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| New GASB Rule Requires School Districts to Project Future Cost of Post-employment Benefits BRIEFING BULLETIN April 2006 Number 06-12 View complete bulletin [102k] As a result of a new rule from the Governmental Accounting Standards Board (GASB), all government employers, including school districts, will soon be required to perform an actuarial valuation to determine the total cost over the next 30 years of any promised retirement benefits, mainly retiree health insurance. The following are some common questions regarding the new GASB rule: What will this new rule mean for school districts? School districts will be required to calculate and report on the funding status of all post-employment benefits other than pensions and to include this as a financial liability in their annual reports. What is a post-employment benefit? The most common post-employment benefit provided to retirees is health insurance where the employer pays some or all of the retirees' premiums. How are retiree health care costs currently reported by school districts? Currently, retiree health care costs are reported by most school districts on a "pay-as-you-go" basis. For example, if a school district spent $1 million on retiree health insurance in a given year, that is the amount that would be reported. However, from an accounting perspective, this approach does not reflect the true costs of the employer liability because post-employment benefits, such as health insurance, are earned during an employee's working years. Therefore, the new GASB rule will require school districts to calculate and include in their financial reports an amortized cost over 30 years of the future retirement health insurance benefits earned by all active and retired employees. Will the projected future cost of these post-employment benefits be astounding? Yes. According to a recent New York Times article, the city of Duluth , Minnesota recently completed an actuarial study to determine the cost of their promise of free lifetime health care to all retirees. The total cost was estimated to be $178 million, which is more than double the city's current budget. How much will districts need to put aside for post-employment benefits? Districts are not required to set aside any funding as GASB does not have the authority to force a district to fund a liability. However, districts that don't set aside any funding will need to report the full amount of post-employment benefits as an unfunded liability on their financial statements. What factors will impact the extent of a district's liability for post-employment benefits? The extent of the future costs will largely depend upon both the number of current and future retirees that will have significant medical benefits paid entirely or in part by the district and the number of current and future retirees that are provided significant amounts of life insurance. How will districts react when faced with this new information? Districts will likely have three options and may use some combination of the three. The three options are 1) establish a reserve fund and begin to make periodic payments to fund the benefits as they are earned; 2) continue to use a pay-as-you-go approach and carry the cost of retiree health insurance as an unfunded liability in their financial report; or 3) seek to reduce retirement health insurance costs by dropping retiree coverage, cutting benefits or increasing retiree contributions. If a district chooses to continue using a pay-as you-go approach, what impact will that have? If a district continues to simply use a pay-as-you-go approach it could negatively impact its credit rating, resulting in higher borrowing costs, because it will be required to report a substantial unfunded liability. Although, according to Moody's Investors Service, one of the largest credit rating companies, "Moody's does not anticipate that the liability disclosures will cause immediate rating adjustments on a broad scale. The credit impact will depend on several factors, including the size of the unfunded liability relative to the key financial measures, such as size of payroll, budget and tax base." When does the new rule take effect? The new GASB reporting requirement is being phased in over a three-year period according to the following schedule which is based on the size (annual revenue) of the government entity:
Is their a similar reporting requirement for the private sector? Yes. A similar requirement was enacted for the private sector in 1990 by the Financial Accounting Standards Board (FASB). How did the private sector respond to the disclosure requirement regarding the future cost of retiree health insurance? Unfortunately, many companies significantly reduced or eliminated their commitments to provide retiree health insurance. According to the Employee Benefit Plan Review, the percentage of large employers (over 200 workers) providing retiree health insurance in the private sector dropped from 66 per cent in 1988 to
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