Thursday, June 15, 2023

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; City of Winston-Salem Earns Gold Medal For Foresight and Funding Discipline
Raleigh, NC
Jun 15, 2023

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. 

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. 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.

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.” 

Table showing 10 NC counties with the highest OPEB


Table showing 10 NC municipalities with highest OPEB