A new accounting standard has states and local governments worried about their ability to borrow money, while employees fear their benefits may be cut.
The reason for worry is a 2004 accounting standard by the Governmental Accounting Standards Board (GASB), known as GASB 45. Starting in December, states will be required to account for the cost of health care benefits for retiring public workers. States are not required to set aside money to cover the liabilities, but failure to do so could hurt the states’ credit ratings and therefore make borrowing more costly, Stateline.org reported Wednesday.
States have been focusing on balancing their books and are just now tackling the issue of unfunded retiree liabilities. “It still hasn’t really hit the radar screen” for some states, said Sujit CanagaRetna, senior fiscal analyst at the Southern Office of The Council of State Governments.
GASB says that states have been following a “pay-as-you-go” approach: The cost of benefits is not reported until after the employees retire. However, GASB contends a more open approach, and one that will allow for better decision-making, is to account for costs and obligations governments incur during the years that employees are providing services, for which benefits are owed in exchange.
GASB says that one of the most common misconceptions about Statement 45 is that it requires governments to fund retiree health care benefits. “How a government actually finances benefits is a policy decision made by government officials,” GASB said on its website.
Consider the issues Maryland is facing. The state’s unfunded liability for retiree health care costs is estimated at $20 billion, Michael Rubenstein, senior policy analyst at Maryland’s Department of Legislative Services, told Stateline.org.
“No one had a sense that it would be that big or that unmanageable,” he said. The state will have to set aside $1.6 billion each year to start covering the costs; the state is currently paying $300 million to cover retirees’ health care expenses, Rubenstein said.
GASB standards also cover local governments, although implementation is later than for states. Officials in one Minnesota city, Winona, do not fear the GASB rule because retiree health-care benefits end at age 65. “The city believes that the adoption in fiscal year 2007 of GASB’s requirement to record post-employment retirement health care benefit will not be significant given the average age that an employee retires from the city is 60 years old and the benefit expires at age 65,” the Winona Daily News reported, quoting the city audit.
However, other Minnesota cities are struggling with underfunded post-retirement health care plans that pay benefits until the retirees die. Cities like Duluth, forced to re-direct millions of dollars each year toward retirees’ health care, might see their bond ratings fall because of the continuing liability of the plans, the newspaper reported.