Opinion: Lawmakers Should Close Health Plan Hole

By John Hood

RALEIGH — During the 2023 fiscal year, the federal government ran a $1.7 trillion deficit. That’s an increase of $320 billion, or 23%, over last year’s deficit. And the worst is yet to come. The best estimate of Washington’s unfunded liabilities over the next 75 years is a staggering $80 trillion, attributable mostly to Social Security and Medicare.

State government in North Carolina is in far better shape. It ran a significant surplus last year, not a deficit. So far this year, the state is also running a healthy cash surplus and has some $7.5 billion stored in its rainy-day fund and other reserves that would be easy to access if a fiscal or natural emergency required it.

I know these numbers are hard to assess in isolation, so I’ll cite a handy analysis from the state fiscal policy program of the Pew Charitable Trusts. The Pew researchers gather savings data from all 50 states and then compare them to annual budgets to determine how long each state could maintain its services without collecting a single dime in revenue.

That’s an unrealistic scenario, of course. Even in a severe recession, governments continue to collect taxes and other revenue. Still, the statistic makes it easy to compare state finances across the country.

In their latest study, released earlier this month, the Pew scholars found that the median state government had enough money in their rainy-day reserves to operate for 46 days. Wyoming, a low-population state that derives much of its revenue from drilling and mining assessments, has enough rainy-day dollars to deliver services for 307 days. The worst-situated state, Washington, could stay afloat for only eight days.

North Carolina comes in at 62 days, well above the national median. That’s longer than all of our neighbors, though Georgia’s position is only slightly weaker.

Now, these figures reflect just funds deposited in formal rainy-day accounts. That’s hardly the only way governments build up reserves. Of that $7.5 billion in North Carolina savings I mentioned earlier in this column, the rainy-day amount was $4.75 billion. The rest consists of other liquid reserves and unspent funds.

To paint a broader picture of state savings, the Pew study adds unreserved credit balances to rainy-day funds. In the median state, these two categories of savings together can fund 113 days of state spending. North Carolina’s figure isn’t much different, 115 days. Among our neighbors, Tennessee (119 days), South Carolina (133 days) and Georgia (145 days) are in a stronger position. Virginia is weaker, at 60 days.

What about future fiscal obligations? North Carolina has done a reasonably good job of building up sufficient assets to cover pensions for public employees. As of 2021, Pew rates our pension funds as 95% funded. That’s the 12th-highest funding ratio in the country, though Tennessee (114%) ranks higher and Georgia (92%) isn’t much lower.

But that’s not the only benefit we owe current and former public employees. Many are also eligible for supplemental health care benefits upon retirement. Alas, we haven’t done nearly enough to prefund these expenses.

According to State Treasurer Dale Folwell, North Carolina’s total liability for retiree benefits other than pensions stands at $32.6 billion — $25 billion for state employees and $7.6 billion for local employees. The latest nationwide comparisons from Pew give North Carolina a 5.5% funding ratio for these benefits.

Georgia, Virginia, and South Carolina have higher ratios than we do. Tennessee hasn’t put aside any money for retiree health benefits, but that’s less worrisome because the Volunteer State’s total liability is just $2 billion.

In general, North Carolinians can be proud of the way our leaders manage public finances. They tend to budget conservatively, set firm priorities, and save for a rainy day. Over the next few years, however, state and local policymakers ought to invest more revenue in pension and retiree-health funds.

Washington has already created a big enough fiscal mess. North Carolina officials should be subtracting from it, not adding to it.

John Hood is a John Locke Foundation board member. His latest books, Mountain Folk and Forest Folk, combine epic fantasy with early American history (FolkloreCycle.com).