New Mexico faces big deficit in health benefits fund

Treasurer seeks new controls on state spending

SANTA FE — For years, a state fund that handles health insurance benefits for public employees in New Mexico operated at a deficit — a figure that reached $119 million last year, according to state documents.

The state kept premiums flat, even as medical costs climbed.

Now, two state legislators say, the state General Services Department is inappropriately asking cities and counties to help cover a tab run up by the agency's own mishandling of the fund.

It never should have been allowed to operate at a deficit, they say, given state laws designed to prevent public agencies from spending more than is available.

Sen. Pat Woods

"It's not fair to retroactively ask for money for services already provided," state Sen. Pat Woods of Broadview said in an interview. "The department — General Services — wasn't asking for premium increases when they knew good and damn well the fund was underfunded."

He and Rep. Jack Chatfield of Mosquero — Republicans who serve on the influential Legislative Finance Committee — are asking Democratic Gov. Michelle Lujan Grisham's administration for answers and urging the state auditor and others to scrutinize the handling of the fund.

At issue, they say, is the state's push to collect $32.6 million — a special assessment of sorts — from 140 public entities that participate in the group health insurance fund.

It's akin to paying your premiums all year, Woods said, then having the insurance company say after the fact that it should have charged more, sticking you with a new bill.

The agency's push to collect the money from local governments, however, is rooted in budget language authorized by the Legislature.

Lawmakers this year appropriated $96 million to help backfill the deficit, but with a requirement for GSD to seek funds from other sources, too, such as local governments that participate in the fund.

Lujan Grisham spokeswoman Caroline Sweeney said Monday the department is simply carrying out the directive included in the budget package adopted by lawmakers.

"This fund has periodically run a deficit, including several times in past administrations," Sweeney said. "The administration looks forward to working with the legislature on a long-term plan to address the issue in the next session."

The deficit has been building for years.

In a formal response to auditors this year, the General Services Department acknowledged the cash balance in the benefits fund wasn't enough to cover the cost of health insurance claims. But department officials said they were addressing the issue to meet legal requirements.

They attributed much of the deficit to unexpected costs driven by the COVID-19 pandemic.

"There has been a perfect storm of more usage, higher costs and more illness, which has put steady pressure on health care costs," the General Services Department told auditors.

Governor vetoed push to raise premiums

The dispute centers on the state fund that handles group insurance for state employees and some cities, counties and universities. It covers about 58,000 individuals, according to legislative documents.

It's a type of self-insurance in which the General Services Department sets premiums — a portion of which are paid by the government employer and the remainder by the employee. State law requires risk management officials within the department set the rates and otherwise administer the plan.

Independent auditors flagged the fund when evaluating the state government's 2022 financial statements.

They said it had a run up a deficit of $119 million by paying for health care costs without enough revenue to cover the expense, in conflict with state law.

The General Services Department, auditors said, simply hadn't raised premiums to offset the increased costs.

Risk management officials within GSD — part of the governor's administration — are empowered to set the rates. But lawmakers have pushed for increases.

Gov. Lujan Grisham herself has blocked legislative attempts to boost premiums.

Last year, she used her line-item veto power over the state budget to strike funding for increased rates, saying she had approved no premium increase.

This year, she vetoed language calling for an increase, contending it infringed on the executive branch's authority to set the rates.

Premiums haven't increased for several years, according to legislative documents.

They had, however, been going up before the pandemic. The rates state employees pay for medical, dental, vision and other types of insurance coverage had previously increased every year for five consecutive years entering 2020.

In a written statement, Sweeney said Lujan Grisham "believes access to healthcare is crucial and has always been focused on keeping costs down to eliminate financial stress on approximately 50,000 state and local government employees, especially during the tough pandemic years."

'No way legally'

In this year's report, state auditors didn't recommend a particular solution to address the shortfall. But they said the fund had a deficit, putting it out of compliance with state requirements.

State Auditor Joseph Maestas referred the findings to the Lujan Grisham administration and Legislative Finance Committee in February.

Sen. Woods, one of the LFC members, said the spending warrants further scrutiny.

"There's no way legally they could have paid claims out of a fund that doesn't have funds in it," he said.

Staff analysts for the Legislative Finance Committee raised a similar concern. In a recent report, they said the employee health benefits fund had operated at a deficit since fiscal 2021 despite a state law "designed to prevent agencies from spending without available funds."

Sen. George Muñoz, a Gallup Democrat and chairman of the Legislative Finance Committee, said the executive branch should have been setting appropriate premiums to operate the fund.

Deficit spending, he said, isn't permitted by law.

"We have to have a balance," Muñoz said.

Steps to curb payment 'override'

Laura Montoya

State Treasurer Laura Montoya, a Democrat who took office in January, is pushing for new controls that would allow her office to oversee — and reject — deficit spending in the future.

In a letter to legislators, she said her office had no knowledge "of these fund account overdrafts" until Maestas, the state auditor, notified her in March.

Montoya said she is asking the Lujan Grisham administration to create an alert of some kind that would notify her of any attempts by an agency to "override the software system to approve a payment despite not having sufficient funds in the respective account."

She also wants authority to deny override attempts, though she acknowledged they can be appropriate in certain circumstances involving federal funds or when the revenue is on its way.

Legal conflict

Public agencies are now wrestling with how to bridge the shortfall.

The Legislature this year appropriated about $96 million to help stabilize the group insurance fund. Lawmakers also included language requiring the General Services Department to secure other funding to address the shortfall, in part by assessing local governments and others who use the fund.

But the New Mexico Municipal League, an organization that represents city governments, contends it's improper for the state to turn to local governments at this point.

The league calls it a "retroactive" assessment intended to force cities to pay again for insurance coverage they already received and paid for.

"We expect that upon further legal review, the executive will recognize that this current approach potentially violates both the New Mexico Constitution and several state statutes," league executive director AJ Forte said in a statement, "and we would hope this leads the executive to refrain from invoicing local governments with retroactive assessments."

The assessments came after cities developed their budgets, according to documents the league released in response to a Journal request.

"Forcing local governments to cover these substantial and unanticipated costs would take money from employee pay raises and other critical needs," Forte said in a letter to cities.

Las Cruces alone was assessed $3.7 million. Albuquerque isn't on the list because it operates its own health benefits fund.

Joy Esparsen, executive director of New Mexico Counties, the association representing county governments, said the state never should have allowed the fund to become insolvent.

But at this point, she said, she doesn't believe the state has authority to levy a special assessment.

If allowed to go through — after counties set their budgets — it could interfere with county programs, efforts to fill staff vacancies and cash for capital projects, she said.

"It's frustrating that they have not increased premiums," Esparsen said. "We could have planned and responded to that more appropriately."

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