Fitch Issues Special Report on GASB 45

Fitch Ratings issued a Special Report, “The Not So Golden Years” on Wednesday, June 22, 2005. The report discusses the credit implications of GASB Statement No. 45, a public sector accounting standard for other post-employment benefits (OPEB) introduced to improve disclosure of employment costs incurred by state and local governments.

OPEBs, which consist primarily of healthcare benefits, and pensions, are part of the total compensation packages offered by state and local government employers to attract and retain qualified employees. GASB 45 establishes standards for the measurement, recognition of OPEB-related expenses/expenditures and liabilities (assets), note disclosures and required supplementary information (RSI), when applicable, in the financial reports of government employers. Pensions are not included in GASB 45. GASB 45 is scheduled to be implemented by phase 1 governments (those with annual revenues of $100 million or more) in financial statements for periods beginning after December 15, 2006.

Fitch views GASB 45 as a positive step towards more fully illuminating governmental obligations. At the same time, Fitch recognizes the tension inherent in allocating resources toward today’s critical government services and meeting funding requirements for future retirement benefits. The report notes that while some studies indicate prefunding OPEB on an actuarial basis may entail a five- to ten-fold increase in annual outlays, a lack of funding and managing of OPEB liabilities could adversely affect an issuer’s credit rating. Additionally, the report indicates that the prudent accumulation of assets, well in advance of benefit cost escalations, in trust accounts outside the general fund can avoid or forestall liquidity problems or tax capacity concerns that could lead to credit deteriorations.

The complete report can be downloaded from the www.fitchratings.com Fitch Ratings web site. A teleconference to discuss the report is scheduled for Thursday, June 30, 2005 at 11:30 a.m. EDT. U.S. and Canadian participants should call 888-266-4139 and callers outside the U.S./Canada should call 706-643-1860 five (5) minutes prior to the start of the teleconference. If you would like to participate, email pfconference.calls@fitchratings.com. A replay of the teleconference will also be available on the Fitch Ratings web site under the “Teleconference & Online Events” link in the “Resource Library”.

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