Accounting & Tax

New Rules Could Cut Retiree Benefits

Once state and local governments must record, for accounting purposes, the full cost of promised health benefits, many employers may cut their liab...
Stephen TaubJune 22, 2004

A new accounting standard could reduce benefits promised to retirees of state and local governments.

The rules, developed by the Governmental Accounting Standards Board, require employers to measure and report the long-term costs of retiree health benefits while employees are still working, explained The New York Times. Currently these costs are reported only when actually provided — which could be many years after the employees have retired.

Under the new standards, however, state and local governments must record for accounting purposes the full cost of the promised health benefits. This could force many employers to cut their liabilities by reducing benefits or shifting more of the cost to retirees, said the Times, citing government officials and accountants.

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Supporters of the new rules, noted the paper, say they will enable government officials, investors, and taxpayers to better quantify the commitments to current and future retirees. But critics — namely, government employees — warn that the new rules combined with high health care costs will only lead to a reduction in health insurance benefits.

“State and local governments have generally been looking at the tip of the iceberg,” Karl Johnson, project manager for development of the new rules, told the paper. “They just looked at what they could see on the surface — what they have to pay this year for current retirees — without measuring the cost of their commitment to provide retiree benefits to large numbers of active workers.” Unfunded liabilities for retiree health benefits total billions of dollars in many large states, added Johnson.

The accounting standards board, a private entity, issued financial reporting standards in April for health plans that cover state and local government employees, according to the Times. The paper added that the board plans to give final approval this week to a companion document, which sets accounting standards for public employers that sponsor these plans.

Most public employers finance retiree health benefits as the bills come due, noted the Times. Once the board’s new rules go into effect, many state and local governments will probably create trust funds to fund future health benefits for retirees — and according to the paper, these suddenly higher current costs will immediately hit the budgets of state and local governments, straining their finances.

Hence, the concern among many critics that the new rules could lead to a reduction in benefits as governments try to incorporate these additional, previously unforeseen costs. The fiscal shock could also hurt bond ratings.

“We are concerned that a lot of our retirees will end up losing their health benefits,” Frederick Nesbitt, executive director of the National Conference on Public Employee Retirement Systems, told the paper.

“What’s going to happen in the public sector is exactly what happened in the private sector,” he added.