By Gail Perry
The Governmental Accounting Standards Board has published Statement No. 43, Financial Reporting for Post-Employment Benefit Plans Other than Pension Plans.
That statement, along with the companion Statement No. 45, Accounting and Financial Reporting by Employers for Post-Employment Benefits Other than Pensions, which is due to be published at the end of July, requires state and local governments to include in their financial reports the full cost of benefits such as health care and life insurance that have been promised to future retirees.
The GASB standards are similar to standards that have been in place in the private sector since 1990.
The requirements for plan reporting are effective one year prior to the effective date of the employer reporting statement. Effective dates are based on the size of the sponsoring government entity.
Government employers with annual revenues of at least $100 million are required to implement the new reporting requirements in their financial statements in the first fiscal year beginning after Dec. 15, 2006. Government employers with annual revenues between $10 million and $100 million have a required financial statement implementation in the fiscal year beginning after Dec. 15, 2007, and government employers with annual revenues of less than $10 million have until the fiscal year beginning after Dec. 15, 2008, to effect financial statement implementation.
All state, county and local governments, including school districts, water authorities and state colleges, are affected by this ruling — more than 80,000 entities. The dollar amount of this change in financial statement reporting is predicted to total into the billions of dollars in some of the larger states.
Karl Johnson, GASB project manager for the other post-employment benefits project, described GASB’s concern that public employers are not financing their future benefits. “Most governments are on a pay-as-you-go basis, so there are some quite large undisclosed and in most cases unmeasured liabilities,” he said.
“Currently, most governments don’t recognize the expense for these benefits until the benefits are actually paid, after the people are retired,” said Johnson. The new GASB statements would “require them to accrue expense that would approximate the years when the employer is receiving the services.”
It is estimated that about three-quarters of state governments and at least half of local governments provide retiree health benefits.
OPEB disclosure rules include requirements to measure the cost of benefits and accrue OPEB expense, provide information about actuarial accrued liabilities and the extent to which such liabilities have been funded, and provide information regarding potential demands on future cash flows.
“The way the board looks at these transactions is that OPEB arises as a result of an exchange transaction between the employer and the employees. All of it is part of the cost of services in the current period,” explained Johnson. “So if the government is not recognizing that cost and not funding that, then they are relying on someone later to pay for it, so it’s being paid by taxpayers in a period sometimes long after the period that actually ended.”
A benefits cutback?
Public employees have expressed concern that the ultimate effect of the new GASB rules will be a reduction in benefits. Combined with the high cost of health care, the requirement to account for and disclose future benefits may give government employers the incentive to cut back on or even eliminate government funding of retiree health insurance.
“We are concerned that a lot of our retirees will end up losing their health benefits,” said Frederick H. Nesbitt, executive director of the National Conference on Public Employee Retirement Systems. The NCPERS opposes the GASB requirements and instead supports legislation to stop the spiraling costs of health care and federal aid to governments that provide health care benefits for retirees.
In spite of concerns about dwindling health care benefits for government employees, a recent report authored by Jack Hoadley of the Health Policy Institute at Georgetown University concluded that states are being proactive about attempting to cut costs while maintaining benefits for retirees. “Overall, nearly every state has taken some kind of action to control costs, including changes to benefits or administrative procedures or higher cost-sharing requirements for their retirees,” stated the report. “However, no states have terminated subsidized health benefits for current or future retirees.”
Government employees may find more health care costs shifted their way in the future as government organizations wrestle with the options of raising taxes to fund retiree benefits versus cutting benefits or shifting costs.
This is not just an anticipated trend among government workers; it is a trend nationwide. In the Kaiser/Hewitt 2003 Survey on Retiree Health Benefits, which analyzed benefits in the private sector, survey findings show that 89 percent of surveyed employers expect new and future retirees to share in the cost of retiree health coverage. The annual Kaiser/Hewitt survey focuses on large employers who are likely to offer retiree health coverage.
Other concerns have arisen in light of the new GASB standards. Chicago-based Aon Consulting warned that the new accounting standard may adversely affect bond ratings and balanced budget rules, may require prefunding of benefits, and may require periodic evaluations for calculating income statement expenses.
Providing a clearer picture
The GASB rules emphasized the need for financial statements to provide a complete picture of all current as well as future liabilities. Johnson addressed the concern that if public officials have to report this information it is likely to affect their policy decisions, and Johnson sees this as a positive result of the reporting change.
“It will provide governments with much better information on which to base their decisions,” he said. “I think it provides the best opportunity to do some planning and perhaps manage these benefits in a way that will be sustainable longer, compared to doing pay-as-you-go until the pay-as-you-go requirement gets too high and suddenly they’re not able to continue.”
“Lack of information is not a safe harbor,” said Johnson.
