Costly Change Looming for Retiree Benefits
Rule Aims to Force Public Sector To Tally Future Health Spending
By Bill Turque, Staff Writer
Monday, January 30, 2006
State and local governments in the Washington region will soon
be forced to show for the first time how much it will cost to
provide health care benefits to their current and future
retirees, a commitment with a price tag in the tens of billions.
The disclosures will be the result of a rule handed down in 2004
by the Governmental Accounting Standards Board (GASB), a
little-known but influential private body formed to improve
financial practices in the public sector. The rule, which takes
effect at the end of this year, carries no legal weight. But
the board's findings are closely watched by Wall Street and the
bond rating agencies that assess the financial health of state
and local governments.
That means the rule is likely to have far-reaching consequences,
finance experts and local officials say. Governments, school
boards and other public bodies throughout the country will be
compelled to report what they owe retirees for health care over
the next 30 years -- and to begin setting aside additional
millions of dollars to pay for it.
It will take two to three years for the full effects of GASB 45,
as the rule is known, to play out. But officials say it could
lead to reduced benefits for retirees. Governments that don't
have a plan for fully funding their obligations could have their
bonds downgraded, limiting their ability to borrow at favorable
rates and costing taxpayers millions in additional interest
payments for new schools, roads and other capital improvements.
"It's a big deal, and it will have a big impact on our financial
statements," said Gail Francis, deputy finance director for
Prince George's County.
Parry Young, public finance director for Standard & Poor's
Corp., said many governments will be able to absorb the effects
of GASB 45 with relative ease. Some, he warned, especially
those providing extensive health benefits, will face "painful
decisions," forced to choose between funding critical services
now and investing in needs that will have to be met decades down
It is no secret that many states and localities face huge
obligations -- above and beyond pensions -- to former employees,
mainly in the form of medical coverage, including for
prescription drugs, and life insurance. The long-term cost of
these benefits, however, has traditionally been treated as a
fiscal "don't ask, don't tell," missing from official financial
Most jurisdictions cover such costs year to year on a "pay as
you go" basis. Maryland, for example, will spend about $300
million on health care in the fiscal year that ends June 30 for
its 66,400 active employees, 55,600 retirees and their
dependents. Fairfax County has budgeted about $10 million for
its 32,000 government and school employees and the 2,100
retirees enrolled in its health program.
Under GASB 45, governments have until July 1, 2007 (the
beginning of fiscal 2008), to start carrying on their books the
full cost of retiree health benefits over the next 30 years.
They must also have a plan for meeting those obligations.
Some state and local governments have started to calculate what
they owe, and the numbers are enormous: $20 billion in
Maryland, $5 billion in Virginia (which offers workers more
modest post-employment benefits), $2 billion in Montgomery
County and $826 million in Fairfax. The District, which didn't
assume responsibility for pension and health benefits from the
federal government until 1997, faces a relatively tame $509
These figures are only snapshots, officials caution. As health
care costs increase, so will the numbers. In 2000, for example,
Maryland's "unfunded liability" for retiree health care was $3
"The numbers start to get very large very quickly," Young said.
So quickly, finance experts say, that it will be virtually
impossible for most jurisdictions to meet the requirements of
GASB 45 under the pay-as-you-go method. Maryland, with one of
the nation's more generous packages of health benefits, would
have to increase its annual payments from $300 million to $1.9
Most jurisdictions are likely to "pre-fund" their obligations by
placing money in a trust and letting it grow over time through
returns on investments. Fairfax has set aside $10 million.
Last year, the District took $138 million from its healthy $1.2
billion surplus to begin meeting the GASB rule. In his proposed
budget for fiscal 2007, Maryland Gov. Robert L. Ehrlich Jr. (R)
includes $100 million for compliance.
Some officials say the other probable consequence will be cuts
in benefits. A Maryland task force that studied the issue
concluded in its report last month that reduced benefits -- most
likely for younger workers -- are all but inevitable.
"It will be very difficult for the state to sustain the current
level of retiree benefits for all employees and retirees into
the future," said the report by the panel, co-chaired by state
Sen. Edward J. Kasemeyer (D-Baltimore County) and Del. Mary-Dulany
James (D-Harford). The General Assembly is likely to appoint a
commission to study the matter more closely, almost certainly
kicking the whole politically sticky issue past the November
Ehrlich administration officials said they are prepared to do
what is necessary to comply with GASB 45 and maintain the
state's top bond rating. "We are a triple-A state, and we
intend to keep that rating," said Cecilia Januszkiewicz,
Maryland secretary of management and budget. "We'll have to
decide what can and should be done."
Maryland state employees, smarting from steep increases in
prescription drug co-payments last year, worry that GASB 45 will
eventually prompt the kind of wholesale reduction in benefits
that private-sector workers began experiencing in the 1990s --
triggered, at least in part, by a similar change in accounting
"As public employees, we felt we would be immune from that,"
said Curtis Johnson, president of the American Federation of
State, County and Municipal Employees Local 266. Johnson, an
admissions coordinator at Spring Grove Hospital Center in
Catonsville, Md., has 32 years of state service.
The current health plan, which pays between 50 and 90 percent of
covered medical and hospital costs, depending on the package
selected, costs Johnson $90 a month from his annual salary of
$30,000. Much more than that would be a hardship, he said,
especially as a retiree with a projected $913 monthly pension.
"I'll be in a world of trouble," said Johnson, 53.
"We're infuriated that they would even consider it," said Royce
Treadaway, 46, also a union leader and a market analyst for the
Maryland Port Authority in Baltimore. Treadaway, who makes
$44,000 a year, said one of the attractive trade-offs of the
comparatively low salaries in government service are benefits
that are more secure than those in the private sector. Should
that change, she said, it would be "degrading and appalling."
Gino Renne, president of United Food and Commercial Workers
Local 1994, which represents about 6,000 Montgomery and Prince
George's employees, said changes in accounting standards were
used as "an excuse" by the private sector to cut benefits.
Rather than focus on cuts, he said, the issue for state and
local governments should be how to contain the growth of health
"All the parties have to be more creative," Renne said.