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Life Health > Health Insurance > Health Insurance

Public Employers Look For Way Out Of Benefits Cost Shell Game

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Like its college football, Texas is turning the shell game into a spectator sport. Following in the Lone Star State’s footsteps, Connecticut, the state that is home to the independent accounting standards board that is leading the way to government transparency, also wants to hide the pea.

Both states have figured out logical-sounding arguments to support their contention that they should not have to worry about GASB 45. That’s the accounting rule issued in 2004 that told governments to figure out the cost of health care benefits that they have promised to state workers in retirement–and then reflect those costs as a liability on the books today.

Texas has passed a law that says its state and local governments have the option of ignoring the standard.

Connecticut legislators were less frontal in their assault, simply giving a state official the authority to pick and choose which accounting standards to follow (although the governor recently vetoed the legislation when it reached her desk).

These two states are trying to stir up a government rebellion against GASB 45. Why? Because it is not very convenient for politicians, who are used to voting for benefits today and putting off paying for them until tomorrow, to be faced with the kinds of obligations that retiree health care costs add up to.

Just a few examples of the public tab over the next 30 years: the state of Pennsylvania, $14 billion; New York City, $50 billion; the state of California, $48 billion; Utah State University, $93 million; and the Los Angeles Community College District, $625 million. In fact, testimony by an expert to New York legislators recently put the total cost of all unfunded public sector liability for health care costs at $600 billion to $1.3 trillion. To put that in context, consider that the outstanding value of all state and local government municipal bonds is roughly $2.3 trillion.

So forget the posturing that Texas and Connecticut are engaged in as they try to keep future liabilities from clouding their present spending plans. Instead, look at the reality. Government workers across the nation are typically sold on staying in the public sector because of the value of benefits, both during their careers and in their retirement. In a world where the private sector is rapidly moving to “defined contributions” rather than “defined benefits” in both pensions and health care, government is the last place where employees can still bank on cradle-to-grave security.

The cost of that security blanket for public employees, however, is rising rapidly. And just as private companies found they could not remain competitive in a global economy with pension and health care costs adding a heavy burden to their bottom line, government entities are finding it tough to balance the promises they have made to retirees with the double demand from the public for high services and low taxes. So far they have managed it because the future cost of their commitments is usually safely hidden away in a footnote–or not even calculated at all.

GASB 45 has changed that dynamic, requiring governments to bring the hidden costs out into the sunlight. Nothing in the rule requires governments to actually fund their liability once it is on the books. But since rating agencies take liabilities seriously, public agencies know their ability to issue bonds and raise funds could be severely impacted if they ignore GASB 45.

A role for insurance experts

Instead of playing games, responsible government leaders are already taking action to address the liability. Some are tackling the tough financial numbers:

–New York City, with its $50 billion liability, has established an irrevocable trust fund for health care benefits with an initial funding of $1 billion and more to come. The investment returns over time are expected to reduce the unfunded liability.

–Ohio, which has an unfunded liability of $18 billion, has increased the contribution that employees and retirees must make toward health insurance premiums if they have worked less than 30 years. Alabama has increased the premium payments for retirees who leave the workforce with only a limited term of service.

–Gainesville, Fla., has issued bonds to cover its $35 million liability and remove it from today’s books. The plan is to deposit the proceeds in a trust that can leverage the funding through investments and pay the benefits as they come due.

–California’s huge retirement system, CalPERS, has set up a trust fund that any local government in California can easily use to set aside funding for retiree health care costs. One major advantage is tapping into the investing expertise that CalPERS uses to defray the cost of future pensions.

Smart public sector leaders are getting out in front of the GASB 45 dilemma by turning to the experts that have proven expertise in the private sector. The private sector’s response to FASB 106 liability over the past decade provides valuable case studies, which will work in tackling similar issues that face government agencies. Consultants and benefit producers that have a track record of assisting private sector clients will find themselves at the forefront of providing solutions for the public sector.

It is time for all government leaders, including those in Texas and Connecticut, to recognize that they need to solve the problem of unfunded liability for future benefits–not hide it under a shell that can be moved around to confuse taxpayers. For starters, many public agencies struggling to cope with the new environment they’re operating in are building teams of experts to identify the right combination of policies and strategies that will work for their specific situations. Brokers have an opportunity to play a key role on those teams by offering their expertise on insurance solutions that will lower costs while still meeting the commitments that have been made to employees and retirees.

Samuel H. Fleet is president and CEO of AmWINS Group Benefits, Warwick, R.I. He can be reached at


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