How North Carolina’s New Budget Might Accidentally Break the State Retirement Plan
The Proposed Construction for UNC Medical Center in Chapel Hill, NC - Source: Wikipedia Commons
North Carolina’s budget for the next two fiscal years, H.B. 259, makes changes to policies of the University of North Carolina (UNC) Health and Eastern Carolina University (ECU) Health which received little reporting at the time of the bill’s passage but have since caused a legal crisis at the State Treasury and strong allegations of fiduciary misconduct.
Bundled into the 625-page main bill of H.B. 259 was the content of another bill, S.B. 743, which had passed the Senate and been stuck in the House since May. In a nutshell, S.B. 743 clarifies the operational capacity of UNC Health and parts of ECU Health, expands the capacity of these groups to merge with non-governmental health providers, and allows them to create a new employee retirement plan separate from the ones used by other state employees. UNC Health and ECU Health are state-owned entities closely associated with UNC-Chapel Hill and ECU, but they have their own employees.
S.B. 743 was controversial from the start because of the merger provision. The Federal Trade Commission (FTC) blasted the bill in an open letter to the House, arguing that state laws were already sufficient to permit beneficial mergers and expanded antitrust clearance would only “reduce competition among healthcare providers and lead to patient harm in the form of higher healthcare costs, lower quality, reduced innovation, and reduced access to care, as well as depressed wages for hospital employees.” Others in eastern North Carolina expressed concerns that the merger provision was part of an effort by UNC Health to swallow up ECU Health.
Still, a toned-down version of the merger language made it into H.B. 259—as did the retirement plan language setting off the most recent crisis. As it stands, UNC Health and ECU Health employees can choose to enroll in the Teachers and State Employees Retirement Plan (TSERS), or the UNC System’s Optional Retirement Plan (ORP). The State Treasury says the similarity between plans is essential to comply with the IRS statute on tax-preferred retirement plans. H.B. 259 changes things—allowing UNC Health or ECU Health to eliminate the option of TSERS and offer a new, undefined retirement plan that will likely be more competitive with other employers, such as Duke Health. Uncontroversial at the time of the bill’s passage, this provision has set off a firestorm at the State Treasury. In an open letter to State leaders, they claim that the entire state retirement apparatus is in jeopardy. Here are their allegations:
If the new health plan has a different employee contribution rate than TSERS, the IRS could change NC retirement plans’ tax qualification status and make all state employees pay income taxes on contributions. A current benefit of TSERS is that contributions are deducted from employees’ incomes before they are taxed. If this were to change, all state employees would have lower retirement contributions and higher taxes.
Even if the IRS does not find the plan illegal, should UNC Health divorce the state retirement plan and no longer pay employer contributions, they would leave behind $1 billion in remaining liabilities that the plan would have to pay to their retirees. Funding for these retirees would effectively be subsidized by other public entities that still pay into the plan, such as public schools. ECU Health would, for its part, leave behind $40 million in liabilities for the state health plan to pay off.
Should UNC Health merge with a non-governmental organization as provided in the bill, they would no longer qualify for TSERS and have to withdraw. UNC Health would incur a massive liability for each employee disenrolled from TSERS soon after withdrawing which the Division of Retirement Systems estimates is worth “multiple years’ worth of employee payroll.” They would have to pay this to TSERS and agree to foot the bill for all litigation filed by employees for loss of benefits, according to G.S. 135-8(i), the law governing the process.
The new plan may be worse for some employees than the option to remain on TSERS. For example, public employees eligible for full retirement after 30 years in TSERS would be forced to give up these benefits if they transferred from a state position to UNC Health.
