by Glenn Cheney

Norwalk, Conn. -- State and municipal governments are bracing for a fiscal shock as the Governmental Accounting Standards Board proposes that they account for and report the annual cost and outstanding obligations of post-employment benefits not covered under the board's statement on pension funding.

The exposure draft is of two statements that would require accrual-basis measurement and recognition of "other post-employment benefits" costs, including the big one, health care benefits. Governmental employers would also be required to provide information about actuarial accrued liabilities and to what extent the plan is being funded.

"This has been a very, very big effort of several years," said Tom L. Allen, GASB chairman. "This is a major focus of what GASB has done since Statement 34 in 1999. This is the most significant project since then."

Statement 34, "Basic Financial Statements - and Management’s Discussion and Analysis - for State and Local Governments," revamped the framework of governmental accounting. Statement 25, "Financial Reporting for Defined-Benefit Pension Plans and Note Disclosure for Defined-Contribution Plans," did not include the other post-employment benefits covered in the current exposure drafts.

One of the exposure drafts covers employer accounting and reporting, while the other is for third-party entities that administer the plans.

The proposal grapples with two difficult aspects of accounting for long-term future benefits. One is the actuarial complexity of predicting probable costs. Large governmental entities can afford the actuarial calculations needed to estimate those costs.

Some states, however, have thousands of small towns that have offered their employees post-employment health and life insurance benefits. Despite the small size of the benefit plans, the calculations would be almost as complicated and costly as those of larger entities. Larger entities that offered small plans to a restricted number of users -- only firefighters for only a few years, for example -- would suffer similarly disproportionate costs.

To alleviate these costs, the proposal offers a simpler method for plans that cover fewer than 100 current or past employees. The method follows general actuarial principles but allows certain assumptions that avoid the need for a full actuarial study.

Allen said that the board is especially interested in reactions to this measure.

"We recognize that this measure results in a little less precision, but it’s a cost-benefit trade-off," Allen said. "The cost is probably lower, and the information, judging from a limited field test we did, at least approximates what one would get if they hired an actuary to do it."

Counter to the recommendations of actuaries, the proposal tries to improve cost-effectiveness by exempting governments that have implicit rate subsidies -- that is, plans that let retirees pay for benefits at the same rate that current employees pay, effectively a subsidy since the retirees, being older, would normally pay more.

"We’ll probably hear some negative feedback on that from the actuary community, and some very positive comments from the preparer community," Allen said.

Mary Metastasio, vice president of Safeco Asset Management, analyzes governmental financial statements. She says the GASB proposal is "a step in the right direction" and that the differences between the financial statements of small and large governments will not produce dysfunctional comparability.

"In any kind of GASB statements, one size doesn’t always fit all, and certain compromises have to be made because small governments don’t have the resources that larger governments have," Metastasio said. "I applaud any movement in the right direction. As an analyst and portfolio manager of municipal bonds, I just want the best information available on the credit quality of the entity, and having more and better information about these future liabilities is only to the good."

The exposure drafts ask several questions that the board would like the preparers and users of financial statements to answer. Users, however, have never responded much to GASB requests for opinions and input. One reason may be the laymen’s difficulty in understanding the issues and technicalities. The board has therefore issued a "Plain-Language Supplement" that clarifies the proposal and its ramifications.

"This is very much a user outreach," Allen said. "We’ve heard from users that this financial information is important to them, so we tell them that we’d like to hear back from them.

The board will hold two public hearings on the issue, in New York and San Francisco, in May. GASB will also hold a forum for users of related information at a meeting of the National Federation of Municipal Analysts in Chicago. Comments are requested by April 30, 2003.

The proposed statement would be effective in three phases based on a government’s total annual revenues in the first fiscal year ending after June 15, 2003. Governments with total annual revenues at or over $100 million would be required to implement the standard for periods beginning after June 15, 2006. Governments with revenues of $10 million to $100 million would have to implement by June 15, 2007, and smaller governments would have an additional year to implement. Earlier implementation is encouraged.

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