According to a Mondaq.com report, Gainesville’s July 2005 sale of Taxable Other Post Employment Benefit Bonds was prompted at least in part in response to new requirements released last year by the Governmental Accounting Standards Board (GASB) under Statement No. 45 (GASB 45) (See GASB Issues New Standards for Post-Retirement Benefits ).
Under GASB 45, local governments will be required to account for retiree health care benefits and other post employment benefits (OPEB) they way they already account for pension benefits. Once phased in, GASB 45 will require, for the first time, local governments to show on their financial statements the accrued liabilities of their retiree medical plans and OPEB that are provided.
Local governments who are authorized under their state and local laws can issue taxable OPEB bonds to fund all or a portion of the unfunded liability, similar to the sale of pension bonds to cover the unfunded liability of a pension plan. But the future liabilities of retiree medical plans depend on factors not present in pension valuations, and more difficult to accurately predict, such as the cost of medical care more than four decades away and changes to federal medical benefits, the report pointed out.
GASB 45 will establish standards for the measurement, recognition, and display of retiree medical plans and OPEB, related expenses/expenditures and related liabilities, note disclosures and required supplementary information, when applicable, in the financial reports of local governments’ financial statements See GASB Issues Guide for OPEB Statements ).
According to the report, most local governments currently fund their retiree medical plans on a pay-as-you- go basis as a current operating expense, and reflect such expenses on their financial statements in the fiscal year in which related payments are actually made. So, most local governments have not deposited enough cash to pay for the unfunded liabilities.
A contribution by a local government into a retiree medical plan which is less than the annual required contribution will result in a net OPEB cost, which will then be required to be recorded as a liability in the local government’s financial statements, the report said. Depending on the type of plan, the footnotes to the financial statements have to include, among other things, the funding policy, contributions made in comparison to the OPEB cost, changes in the net OPEB obligation, the funded status of the plan, a schedule of funding progress, and methods and assumptions of the actuarial valuation.
Unlike employers in the private sector, reducing benefits for current retirees is often not a viable option for local governments, due to legal and political constraints, such as labor agreements, state law, and the political risk to politicians who propose such a course of action, according to the report.
The report warned that without a plan to fund the unfunded liability, the liability may balloon due to increasing medical costs, longer life spans, changes in federal medical benefits, and lower than expected investment returns. Rating agencies will continue to scrutinize local governments’ plans to deal with the ballooning costs of retiree medical plans and other post employment benefits.