Articles
Opeb Bonds: A Potential Solution For A Big Liability
by
Robert D. Klausner
Between now and 2008, the provisions of Government Accounting Standards Board Statement No. 45 will become effective. Under GASB 45, local governments are required to account for retiree health care benefits and other post-employment benefits (OPEB) in much the same way that they have long been required to account for pension liabilities. The effect of GASB 45 is that for the first time government financial statements will be required to show the accrued liabilities for retiree medical plans. State and local governments have expressed deep concern over this liability because of the direct impact it may have on a state or local government's ability to sell debt. In other words, the more liability on a government's balance sheet without a corresponding asset, the more likely higher interest will be required to maintain an investment grade rating on its bonds.
Ironically, at least one local government has opted to fund its GASB 45 liability through the issuance of bonds. The City of Gainesville, Florida, in July 2005, issued what may be the first government bonds in the United States to fund an unfunded, accrued actuarial liability for a local government retiree medical plan.1
The City of Gainesville's use of bonds was prompted in part by Florida law which requires local governments which self-insure their retiree medical plans to demonstrate actuarial soundness. While the state law has long since had this funding requirement, GASB 45 will require, for the first time, its reporting on the City's annual financial statement. As a result of its proactive approach, Gainesville received a higher bond rating.
Gainesville is not alone in working towards funding. Another alternative to the use of bonds is pre-funding of long-term post employment benefits. It was reported on February 1, 2006, that the Vermont Legislature was considering a bill which would allow state police retirees to qualify for post-retirement health care. The Governor's office indicated support for the bill provided that pre-funding was made an integral part.
The looming cost of OPEB liabilities may have a dramatic effect on the continued existence of post-retirement health care benefits. According to the January 30th Washington Post, OPEB liability exceeded $20 billion in Maryland, $5 billion in Virginia (which has more modest post-retirement health care benefits), $2 billion in Montgomery County and nearly $1 billion in Fairfax County. Of greater concern than the overall number is the growth of health care costs. Maryland's unfunded liability for retiree health care in 2000 was $3 billion and has increased by a factor of seven in only six years. As an alternative to bonds or pre-funding, many jurisdictions are simply looking at reducing or eliminating post-retirement health care liability.
In New York City, the Mayor's budget message indicated that it will be asking for reductions in health care benefits.
Unlike pensions which have virtually universal constitutional protection from diminution, health care treads a less certain path. State appeals courts have split almost evenly on the question of whether post-retirement health care is in fact a "retirement" benefit and part of the employment contract. This uncertain constitutional status, combined with a growing an unfunded liability, poses a substantial threat to the security of post-retirement health care benefits.
The National Conference on Public Employee Retirement Systems (NCPERS) is entering the third year of an extensive health care task force study with a significant focus on post-retirement health care costs. The search for new and innovative solutions, combined with a realistic partnership between government and its employees, offers what may be the best protection for the future of post-retirement health care benefits.
1 Facts concerning the Gainesville bonds are derived from Weiner, Michael "State and Local Government Options for Complying With GASB 45 OPEB Reporting Requirement," American Bar Association State and Local News, Volume 29, No. 2 Winter 2006.