The Government Accounting Standards Board (GASB) has released drafts of financial reporting standards that could make government retiree benefit plans — and the plans’ funding problems — easier to understand. The GASB drafts apply to “other post-employment benefits” (OPEB), including retiree health benefits and any retiree life insurance, disability insurance and long-term care insurance (LTCI) plans.
GASB has posted one draft that applies to the state and local governments that provide OPEB through irrevocable transfers of cash to trusts, one for the OPEB plans funded with irrevocable transfers, and one for pension plans that offer OPEB without having access to cash locked in a trust. GASB members voted to expose the drafts for public comment May 28. Comments are due Aug. 29.
Some insurance agents and brokers continue to sell traditional OPEB programs to government employers, and other producers sell alternatives to traditional OPEB plans, such as access to private exchange programs that help retirees use government employer money to cover part of the cost of buying Medicare supplement insurance or Medicare Advantage plan coverage. Contraction in OPEB programs could also create opportunities for agents selling Medicare supplement insurance, Medicare Advantage plans and individual health insurance products directly to individuals.
See also: GASB Proposes Public Pension Rule Overhaul.
The draft proposals are more generous toward governments that try to fund OPEB ahead of time, instead of paying the bills as they come in.
If a plan has access to cash locked in a trust, members can assume the assets will earn a “long-term expected rate of return,” GASB officials say in a summary of the proposals. When an employer is trying to pay for the benefits as it goes along, it must assume the discount rate will be only as high as the 20-year tax-exempt bond yield on high-quality general obligation municipal bonds.
The city of Detroit and the city of Stockton, Calif., have given OPEB funding problems much of the blame for the circumstances that led to their bankruptcy filings. Rating analysts say OPEB funding has been a problem because of a combination of generous promises made in different times; poor government employer understanding of how employee and retiree demographics might change; frequent government employer decisions to skip contributions; poor investment choices; and the effects of low interest rates on OPEB trust assets.
Analysts at Fitch Ratings said in a recent report on state OPEB obligations that states with above-average OPEB liabilities often have above-average liabilities for debt and pensions as well, because the same decision-makers have been overseeing all three types of liabilities. At the state level, “the median reported state OPEB liability is 1.8 percent personal income, with a range of 0 percent to 13.8 percent,” Fitch said.
Officials at some governments with OPEB programs have argued that they should not have to count post-retiree health benefit programs and related programs as financial obligations because, in many cases, the governments have promised to provide defined-benefit pension payments but not OPEB benefits.
“Legal obligations are not the only kind of obligations that are reported as liabilities,” GASB officials say in a summary of the drafts. “Obligations also may be social or moral.”
Even if a government could stop making OPEB payments, financial statements are historical documents and report on a government’s finances as of a certain date, according to officials. ”Therefore,” officials say, “the fact that a government’s promise to provide OPEB was intact as of the date of the financial statements means that the government had an obligation at that time, regardless of whether it could alter or eliminate the obligation in the future.”