States Facing ‘Unmanageable’ Retiree Health-Care Liabilities

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, 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

“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.

You may like these other stories...

Accountants without a succession plan are hurting not only themselves but their clients as well. Here are seven ways to see your practice continues after you retire—some of them are better than others.What Are Your...
In the tax world, as in the real world, there is often a "right way" and a "wrong way" to do things. This is particularly true concerning rollovers from a qualified retirement plan, like a 401(k) or...
Read more from Daniel Mazzola here.Most people – maybe even most accountants – think of Social Security as just a government retirement plan. But perhaps just as important are the survivor benefits, the payments...

Already a member? log in here.

Upcoming CPE Webinars

Sep 9
In this session we'll discuss the types of technologies and their uses in a small accounting firm office.
Sep 10
Transfer your knowledge and experience to prepare your team for the challenges and opportunities of an accounting career.
Sep 11
This webcast will include discussions of commonly-applicable Clarified Auditing Standards for audits of non-public, non-governmental entities.
Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.