For years governments have promised retirees hefty health care benefits to control current labor costs, experts say, according to a Crain’s Chicago Business report. “No one has thought about it as a long term liability, says Fitch Ratings analyst Joseph D. Mason. But now the Government Accounting Standards Board’s (GASB) Statement 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, requires governments to carry the full cost of these benefits over 30 years on their balance sheets within the next two years, “and the numbers are enormous,” the Washington Post says. Governments must also have a plan to meet these costs, or carry them as an unfunded liability, a decision that will likely affect their bond rating.
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While GASB 45, which took effect for the largest government entities at the end of last year, carries no legal weight, the Post says that compliance will be closely monitored by Wall Street and bond ratings agencies.
Most governments currently account for health care costs on a pay-as-you-go basis, reporting expenses as incurred, but many jurisdictions will likely choose to “pre-fund” their obligations by placing money in a trust that will earn investment income, rather than carry a huge “unfunded liability.”
Maryland, a state with a generous health care package, anticipates dramatic increases in costs in coming years, the Post report says, and projects that even the costs of the pay-as you-go method could rise from the current $300 million to $1.9 billion. Maryland estimates its total liability for health care over 30 years to be $20 billion.
In Nevada, Jim Wells, chief financial officer for the Public Employees Benefits Program, says that the state faces a potential unfunded liability of $1.75 billion to $4.4 billion for health care for its retirees, the Associated Press says. If Nevada continues on its current pay-as-you-go system, the state’s liability is $4.4 billion, but if it can afford to adopt the prepay system, the debt drops to $1.75 billion. The state estimates investment income of 8 percent.
Some actuaries estimate that contributions to these investment trusts could be as much as five times the current pay-as-you-go costs, the Crain’s report says, and governments will have to make difficult choices involving potentially lower benefits and higher taxes. John Filan, Illinois’ Governor Blagojevic’s budget director, says the state is trying to look at ways to “fund this number in a way that’s efficient.” Filan says that the government’s workforce reduction over the last few years will help rein in future retiree costs.
Maryland officials concede that the likely consequence of compliance with GASB 45 will be a cut in benefits, the Post says. A state panel, chaired by Senator Edward Kasemeyer and Delegate Mary-Delany James concluded, “It will be very difficult for the state to sustain the current level of retiree benefits for all employees and retirees into the future.”
For public employee unions GASB 45 signals more difficult negotiations over retiree benefits. “In some jurisdictions it is being used as a way to set off discussions on how to roll back retiree heath benefits,” says Hank Scheff, director of employee benefits for the American Federation of State, County and Municipal Employees Council 31 in Chicago, Crain’s reports. “We are prepared to fight to retain retiree health benefits,” Scheff says.
Curtis Johnson, an admissions coordinator at Spring Grove Hospital Center in Catonsville, Maryland, and a public employee for 32 years, was cited as an individual case in the Post report. He pays $90 per month from his current salary of $30,000 towards his heath insurance. More than that would be a hardship, he told the Post, especially on a projected pension of $913 a month.
Union leader Gino Renne, of United Food and Commercial Workers Local 1994 in Montgomery and Prince George’s counties in Maryland, says that state and local governments should focus on ways to control the growth of health care costs. “All the parties have to be more creative,” he says in the Post report.