Imagine you’re a government employee of 20 years counting down to retirement. You’ve saved some money – probably not enough, with the kids going off to college – but you’re secure knowing that, in addition to your pension, your public employer will continue to pay for your healthcare and life insurance after retirement. That was one of the main reasons for working there, right?
Now, suddenly, your government employer is fudging on that deal. They’re saying that they might not have the money for those other benefits when you retire. It’s like a punch straight in the gut.
That’s what’s happening today with nearly 200 state and local government entities around the nation, because an estimated $1 trillion in “other post-employment benefits” (OPEB) are unfunded – money owed to 6 million current retirees and 16 million active employees or 12% of the workforce.
For example, New York City’s estimated unfunded OPEB liabilities total $50 billion, compared to its projected 2008 annual budget of only $57 billion for the entire city. In the state of Michigan, which may have $30 billion in unfunded OPEB liability, active teachers pay 6.55% of each paycheck for retirees now, but if the state were saving for those teachers’ own retirement, it would need to collect 16.55% each paycheck.
Clearly, this retirement benefit dilemma dwarfs the ENRON scandal, yet few outside of the financial sector seem to be talking about it. So why is it a hot issue today? A ruling called GASB 45.
In 2004, the Government Accounting Standards Board (GASB) issued Statement No. 45 requiring state and local government employers that provide healthcare to account for and report the cost of these OPEB benefits annually, as well as related outstanding obligations and commitments. The largest employers, such as states, are required to meet this standard beginning this year. The rule doesn't require entities to immediately set aside money to cover its long-term costs. But they will have to list the costs as a liability on their books, as do corporations, which could dramatically lower their bond ratings.
Prior to this ruling, the order of the day was pay-as-you-go, i.e. these liabilities were counted as an expense as they occurred and were rarely funded prior to the actual realization. There was no accrual accounting for future benefits promised or what they would cost in the future. Under GASB 45, there is mandated shift from cash to accrual accounting, increasing OPEB costs on the general budget significantly for most public entities – as much as two to 10 times above the current pay-as-you-go expense.
This is sending public employers scrambling for a solution. Some are even suggesting that they don’t really owe these benefits to employees. The constitutions of Alabama, Illinois and Michigan specifically prohibit that such benefits be obligated. The same may apply to California, Georgia, Indiana, New Jersey, Rhode Island, West Virginia and Oklahoma.
Sage Advisory Services, a national investment management and financial advisory firm, is an expert on the GASB 45 ruling and liability funding. They currently advise a number of public entities on this issue, including the State of Texas,
Sage Advisory released a webcast on this issue, its ramifications and proposed solutions, on its website. This webcast, entitled “Gasping Over GASB 45,” can be found here. The password is “irving.” This is chocked-full of information I think you’ll find very useful. The dramatic underfunding of 22 million Americans’ retirement benefits is a travesty, and the public should be aware that it is happening.
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