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$9 Billion Shortfall Projected in State Retiree Health Insurance Trust Fund

As a state panel led by Gov. Nikki Haley wrangled last week over whether to require public employees to pay for part of an expected multimillion-dollar increase in health insurance costs this fiscal year, nobody was paying attention to the $9 billion elephant in the room.

Well, maybe with the exception of S.C. Comptroller General Richard Eckstrom.

The S.C. Budget and Control Board voted 3-2 to require workers covered by the state health plan to pay 4.6 percent more in premiums effective Jan. 1. That decision, which likely will be challenged in court – overruled the S.C. General Assembly’s earlier action to leave public employees off the hook for an appropriated $51.5 million increase in health insurance costs this fiscal year, which started July 1.

What the BCB didn’t discuss, however, was how to reduce a projected $9 billion shortfall over the next 30 years to cover health insurance costs for state retirees and their families.

Many South Carolinians probably are aware of a projected shortfall  – or “unfunded liability” in accounting lingo – of approximately $15 billion in the S.C. retirement system, meaning that the state would be on course to collect $15 billion less than what is needed to cover state retirement-income benefits within a 30-year period. The General Assembly this year passed legislation aimed at closing that gap – including, for example, eventually eliminating a popular working-retiree program.

But the Legislature didn’t address a huge projected shortfall in the S.C. Retiree Health Insurance Trust Fund, which was created in 2008 to provide for the employer costs of health insurance benefits for state retirees and retired public school district employees. Participating government employers pay a surcharge on their employee payrolls that is transferred to the trust fund; the fund also receives investment income.

As of June 30, 2010, more than 75,000 retirees and family members were receiving health insurance coverage through the state plan, according to the most recently available actuarial report. Retirees' health insurance premiums are determined by a number of factors, including the type of insurance plan, number of family members covered, and years of service. 

That actuarial report estimated the trust-fund shortfall at $9.14 billion as of June 30, 2010; it had hovered in the $9-billion range the previous two fiscal years.

During last week’s BCB meeting, Eckstrom referred to the trust fund as “woefully underfunded.” None of the other four board members – Haley; Treasurer Curtis Loftis; Senate Finance Committee Chairman Hugh Leatherman, R-Florence; and House Ways and Means Committee Chairman Brian White, R-Anderson – mentioned the shortfall.

Haley during the meeting said any health insurance tax dollars left over after requiring public workers to pay more for their costs would go back to the state’s general fund.

“It’s not that it goes away,” she said. “It just stays in the general fund.”

In unsuccessfully trying to stop a bill last year that expanded the state’s health plan to include joint electric and power agencies and sanitation special-purpose districts, Haley cited the projected $9.14 billion unfunded liability in the Retiree Health Insurance Trust Fund.

In her veto message, Haley said the state would need to kick in $417 million more over what it already is contributing each year to close the gap.

Haley spokesman Rob Godfrey did not respond to written questions last week from The Nerve about the shortfall.

The actuarial report Haley cited in her veto message last year noted that additional contributions of $312 million and $107 million above pay-as-you-go costs were made to the trust fund in fiscal years 2008 and 2009, respectively.

But additional contributions to the fund dropped to $37 million in fiscal 2010, and were projected to be $10 million above the pay-as-you-go costs for the fiscal year that ended June 30, according to the report.

The report was prepared by Michigan-based Gabriel Roeder Smith & Company, the same firm hired to project the long-term funding shortfall in state retirement-income benefits.

Megan Lightle, spokeswoman for the S.C. Public Employee Benefit Authority, told The Nerve last week that updated actuarial reports for fiscal years 2011 and 2012 were not available. In its overhaul this year of the state retirement system, the Legislature created the authority, which began operating July 1, to oversee the retirement and health insurance systems for state employees and retirees.

But an 11-member governing PEBA board has not yet been appointed. At last week’s BCB meeting, the focus of the debate was whether the BCB, acting in place of the PEBA board, or the Legislature has the final say on whether state workers should contribute more toward covering increases in their health insurance costs this fiscal year.

Leatherman, who along with White voted against requiring employees to pay more, said the General Assembly ,in passing the fiscal 2013 budget, intended the state to fully cover the projected increase in health insurance costs; and that the BCB had no legal authority to override the Legislature’s wishes.

Under the Legislature's plan, employer contribution rates would have risen by 6.37 percent. With the BCB's action last week, the increase would be 4.6 percent for employers, employees and retirees, according to a PEBA press release.

“We’re a legislative state, and you won’t catch me going behind the General Assembly,” Leatherman said during the meeting.

To which Eckstrom replied, “I acknowledge that we are a legislative state, and the rest of us are servants.”

Contacted afterward, Eckstrom told The Nerve that health care costs for state retirees have been increasing in recent years as more retirees have entered the system.

Of the projected $73.09 million increase last fiscal year in total health insurance costs, $20.3 million, or nearly 28 percent, was expected to be generated by new retirees in the system, according to information provided earlier to The Nerve by the BCB.

Eckstrom said he believes the General Assembly needs to make more substantial contributions – tens of millions more – each year to the Retiree Health Insurance Trust Fund to make a serious dent in the projected $9 billion long-term deficit.

The “elephant in the room” is actually more than $20 billion, when the projected long-term shortfall in state retirement-income benefits is combined with the estimated deficit in the health insurance trust fund, Eckstrom pointed out.

“We’ve got over $20 billion that we owe there that we don’t have the dollars to settle,” he said, adding that end-of-year general fund surpluses “must be committed to settle obligations we have incurred.”

“The larger issue,” Eckstrom continued, “is that we are sentencing ourselves with our spending habits. If we don’t look for every opportunity to reduce our spending, we are doomed.”

Reach Brundrett at (803) 254-4411 or rick@thenerve.org.

 

Budget General Assembly State Retirement System

S.C. Budget and Control Board S.C. Public Employee Benefit Authority Treasurer Curtis Loftis Sen. Hugh Leatherman Gov. Nikki Haley Rep. Brian White Comptroller General Richard Eckstrom