State and local governments, long generous to employees with promises of health care in retirement, often in exchange for pay increases, are struggling to estimate these costs for financial statement purposes, according to new rules issued by the Government Accounting Standards Board (GASB). While GASB cannot require governments to report their health care liabilities, failure to do so can affect their bond ratings.
Most states have been using a pay-as-you-go system, reporting costs as they are incurred on an annual basis. State and local governments have not set aside money to pay for what these costs will become when more baby boomers retire and the cost of their health care weighs on annual budgets.
In some states, like California with 2.3 million active and retired employees, the estimated costs are staggering. Preliminary estimates of the 30-year liability for the state are $40 to $70 billion. “When you start putting these costs on the books and understand what they involve and the size of the obligation – it’s big,” said Marian Mulkey of the California Healthcare Foundation, the Associated Press reports. “Either way they have to pay for it or somebody has to go back on their promises.”
GASB’s rationale for Statement 43, Reporting for Postemployment Benefit Plans Other than Pension Plans and Statement 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions, according to their press release was that “current financial reporting generally fails to:
- Recognize the cost of benefits in periods when the related services are received by the employer
- Provide information about the actuarial accrued liabilities for promised benefits associated with past services and whether and to what extent those benefits have been funded.
- Provide information useful in assessing potential demands on the employer’s future cash flows.”
Generally, Statement 45 requires “systematic accrual-basis measurement and recognition of Other Post-employment Benefits cost (OPEB) over a period that approximates employees’ years of service and . . . providing information about actuarial accrued liabilities associated with OPEB and whether and to what extent progress is being made in funding the plan."
States face different challenges and are finding different ways of meeting GASB’s requirements. Maine, which has reported the OPEB costs on a pay-as-you-go basis, is “ahead of the curve”, according to State Controller Ed Karass, timesrecord.com reports. The state began estimating costs in the mid-1990’s and put money aside for the liability. That fund has been raided to balance the state’s budget, but $73 million remains.
“Everybody realizes that going from pay-as-you-go to the full actuarial fund is going to be very painful,” Karras told timesrecord.com. In talking to colleagues across the country, Karass said that estimates of the amounts needed to cover the liability on an annual basis were 5 to 20 times the amount states pay today.
The Utah State Legislature passed a law in 2005, which has been upheld in the state’s Supreme Court, that earmarks unused sick leave for retiree health care expenses, Utah’s Daily Herald reports. The employees most affected by this law are those who had planned to use the accrued sick leave in order to take early retirement.
Many Utah state employees have chosen to retire early to take advantage of the benefit before the law goes into effect on April 1, 2007.
Alabama’s Retirement Systems CEO, David Bonner, said he has been warning Alabama legislators that they needed to figure out how to pay for those benefits, the Associated Press reports separately. “We need a constitutional amendment to set up a trust fund that the Legislature can’t raid every time the state has a bad day,” he said. The head of the state’s teacher’s union, Paul Hubbert, agrees that the state needs to set up a fund. He was not sure if it would be funded by the state or by contributions from employees.
In New Jersey, where the state pays teachers benefits, as well as state employee benefits, about 72 percent of the increase in school aid in 2007 is for teachers’ pension and post-retirement medical payments, Bloomberg.com reports. The state’s sales tax was raised by one percent in July, giving the state the highest bond rating. New Jersey plans to borrow to pay costs.
Statement 45 goes into effect over a three-year period beginning after December 15, 2006, for governments with total revenues of $100 million or more. Governments with revenues of $10 million or more must report their liabilities after December 15, 2007, and those with less than $10 million after December 15, 2008.