elected, since they volunteered why do they get any benefits anyway 🤔 hypocrites
Quoting … “Leaving the future retirement of state employees in question. ”
I noted your words “state employees”.
A few questions:
(1) Is the comfortable retirement of “state employees” MORE important than the retirement of the State’s Private Sector workers?
(2) You get generous Defined Benefit pensions with 80% to 90% of the TRUE total cost funded by taxpayers. Private Sector Taxpayers DON’T get Defined benefit pensions (instead getting about 3%-of-pay into a 401K plan which is 1/5 to 1/10 of the annual cost of fully funding Public Sector pensions).
(3) What makes Public Sector so deserving of a better deal than the Taxpayers who pay for almost everything you get ?
(4) The vast majority of Private Sector workers get ZERO (yes ZERO) towards retiree healthcare costs. So why should Private Sector Taxpayers fund a benefit for PUBLIC Sector workers that they don’t also get ?
Maybe, and lets think about all the implications here, the government has no business in our medical care?
If you trust the govt with your retirement account you are as stupid as they are. Come on people. Wake up!!!
Defined Benefit pensions and Employer subsidized Retiree healthcare are BOTH LONG GONE in Private Sector employment.
The TRUE Cost of those 2 items (the DB pension & subsidized retiree healthcare) have a level annual cost of about 25% of pay for non-safety workers and 40% to 50% of pay for Safety workers.
Sure Public Sector wages are 5% to 10% lower than their Private Sector counterparts, but when you make the comparison on a “Total Compensation” basis (wages + pensions + retiree healthcare) the Public Sector swings to a HUGE (15% to 40% of pay) advantage over their Private Sector counterparts.
With 85% of all workers being employed in the PRIVATE Sector, it THAT Sector, NOT the far smaller PUBLIC Sector that determines “market rate” compensation. Private Sector Taxpayers have been financially abused for decades by this OVERCOMPENSATION of those in the Public Sector ….. and it LONG PAST time for it to END !
Give them the extra 5% to 10% of pay and END all further pension accruals for all CURRENT as well as NEW workers, and ALL retiree healthcare benefits IMMEDIATELY.
@ToughLove, I have recently retired from a private sector employer and have a defined pension plan with health care. You are the one that choose to work for your employer, if you don’t like the benefits then find a different employer, Don’t belittle employees that have better benefits than you. You have the same option as they do work for a different employer.
A VERY small % (<5%)of Private Employers have Defined Benefits plans in place today where they are still crediting service accruals. Sure, there are some, mostly BIG Defense contractors wherein their contracts with the Fed Gov't allows them to pass the HIGH cost of these plans onto Federal Taxpayers by covering these costs, and Utilities that factor the cost of these plans into their rate structure.
When there is no "captive" audience (Taxpayers or ratepayers) they are very rare indeed. Even the big Insurance companies who at one time universally provided such DB Plans have terminated or frozen them. And let me be clear on something……. many of those old FINAL AVERAGE SALARY DB Plans (the type universally provided in the PUBLIC Sector) have been frozen and converted to "Cash Balance" plans. While "legally" characterized as Defined Benefit Plans , in every way that matters wrt the level of retirement benefits, they look, act, and function just like 401K DC Plans.
A PROPER comparison between Public and Private Sector "Total Compensation" is not by picking the a outlier (a Private Sector Plan WITH an active DB Pension), but the MUCH MUCH more common situation where all the Private Sector employee typically gets in retirement security is a 401k (Defined Contribution) Plan with about a 3%-of-pay employer contributions.
As to Employer-subsidized retiree healthcare………… beyond a Retiree Health Savings Account (HSA) which is VERY minimal, Subsidized Retiree healthcare in the Private Sector is even LESS common than DB pension.
Your situation (if true) is VERY rare, and you're quite lucky.