The Government Accounting Standards Board gave its preliminary approval Wednesday to new standards that would force greater transparency in the accounting of health care obligations to government retirees.
The seven-member GASB voted unanimously to advance two draft proposals addressing the reporting of what are known as “other post-employment benefits,” or OPEB, including retiree health insurance.
Once passed, these measures would require governments to recognize the net liabilities of their OPEBs on the face of their financial statements.
Currently, the extent of these liabilities can be published in the notes of a financial statement. By requiring this reporting on the face of a financial report, GASB, which sets the financial reporting standards for the public sector, hopes to encourage further transparency on what it views as a vital governmental budget issue.
For decades, OPEB liabilities were never reported on balance sheets, and consequently those obligations went underfunded or even unfunded. That began to change in 2006, when GASB required cities and states to begin to report their health care liabilities to retirees.
The new OPEB reporting standards follow the same logic as the GASB’s latest pension guidance, which go into effect for goverments with effective fiscal years beginning after June 15. Those standards require state and local governments to report their net pension liability in their financial statements.
GASB cannot require cites and states to fund their reported liabilities; it lacks the authority to do so. Whether to force governments to ensure adequate funding was a question left to state and local elected officials.
That, of course, has proven catastrophic in some cases. A 2013 study by Pew Charitable Trust of the 30 largest cities in the country found unfunded pension liabilities of $99 billion, while unfunded retiree health care obligations amounted to $118 billion.
As Detroit prepared to go through bankruptcy last year, its $3.5 billion in unfunded pension obligations was widely known. Less apparent was the $6.4 billion in OPEB obligations, primarily in retiree health care. Underreporting and underfunding of those obligations accounted for more than one-third of all of Detroit’s liabilities.
“OPEB represents a very significant liability for many state and local governments, one that is magnified because relatively few governments have set aside any assets to pay for those benefits,” GASB Chair David Vaudt said in a statement. “It is vital, therefore, that taxpayers, policy makers, bond analysts, and others receive more and better information about these benefits so that they can better assess the financial obligations and annual costs related to the promise to provide OPEB.”
The GASB is also proposing that if a government cannot meet its projected rate of return, leading to a future funding shortfall, then it would have to switch to a rate based on a 20-year tax-exempt high-quality general obligation bond. That could make a liability appear larger than before.
Governments would also have to immediately recognize OPEB expenses, instead of spreading them over many years, and would have to provide more extensive notes in their disclosures.
The drafts of the GASB’s proposals will be posted on its website in June. A comment period will be followed by public hearings Sept. 10-12