Pension Trends   Volume VII, No. 2, May 2006    

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Accounting for Responsibility – GASB 43 & 45
          

Accounting for Responsibility – GASB 43 & 45

One way or another, we are all going to be affected by the financial reporting requirement of Government Accounting Standards Board (GASB) Statements 43 and 45. Most of us will be impacted only by the financial consequences it will have on our towns, cities, fire and school districts and similar government entities – financial consequences meaning additional pressure on tax revenues.

Until now, state and local employers have not had to account for the financial obligations created by health care, long-term care, life insurance and similar benefit programs offered to retirees. GASB does not require that these benefit programs be funded, but it does require that public employers actuarially value and disclose their unfunded liabilities associated with the programs. Because bond rating agencies are likely to take unfunded liabilities into account when assessing a public employer’s financial condition, the landscape for how these programs are managed is going to change.

For starters, we expect pre-funding to become more common. GASB offers significant advantages for funding these benefit obligations. Additionally, in the long run, pre-funding will reduce the amount of tax dollars ultimately needed to fund the benefits, which is one reason why retirement plans have pre-funded their benefit obligations for decades.

Another change is potentially more significant. Most public employers are going to find new GASB liabilities to be shockingly high. In many instances, we expect the annual expense a local government will have to book will be twenty (or more) times greater than the current expense for their retiree benefit programs. What was a $100,000 annual expense will under GASB become a $2,000,000 hit. This may cause some governments to consider reducing retiree benefits or, where law permits, eliminating some retiree benefits altogether. Time will tell.

In the interim, the first step is for public employers to get a handle on the size of their potential new GASB liabilities. The new disclosure rules under GASB will be phased in over the next few years. Large employers (determined by revenue) must comply as early as 2007.

Many employers may have a retiree medical program without even realizing it. One common feature of government-sponsored health plans is to allow retirees to remain on the active health plan until they are eligible for Medicare, with the retiree paying the entire premium. No cost to the employer, right? Wrong, says GASB. These types of plans must account for the benefit as if the retiree group was separately rated from the active group, in which case the premium would be much higher. From this standpoint, the retiree may be paying only half of the true "cost" of coverage, leaving a significant obligation with the employer.

According to one published estimate, nationally there are 85,000 to 95,000 states, cities, and school districts that will be affected. This is a staggering number, and doesn’t even include all the other types of local government entities such as fire and water districts. GASB does offer a "simplified" (but still daunting) approach for valuing benefit programs for very small public employers, but other public employers will be required to engage a qualified actuary to go through a rigorous valuation process to determine the value of their unfunded liabilities. Once the liabilities are known, the next step will be to develop a long-term strategy for how to best manage the liabilities.

Taking into account the time it takes to build and find funding for public employer budgets there should be a sense of urgency. At IAI we certainly feel that way. We are gearing up for what we expect to be a significant new line of business for us. We have added staff capabilities and established procedures and methodologies for doing GASB 43 and 45 work. As I said at the start of this article, one way or another we will all be impacted by the new GASB requirements. At IAI we expect the impact to be direct, significant, and happening soon.

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This newsletter has been published in order to share general information with our professional contacts. The information presented in this newsletter should not be acted upon without first seeking the advice of a CPA, attorney or other benefit professional.