Accounting Rule Targets Benefits in Public Sector

By Linda Jacobson — March 17, 2006 8 min read
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Deadlines are looming for school districts and other public employers to comply with a new financial-reporting rule on the long-term costs for health and other insurance benefits that have been promised to employees.

For the first time, local, state, and federal agencies will have to disclose future benefit costs in current budgets, a requirement that could force policymakers to confront the under-the-radar issue of meeting those costs and explain why such obligations have grown so large.

But even as the high stakes become increasingly apparent, many school finance officials are only beginning to wrestle with how to satisfy the new requirement.

“At this point, they’re not very prepared at all,” said Corey Arvizu, a partner at the accounting firm of Heinfeld & Meech in Tucson, Ariz., whose clients include school districts. “I think the ball’s rolling, but there are a lot of districts out there that aren’t even aware what their policies are regarding their benefits.”

The changes were set in motion in 2004, when the Governmental Accounting Standards Board—an independent, Norwalk, Conn.-based organization that sets financial-reporting standards for government agencies—issued what is called Statement 45.

The GASB rule requires all cities, school districts, and other public agencies that provide such non-pension retirement benefits as health insurance, life insurance, and dental and vision care to recognize and disclose those long-term obligations during the years that an employee is working.

If the costs are not “prefunded,” they will register as a liability on districts’ financial statements.

Traditionally, districts that offer such benefits have used a pay-as-you-go approach, funding them year to year. But according to the GASB, that method doesn’t plan for future costs for health benefits, which have skyrocketed in recent years and will continue to rise.

“Everyone had this idea that they would put this obligation off until the future,” said Harley Ogata, a lawyer for Education Minnesota, a state affiliate of both the National Education Association and the American Federation of Teachers. “The problem is that the future is right now.”

$10 Billion Surprise

Suzi Rader, the director of district and financial services for the California School Boards Association, which has been advising districts on the accounting rule, believes that districts will be shocked when they see just how much debt they have incurred.

“In the years when they started giving these benefits, it probably cost them a hundred bucks a month” per employee, she said. “They’ve seen that number increase to $1,700 a month.”

That’s about how much it might cost today for a family medical plan for each employee just about anywhere, though future costs are not factored in.

Post-Employment Benefits:

Many state and local governments provide post-employment benefits in addition to pensions as part of the total compensation offered to attract and keep qualified workers, including teachers and other school employees. Such benefits include health- and life-insurance commitments that are provided separately from a pension plan. The Governmental Accounting Standards Board’s Statement 45, adopted in 2004, set standards for the measurement, recognition, and disclosure of such post-employment benefits, and related liabilities or assets, in the financial reports of state and local government employers, including school districts, beginning in fiscal 2007.

SOURCE: Education Week

Tight fiscal times have made the problem even worse. During contract negotiations with employees, districts have often agreed to more health benefits in years when they couldn’t afford to give pay raises, or could give only small raises.

The new rule is likely to affect future negotiations between school districts and unions, now that the obligations have to be disclosed and those debts can affect districts’ financial ratings.

“I believe, in the current environment, all of our stakeholders realize something needs to be done,” said David R. Holmquist, the director of risk management and insurance for the 760,000-student Los Angeles Unified School District. “It represents a cash-flow problem.”

And for LAUSD, the figure is staggering. A recent actuarial valuation conducted for the district—the only way to determine such liabilities—showed that those unfunded costs have reached $10 billion to fund current and future retirees over a 30-year period.

That’s why members of the Los Angeles school board, district administrators, and union officials were scheduled to meet in a retreat this week to begin looking at options for addressing the issue.

Plenty of alarming examples from the private sector show what health-insurance costs and other lifetime benefits can prompt an employer to do: Verizon Wireless, American Airlines, Ford Motor Co., and United Airlines are just some of the companies that have frozen or eliminated such benefits, laid off thousands of employees, or even filed for bankruptcy as a result of their unfunded liabilities.

“We heard all the rumbles from private industry, but we thought it wasn’t going to affect us,” said Sam Kresner, an executive assistant to the president of United Teachers Los Angeles, an NEA and AFT affiliate. He also serves as the chairman of a districtwide employee-health-benefits committee.

School districts don’t have as many options as the private sector, said Martin Tokunaga, a consultant with the California School Boards Association. For example, districts can’t take back a benefit that was given during the collective bargaining process, he said, unless the change is negotiated.

