State Health Plan Shortfall Drops $7 Billion; New Report Brings Good News for Retirees

A ticking clock next to stacks of coins with plants on top.
Nattanan Kanchanaprat

The shortfall in the amount of money needed to pay for health benefits of state retirees and those who will retire has plummeted $7.17 billion in the past year, according to a report just released by The Segal Group.

The Retiree Health Benefit Fund is at its highest rate of funding since State Treasurer Dale R. Folwell, CPA, took office in 2017 and inherited a system mired in financial hardship.

“This is a positive report, as we are benefiting from the tailwinds of high interest rates, but facing headwinds of inflation and the exorbitant costs of health care. Despite the progress more work remains to be done to achieve even greater stability in the fund,” Treasurer Folwell said.

“There is a long-term solution to decreased liabilities. Hospitals need to be transparent in posting their prices. And they should do the right thing by cooperating with us in reducing costs to the health plan by weeding out $300 million annually in waste and inefficiencies in health care delivery,” Treasurer Folwell said.

The Segal researchers assessed the plan’s assets and net liability for postemployment benefits other than pensions (OPEB) as of June 30 for retirees and permanent, full-time, general employees who will claim the benefit once they retire. The report is a vital tool for continuing to attack the unfunded liabilities in the OPEB plan.

“You can’t manage what you can’t measure,” Treasurer Folwell said during a meeting of the OPEB Valuation Committee on Wednesday, Aug. 31.

According to the report, the unfunded liability was expected to increase year over year to $32.44 billion. Instead, it decreased dramatically from $30.92 billion June 30, 2021, to $23.75 billion as of June 30 of this year. In turn, the funded level of the plan, based on the market value of assets, rose from 7.72% last year to 10.58% as of June 30 this year.

Treasurer Folwell first won election in 2016 promising to position public policy to whittle down the enormous OPEB liabilities that were receiving scant attention. The funding ratio of the plan was just 2.4% at the time, among the worst in the nation. According to the most recent report, the plan’s funded level rose more than fourfold since then and now is funded at 10.6%. The treasurer believes it is possible for the state plan to achieve a much higher funded level, pointing to the example of Winston-Salem, whose plan is over 80% funded.

The improved outlook of the Retiree Health Benefit Fund is due in large part to higher discount rates. That lowered unfunded liabilities by $6.1 billion. Sharp contract negotiations to select the State Health Plan’s Pharmacy Benefit Management services was credited for a $2.57 billion reduction in liabilities. The new contract for managing the prescription drug benefits, is scheduled to take effect Jan. 1, 2023.

As part of his previous work to shrink unfunded liabilities Treasurer Folwell spearheaded renegotiation of the Medicare Advantage Fully Insured Plan and Related Services in 2020. Potential cost savings of almost $1 billion are expected over the course of the five-year contract.

He previously championed creation of the Unfunded Liability Solvency Reserve Act, which was unique among the states. The reserve is funded through appropriations from the General Assembly, as well as any funds that exceed the statutory requirements for the “Rainy Day Fund” and savings from refinancing general obligation bonds or special indebtedness. The law established an Employee Benefit Trust Fund where those dollars go to address unfunded pension and health plan costs.

There are 609,448 retirees, spouses, surviving spouses, active, and vested but inactive OPEB plan members. Plan eligibility is open to retirees from state, UNC, community colleges, local school systems and other entities including local governments. Employees hired on or after Jan. 1, 2021, are not eligible for OPEB benefits. The plan is funded by employer contributions at a rate of 6.68% of employee pay in 2022, and premiums based on the coverage plans selected and, in some cases, years of service.