AUSWR
The Association of U S West Retirees
 

 

 

Retiree Health Costs to Hit Government Employers
By Jilian Mincer
The Wall Street Journal
Thursday, November 9, 2006

NEW YORK -- Like the toothache you can't ignore, public employers will soon have to face the pain of funding retiree medical benefits.

Some of that hurt will probably spread to public employees, taxpayers and municipal-bond investors as well.

Until now, public employers only had to report the day-to-day cost of health coverage, but that accounting is about to change. Employers will soon have to disclose the accrued cost of unfunded retiree benefits to comply with the Governmental Accounting Standards Board's new standard. The new rules apply to an estimated 24.5 million state and local government employees, teachers, and county and city workers.

J.P. Morgan Chase & Co. issued a preliminary estimate that the present value of unfunded public-employee health care and other nonpension benefits would be between $600 billion and $1.3 trillion. A small portion of these liabilities are currently funded, J.P. Morgan said.

While the new standard doesn't apply to federal employees, many states and cities will have no choice but to increase taxes and reduce services and benefits to meet these costs. "I think this is going to be a major shock to some commissioners, budget officers and citizens when they start seeing these liabilities," said Michael Merlob, a consulting actuary for Gallagher Benefit Services.

Public employers with at least $100 million in annual revenue will have to begin reporting these numbers in the first fiscal year beginning after Dec. 15, 2006. The rules go into effect Dec. 15, 2007, for those with revenue of $10 million to $100 million. Those with revenue of less than $10 million have until after Dec. 15, 2008.

While the new standard only requires that the numbers be reported, public employers will feel the pressure to address the shortfalls rather than face lower bond and credit ratings. "If they don't comply, they won't get a clean audit report," said Mr. Merlob.

Robert Kurtter, senior vice president for state ratings for Moody's Investors Service, said the liabilities vary significantly, and it is too soon to predict the final impact on governmental credit ratings. Moody's, a unit of Moody's Corp., will consider not just the obligation but how the employer plans to address the problem.

For those with a large obligation, "this is a big cost," said Mr. Kurtter. "It's going to be reflected in their budgets, their audits, and their balance sheets going forward."

About 82% of public employers surveyed by Mercer Health & Benefits are concerned about the impact of the new standard on their organizations, but at this point few are planning any cuts or tax increases. "They're aware they haven't funded these things, but they don't seem to have plans," said Dallas Salisbury, president of the Employee Benefit Research Institute in Washington, D.C.

Write to Jilian Mincer at jilian.mincer@dowjones.com

http://online.wsj.com/article/SB116303206585517956.html?mod=hps_us_at_glance_health