UNC Health and ECU Health have brushed off the concerns, saying they looked everything over and see no issue. The State Treasury and representatives of the state retirement plan were not convinced. In a pleading press release, Treasurer Dale Folwell followed up on the previous letter, writing on October 25th, “We are strongly concerned that if UNC Health and ECU go forward with these proposals it could jeopardize the entire tax-exempt status of the systems, creating an untenable situation where members of the pension system could owe billions in back taxes to the IRS. We tried to warn UNC Health and the General Assembly, but they refused to discuss.” He added that resolving the issue, “could be the most important thing I do as Treasurer.” A UNC Health spokesman, Alan Wolf, did not see the issue as a crisis, stating that the “State Treasurer is making unrealistic assumptions on the number of state employees likely to transfer out of the existing pension program.” During the weeks following Folwell’s press release, there was little press coverage of the issue, and it was assumed that conversations between the Treasury, UNC Health, and ECU Health were taking place behind closed doors.
Two weeks later, on November 7th, Folwell hinted at how those negotiations had gone. “Every attempt that we have made to talk to the people at UNC Health Care about this decision has been met with, we’re not interested,” he stated in a press conference. The state legislature is currently out of session, and will not meet until mid-December for a one-day session focused on emergency items. The regular legislative session does not begin until April. Folwell has made it clear, however, that he wants the legislature to act soon. “Things like this can be dealt with in 15 minutes of legislative time,” he said.
Because many of the Treasury’s claims are speculative, it is tough to verify their accuracy. For their part, UNC Health has cast doubt on the $1 billion liability figure, accusing Folwell of misrepresenting the data by modeling an unrealistic scenario in which all employees switch to the new plan. Moreover, the Treasury’s Office and UNC Health have had a chilly relationship, which could lead to the perception that Folwell has a special interest in knocking UNC Health down a peg. In January, his office grilled UNC Health and other hospitals in the state for hospital consolidation and ratcheting up executive pay. His suspicion of UNC Health’s commitment to service leadership continues. He told reporters in early November that the retirement plan changes were “probably going to be to the benefit of people who don’t make less than $40,000 a year, but probably make $400,000 a year.”
But if Dale Folwell is crying wolf, it is hard to understand why. He is one of the many Republicans running in an increasingly packed race for governor in 2024, and openly rebuking a decision made by his Republican colleagues in the legislature hardly seems like a pathway to endorsements. His knowledge of the subject matter is unquestionable. He has worked in the NC government since 2004 and has years of experience managing the state health plan—it is something that he is deeply proud of, as his page on the Treasury’s website makes clear. Moreover, it was not Folwell but his director of the Retirement Systems Division, Thomas Causey, who initially raised the alarm. Representatives of the State Employees Association soon joined in. These groups may have an interest in protecting the current state retirement plan but would have no obvious reason to lash out at UNC Health unless they sensed a genuine threat.
Whether or not the new retirement plan causes the doomsday scenario depicted, the incident reveals a political reality in the state: the influence of UNC Health. It takes power to get expanded merger authority into the state budget, not to mention a legally unspecified retirement system unvetted by those close to the issue. These policy changes come in addition to hundreds of millions of dollars that NC invests in UNC Health infrastructure. The state legislature is willing to use state funds to make UNC Health larger and more equipped to recruit top talent. Their support is also bipartisan. The original bill expanding merger authority and allowing the new retirement plan, S.B. 743, passed unanimously by all 48 state senators present.
The political clout of UNC Health and its overwhelming support in the Senate should at least raise alarms. It suggests that there was little debate in the General Assembly about the concerns of the FTC and the Treasury about UNC Health consolidating and raising prices. The lack of concern or even awareness is worrying. There is strong evidence from economists that mergers raise prices for consumers, and one should be skeptical of the idea that UNC Health is magically immune from this effect because they are a state entity. The organization is managed like a business and should be treated like one. While UNC Health may see its request for protection from antitrust enforcement as a means to stay competitive with consolidated peer provider networks, it could also be heard as a call for the state to arm UNC Health in a race for greater market power. It is unclear how this would benefit North Carolinians. Now that UNC Health has secured partial merger provisions in H.B. 259, legislators and State Treasury officials should carefully watch how they use it. Will they lower prices and expand services, or pursue anticompetitive practices that leave patients with fewer options and larger bills?