ASHINGTON,
June 20 — New accounting standards will require state and
local governments to acknowledge the full cost of health
benefits promised to retirees, putting immense pressure on
public employers to reduce their liabilities by scaling back
benefits or shifting more of the cost to retirees, government
officials and accountants say.
Supporters say the rules will help state and local officials,
investors and taxpayers understand the magnitude of these
commitments to current and future retirees.
But public employees — civil servants, police officers,
firefighters, judges, teachers and state university professors
— predict that the rules, combined with the soaring cost of
health care, will speed the erosion of health insurance in the
public sector, as happened at many private companies in the
early 1990's.
The rules, developed by the Governmental Accounting Standards
Board, an independent nonprofit organization, apply to all state
and local governments. They require employers to measure and
report the long-term costs of retiree health benefits while
employees are still working. Under current practice, most public
employers do not report such costs until they pay for the
promised benefits, often many years after employees have
retired.
"State and local governments have generally been looking
at the tip of the iceberg," said Karl D. Johnson, project
manager for development of the new rules. "Our standards
require them to measure the iceberg. Many public employers have
never looked under the water. They just looked at what they
could see on the surface — what they have to pay this year for
current retirees — without measuring the cost of their
commitment to provide retiree benefits to large numbers of
active workers."
In large states, Mr. Johnson said, such unfunded liabilities
for retiree health benefits total billions of dollars.
The standards are set forth in two documents. In April, the
seven-member board issued financial reporting standards for
health plans that cover state and local government employees. It
is scheduled to give final approval this week to a companion
document, which sets accounting standards for public employers
that sponsor such plans.
The board, formed in 1984, is a private entity, but
accountants and auditors accept its pronouncements as
authoritative. State and local governments have a strong
incentive to follow its standards because compliance helps them
borrow money in the bond market at favorable rates.
Most public employers finance retiree health benefits on a
pay-as-you-go basis, as bills come due. Experts on employee
benefits said the new standards would encourage state and local
officials to set aside money in trust funds for the purpose of
providing health benefits to retirees.
The cost of such contributions would be a new, immediate
expense for state and local governments, many of which are
already struggling with severe financial problems.
Labor unions and health plan administrators said the
standards could jeopardize health benefits for millions of
retired public employees. Moreover, they said, the standards
will cause a fiscal shock to state and local government agencies
and could harm their bond ratings.
"We are concerned that a lot of our retirees will end up
losing their health benefits," said Frederick H. Nesbitt,
executive director of the National Conference on Public Employee
Retirement Systems.
The Financial Accounting Standards Board, a sister
organization, issued similar standards for private employers in
1990. Many companies have cited those standards as a reason for
cutting retiree health benefits.
"What's going to happen in the public sector is exactly
what happened in the private sector," Mr. Nesbitt said.
Daniel C. Givens, a Florida firefighter who is chairman of
the Miami Firefighters Relief and Pension Fund, said: "The
new standards will suddenly put a strain on the city for a
long-term liability that has been developing for years and
years. Retirees will feel the brunt of the impact. They can
expect to see reductions in benefits and increases in
costs."
Public employers are more likely than most industries to
offer health benefits, but the prevalence of retiree coverage in
general has been declining. In a survey of large private and
public employers, the Kaiser Family Foundation found that 38
percent offered retiree benefits last year, down from 66 percent
in 1988. When coverage is still available, premiums, co-payments
and deductibles are increasing.
Melvyn Aaronson, treasurer of the United Federation of
Teachers in New York, said, "The new accounting standards
will accelerate those trends."
The board sets accounting standards for 80,000 state and
local governments, affecting more than 15 million employees.
About three-fourths of state governments and more than half of
local governments provide health benefits to retirees.
Many of the arrangements were adopted years ago, when costs
were relatively low, but "times have changed, and many
employers now spend 5 percent to 10 percent of payroll, or more,
on retiree health benefits," said Paul Zorn, a consultant
at Gabriel, Roeder, Smith & Company, which advises more than
400 state and local government entities.
Under the standards, public employers will have to disclose
the assets and long-term liabilities of their health plans. They
will also have to calculate the amount of annual contributions
that would be needed, over many years, to provide the promised
benefits.
Cynthia B. Green, a member of the governmental standards
board, said: "Historically, government employees have
sacrificed salary increases for promises of enhanced benefits.
These governments rarely calculate the price tag. They almost
never consider whether the promises are affordable. A retiree
may have been promised generous benefits, but if the employer
can't honor the promise, what good is it?"
Ms. Green, a former vice president of the Citizens Budget
Commission, a watchdog group in New York, said she did not know
if the critics' "dire predictions" would come true.
"If governments find out they have big liabilities,"
she said, "some may cut spending, some may raise taxes and
others may change the benefit package. Or they could combine
these options."
Unions contend that the standards will force public employers
to overstate their liabilities for retiree health benefits,
because the standards ignore the fact that employers can reduce
or eliminate health benefits in the face of fiscal pressures.
But the board refused to let employers take credit for
savings that might result from benefit cuts in the future. Such
bookkeeping techniques "lack objectivity and would give
recognition to changes that have not occurred and may not
occur," the board said.
Cathie G. Eitelberg, senior vice president of the Segal
Company, a benefits consulting firm, said the new disclosures
would draw attention from taxpayers and elected officials.
"When taxpayers see the magnitude of the unfunded
liability," Ms. Eitelberg said, "there will be changes
in the way benefits are financed and delivered, because
ultimately the taxpayer pays the bill."