VHDA Program Transforming Communities - the Virginia Municipal ...

By Mary Jo FieldsAccounting changes pose questionsabout future of benefits for retireesNew standards issuedby the Governmental AccountingStandards Board (GASB)require that governments recognizethe cost of benefits for retirees duringthe time period that the employee ison the payroll, as opposed to when theemployee actually retires.Larger local governments withrevenues of more than $100 millionmust start recognizing the cost ofthese post employment benefits intheir audits for FY07. Those governmentswith revenues of $10 million ormore, but less than $100 million, willbe subject to the standards for theiraudits for the 2008 fiscal year, whilethe remaining governments (revenuesless than $10 million) will be subjectto the standards for their audits of the2009 fiscal year.What are “other post employmentbenefits?” These are benefits,other than a pension, that employeesreceive after they have separated fromemployment. The most typical OPEBis health insurance for retirees, butother OPEBs include life insurance,dental insurance, long-term disabilityor long-term care benefits.If the government incurs liabilitiesin the offering of these benefits, thenthose liabilities have to be shown onthe government’s financial report, underthese new accounting standards.Local governments may incur liabilitieseven if their post employmentbenefits are limited to just makinghealth insurance coverage availableto retirees if the retirees are includedin the same pool as active employees.This is the case even if the retireesare paying 100 percent of their ownpremiums.The GASB standards make it advantageousto fund post employmentbenefits through independent trustfunds that allow for the segregationand accumulation of assets to pay forpost employment benefits. A failureto pre-fund these post-employmentbenefits could end up affecting bondratings.Cities, counties, towns, schoolboards and other political subdivisionsare authorized to establish these trustsin order to pre-fund post employmentbenefits under the provision of SB789, enacted during the 2007 sessionof the General Assembly.SB 789 specifies that localitiesestablishing these trusts be requiredto appoint a finance board to managethe assets of the trust, although the retirementboard can serve that functionin those localities that have their ownindependent retirement systems. Theboard also must retain an investmentmanager.The price tag for pre-funding theseOPEB liabilities can be significant, dependingon the make-up of the localwork force and the types of benefitsthat have been extended. The stateAuditor of Public Accounts estimatedlast July that the state should includefunding of $198 million in its FY08budget in order to meet the pre-fundingrecommendations posed by theGASB standards.At the local level, anecdotally,localities have said the cost of prefundingpost employment benefitscould cost anywhere from 1 cent to 20cents of the real estate tax rate.When these types of accountingstandards were applied several yearsago to the private sector, companiesresponded by cutting back on benefitsprovided to retirees. They could notafford to pre-fund the benefits, andthey did not want to have to some theliabilities on their annual financialstatements.Local and state governmentsalready are beginning actuarial studiesto determine what it would cost topre-fund the OPEB benefits. Partof that process may well include anexamination of what benefits are providedto retirees. As is the case withthe private sector, some governmentsmay cut back on benefits. Indeed,some local governments already havecut back on the benefits affordedretirees.While this may be “goodgovernment” in the sense of fullyacknowledging the cost of benefitsand of being a good steward of localrevenues, it may not be “good government”in terms of personnel policyor even in terms of the use of othergovernment services such as Medicareor Medicaid.The onrush of baby boomers intoretirement will exacerbate these andother issues relating to retirementbenefits. State and national newspapersin the past several months havepublished numerous articles comparingretirement benefits afforded publicemployees as compared to thosegranted workers in the private sector.A defined benefit retirement plan,such as is offered through the VirginiaRetirement System, is the norm formost public employees. This typeof retirement plan guarantees aminimum benefit to retirees. Mostprivate sector employees, however, arecovered by defined contribution plansthat do not include such a guaranteedbenefit. The costs of paying for otherpost employment benefits will surelybe part of any discussion of what areappropriate benefits for retirees, andhow much governments can afford.About the authorMary Jo Fields is directorof research for the VirginiaMunicipal League.20 VIRGINIA TOWN & CITY