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
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
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
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