Incentives to Comply

Larger districts—those that had annual revenues of at least $100 million in fiscal 1998—must comply with the rule beginning with the 2007 federal fiscal year. The requirements will be phased in for smaller districts in the 2008 and 2009 fiscal years.

Statement 45 doesn’t require that the future benefits be paid for, but because the costs will be posted on financial documents, they will affect a school district’s credit and bond ratings. That means it might be harder for districts to borrow money to build schools. Districts, therefore, have an incentive to start putting money aside to cover the anticipated expenses.

“You can put your head in the sand, but that’s going to come back around and bite you,” said Barry Newbold, the superintendent of the 77,000-student Jordan school district in Utah.

Utah districts were given an additional incentive last year by the state’s Office of Legislative Auditor General to start listing such costs and putting money aside to cover them. In a series of recommendations, the auditor advocated financial sanctions in the future for districts that failed to make progress toward the GASB rules.

What’s more, the state legislature passed a bill—that was signed into law—phasing out post-retirement health insurance for state employees.

“We saw a one-year window of opportunity to resolve these issues on our own,” Mr. Newbold said.

His district formed a task force with representatives from the local employee associations to design some possible solutions. Ultimately, the school board approved a plan that freezes those post-retirement fringe benefits for current employees, but gives them the opportunity to receive a lump-sum payment in place of the benefits when they retire.

For teachers with 30 years in the district, the payment will be close to $110,000, which they can use to buy private insurance. Employees hired after July 1, however, won’t have those benefits.

“There’s a very mixed reaction,” Mr. Newbold said. “People are upset and anxious over this.”

The Jordan district had at least started saving money three years ago to put toward its liability of $256 million. So far, it has saved $27 million for that purpose.

Financial experts say the first step toward meeting Statement 45 for any district is to have an actuarial valuation completed. Some state school boards’ associations have been working to help inform districts on the process.

The California School Boards Association even started a program—GASB 45 Solutions—that is working with actuaries to conduct the valuations for districts and set up irrevocable trust funds in order to start “prefunding” the benefits, which is required by Statement 45.

Public Outcry Ahead?

To gauge just how many California districts were likely to face liability problems, the group surveyed the state’s 1,037 districts and county offices of education. About 600 responses were collected, and 440 answered that they do offer post-retirement benefits other than pensions.

When GASB 45 Solutions began, Mr. Tokunaga said, “We thought our phone would be ringing off the hook.” Instead, he worries that districts aren’t moving quickly enough to address the issue. He estimated that only about 20 percent of the districts have had a finished valuation.

Meanwhile, some California district and union officials are looking to the legislature to intervene.

A bill introduced by state Sen. Sheila J. Kuehl, a Democrat, would essentially create a universal-health-care system for all California residents, financed by a payroll tax, with 8 percent paid by employers and 3 percent paid by employees per paycheck.

If the bill became law, Californians’ lifetime medical needs would be covered by a single insurer, and reduce districts’ liability for health benefits to nothing.

Insurance companies are wary, and point to what they say are problems in Canada’s universal health-care system.

Sen. Kuehl argues California could save money under her plan.

Experts predict, though, that regardless of the outcome in California, most districts will be left responsible for the liability. “It would be great if the state would agree to fund prior commitments, but I have a hard time seeing a state willing to bail a district out,” said Tiffany Rodning, the deputy executive director of the Minnesota School Boards Association.

Another issue is also on the horizon: Some observers say taxpayers are likely to be angry when they realize that promises of retiree benefits constitute huge debts for their cities and school districts.

“I think it’s going to create a huge public outcry,” Mr. Tokunaga of the California school boards’ group said. “Most people don’t have retired medical benefits.”

In Utah, Mr. Newbold said that citizens who have called him about the Jordan district’s plan to eliminate lifetime health coverage typically have been concerned about losing their children’s teachers. But then, he said, he tells them about the list of benefits that were included in the package—and their reactions change.

“They say, ‘I had no idea they were getting all of that,’ ” he said. He added that if there was a huge reaction from taxpayers, “it’s my anticipation that there would be very little public sympathy for the loss of the benefit.”

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A version of this article appeared in the March 22, 2006 edition of Education Week as Accounting Rule Targets Benefits in Public Sector


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