How Benefit Professionals Can Help Small Public Entities Save When Complying With GASB 45

The sluggish economy has left many struggling in recent years – individuals, families, small businesses, large corporations, states, and even entire countries. One group that’s been particularly hard hit – struggling with decade’s worth of debt, ever-growing expenses, and an eroding tax base – is municipalities.

Since 2010, more than 30 municipalities have filed for bankruptcy including Harrisburg, Pa., and San Bernardino, Calif., according to Governing.com.

It’s not just the economy that’s been posing a challenge for these public entities in recent years. A 2006 Government Accounting Standards Board (GASB) regulation has added to the pressure, forcing municipalities to release estimates of liabilities related to their future retiree health and dental benefits – and the numbers are daunting.

To put it in perspective – California and New York have released cost estimates for unfunded liabilities of $48 billion and $50 billion respectively, while smaller communities Rye, N.Y., and Berkley, Mich., estimated their unfunded liabilities at $40 million and $22 million.

With such large numbers now posted prominently on their financial statements, municipalities are anxiously looking for ways to reduce their future healthcare liability. In addition to the reporting and administrative costs public entities must endure to comply with GASB 45, posting a huge liability on their books can negatively impact their ability to raise capital. Ratings agencies like Moody’s and Standard & Poor’s may downgrade their respective bond ratings, which could increase their cost of borrowing.

Solutions for Compliance

One solution was recently proposed by Minnesota in a position paper on GASB 45. The state auditor indicated that all public entities are not necessarily required to incur the costs of an actuarial study as many public entities may have assumed. Small public entities with less than 100 plan participants can use a do-it-yourself actuarial calculation. Public entities, which have more than 100 plan participants, but have low participation by retirees in their health plans and a low unfunded liability, may also use this alternative calculation method instead of incurring the cost of an actuarial study, the auditor concluded.

The best option for the public entity depends on its unique circumstances, but possible solutions include:

Contract Out. By using a third party administrator with access to a national pool of retirees, public entities can create a separate plan for their retirees. This approach can eliminate uncertainty in annual costs, spread the risk, reduce administrative costs, and offload customer service responsibility while reducing OPEB liabilities.

Employ a PDP. While Medicare Part D has complicated the retiree health benefits picture, a compelling case can be made for contracting with a Prescription Drug Plan (PDP). This can provide an alternative that can avoid the costly strings attached to a retiree subsidy, shift risk to the PDP and federal government, outsource customer service and retiree education, and convert an unfunded liability to a current, quantifiable cost.