GAO: GASB 45 Could Spark Important Govt. Health Coverage Discussions

That was the key conclusion of a report released Wednesday by the Government Accountability Office (GAO), “Government Retiree Benefits Current Status of Benefit Structures, Protections, and Fiscal Outlook for Funding Future Costs.”

GAO researchers said the best scenario as the effects of Governmental Accounting Standards Board’s (GASB) Rule 45 continue to play out is that the disclosure rule forces a public debate about the proper level of those health care and other retiree benefits and how they should be funded.

GASB Impact

Adopted in 2004, GASB 45 requires governmental entities to account for post-retirement benefits (See GASB Hands Down Nonpension Benefit Accounting Guidance ) and disclose how the governmental entity plans to pay for the benefits.

“As state and local governments begin to comply with GASB reporting standards, information about the future costs of the retiree health benefits will become more transparent,” GAO researchers wrote. “Policy makers, voters, and beneficiaries can use this new information to begin a debate on ways to control escalating health care costs, the appropriate level of future benefits to be provided to public sector retirees, and who should pay for them.”

According to Census data cited by the GAO, in fiscal year 2004-2005, state and local governments provided retirement benefits to nearly 7 million retirees and their families

According to a Workplace Economics, Inc., 2006 survey, on average, state employers paid over 90% of the cost for single employee coverage, and over 80% for family coverage, for active workers. Once workers retire, access to group coverage generally continues, but the extent of the employer contribution often declines, and different benefits are often provided depending on whether or not the retiree is eligible for Medicare, the GAO said.

Retiree Health Care

Particularly when it comes to retiree health care, those newly disclosed costs could be substantial. According to the report, GAO’s model developed to simulate the fiscal outlook for state and local governments indicates:

• estimated future pension costs (now about 9% of payroll)would require an increase in annual government contribution rates of less than a half percent, but
• estimated future retiree health care costs (currently about 2% of employee pay) would more than double by the year 2050 if they continue to be funded on a pay-as-you-go basis. As with pensions, this estimate is particularly sensitive to assumptions about the growth in health care costs and costs could rise more rapidly than projected, the GAO said.

A key weakness of the current picture, according to the GAO: while state and local governments have set aside funds to meet most of their future pension costs, they have not yet developed long-term strategies to finance future escalating retiree health care costs.

There is apparently still a good deal of work left to be done in state capitols and local city and county offices: Many government officials surveyed for the GAO report indicated they are just beginning to estimate the amount of their unfunded liability for retiree health care costs and that they had not yet developed funding strategies.

In general, GAO researchers pointed out, state and local law provides less legal protection for other state and local government retiree benefits, such as health care. The government entities frequently provide for such benefits as a result of union contracts and are treating the item as an operating expense on a pay-as-you-go basis.

The report said state and local governments typically provide their employees with retirement benefits that include a defined benefit plan, a supplemental defined contribution plan for voluntary savings, and group health coverage.

However, the way each of these components is structured and the level of benefits provided varies widely-both across states, and within states based on such things as date of hire, employee occupation, and local jurisdiction, the report said.

According to the most recent Census data available as cited by the GAO, in fiscal year 2004-2005, there were a total of 2,656 state and local government pension plans. Defined benefit plans were still prevalent for most of these other state and local employees as well.

For example, a nationwide study conducted by the National Education Association in 2006 found that of 99 large pension plans serving teachers and other school employees,79 were defined benefit plans, three were defined contribution plans, and the remainder offered a range of alternative, optional, or combined plan designs with both defined benefit and defined contribution features.

The GAO report is at http://www.gao.gov/new.items/d071156.pdf .