Publication

April 17, 2006Client Alert

Early Action Recommended to Comply with New Rules Regarding Government Entity Reporting of Post-Employment Benefits

Under the current rules, state and local governments report the costs of retiree health insurance and other post-employment benefits (OPEB) on a pay-as-you-go basis. Common OPEB benefits include medical and dental coverage, vision coverage, life insurance or long-term care insurance. Government entities regularly make substantial promises to large groups of employees that they will continue to fund their health insurance or other benefits after they retire. Under the pay-as-you-go system of accounting, these government entities are not required to account on their financial statements for the cost of these future promises. Promises to employees do not appear on the financial statements until the employee retires. However, under new Government Accounting Standards Board (GASB) guidelines, such entities are required to account for the obligation to pay OPEB.

Under GASB 45, government entities will be required to implement the full accrual system of accounting with respect to retiree health insurance and other post-employment benefits. This method generally requires that government entities obtain an actuarial valuation of their future promises to pay retiree health and other post-employment benefits and that they include those as liabilities on their financial statements. Additionally, it requires that the employer establish an amortization schedule for the funding of the benefit. It does not, however, require government entities to fund their future promises.

Effective Date of GASB 45

GASB 45 becomes effective in stages over a three year period.

  • For government entities having $100,000,000 or more in annual revenue the effective date of GASB 45 is December 15, 2006.
  • For government entities having between $10,000,000 and $100,000,000 in annual revenue the effective date of GASB 45 is December 15, 2007.
  • For government entities having less than $10,000,000 in annual revenue, the effective date of GASB 45 is December 15, 2008.

What Can Michael Best and Friedrich LLP do to Help?

There are a number of ways for a government entity to address this liability:

  • Cost Control
  • Pre-Funding and Liability Transfer
  • Bond
  • Negotiations

Cost Control

Many retiree health plans (and other retiree benefits) are based on very old models for providing health coverage or benefits. In some cases, a simple update to the existing benefits structure will save more money than radical changes. In some cases, better integration with Medicare may reduce the cost of providing benefits. In other cases, we can assist with the creation of replacement arrangements, ranging from self-funded health plans to defined contribution health arrangements (in which the employer's contribution is fixed). Furthermore, it may be possible to reduce or eliminate existing benefits.

Many of these restructuring solutions require experience with negotiation and collective bargaining. Michael Best has guided other clients through the process and can provide the experience necessary to smoothly implement these cost control solutions.

Pre-Funding and Liability Transfer

Other solutions involve funding the benefits through a trust or in conjunction with an insurance company. Although these solutions do not reduce the overall liability, the funding of the liability will reduce the current annual costs associated with the OPEB liability. Pre-funding of the liability through the creation of a trust or similar arrangements raises numerous legal issues for governmental entities. Michael Best stands ready to help entities navigate this maze of legal regulations. In other cases, it may be possible to transfer the risk to an insurance company. This solution could be very advantageous, however, it will carry additional costs associated with the risk transfer.

Bonds and Financing

Some municipalities may be able to issue bonds to cover the OPEB liability or finance the liability through other means. Michael Best can assist governmental entities with the issuance of bonds and securing financing.

Early Action Recommended

The first step in solving the OPEB problem is to determine the amount of the liability and the scope of the issue. The second step will be to determine which of the above solutions are proper and can be implemented with respect to a particular governmental entity. The final step will be to implement the appropriate solution. The timeline for this complicated and detailed process should begin immediately.

For more information, please contact Robert W. Mulcahy at 414.225.2761, or rwmulcahy@michaelbest.com; Charles P. Stevens at 414.225.8268, or cpstevens@michaelbest.com; Eric H. Rumbaugh at 414.225.2742, or ehrumbaugh@michaelbest.com; or Marion C. Smith at 414.225.2760 or mcsmith@michaelbest.com.

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