AGA Today

A Balancing Act: Municipalities Struggle to Understand New Accounting Guidelines

by Andy Giegerich
The Portland Business Journal

New rules requiring that state and local governments disclose their future health benefits costs could wreak havoc on public employees, municipal budgets and, eventually, all Oregon residents.

Issued by the Governmental Accounting Standards Board (GASB), the new rules will require local governments to determine how much they'll pay for future benefits, then book that figure on their balance sheet as liabilities, which can affect how investors evaluate balance sheets. The rules don't require the governments to stockpile money to pay off the liabilities, but jurisdictions that don't do so or take other preventive actions could face lower credit ratings. Excessive liabilities often hint at long-term financial challenges. The move could affect health benefits for some workers, especially early public employee retirees.

The rules could also impact governmental budgets, thereby slashing public services. And if credit ratings are lowered because of the new disclosures, bond issuers may think twice before allotting money for large-scale municipal projects. “It affects absolutely everybody,” said Ken Rust, the city of Portland's interim chief administrative officer. “The intent is good, the question is, what's the right thing to do to address the issue?”

Officials in Oregon and Portland are launching actuarial studies to estimate their new liability levels. The officials offered no estimates as to how much liability will appear on local budgets, but Oregon faces smaller hits than many other jurisdictions because state and city public workers don't receive health benefits upon reaching age 65. They're instead immediately switched into Medicare rolls.

In contrast, Maryland officials told the trade publication Stateline they would need to disclose, and possibly find funding for, $1.6 billion in liabilities beginning next year. The state currently only sets aside $300 million annually for retirees' health care benefits. While the hit for Oregon cities and counties will be considerably less, state employees and other residents could feel the effects in several ways. If either the city or state took away the implicit subsidy, “I'd imagine we'd see more people sticking around until they're 65,' said Oregon State Auditor John Radford said. Radford also suggested that the state and cities could create an entirely new plan for early retirees and older workers for which they'd pay 100 percent of the cost. State and city administrative types say they're still determining how to deal with fallout from the new rules.

The state's bond rating, while improved from third-tier to second-tier status over the last year, still lags behind those posted in other states. City leaders say Portland has overall good bond ratings. “Bondholders may get nervous if they see these liabilities getting bigger every year,” said Dennis Monaghan, vice president of Chicago-based Aon Consulting Inc.'s Portland office, which is consulting the city on how to handle the matter. “They'll look to see how much a particular county will be paying 20 years from now, and determine whether that cost is so great that they have to lay off sheriffs to make their bond payments. I think people will be shocked.”

Rust said, “We can report it and measure it, but we don't know if we can fund it because that could cause negative financial consequences for us. If we don't fund it, the liability will grow, and if that grows, we could have investor concerns.”

The GASB establishes financial accounting and reporting standards oversees for state and local governments. The group approved the disclosure rules two years ago in an effort to add more transparency to jurisdictions' accounting practices. Under the old booking rules, governments booked benefits payouts as cash expenses in their yearly budgets. The new rules, called GASB 45, will phase in over the next several years; Oregon and Portland must adopt the new rules for their 2007-2008 fiscal years.

Radford and Rust say the actuarial studies will project the costs of providing future benefits to retirees. The state and city could then decide whether to establish trusts or other funds that effectively addresses the projected benefits liabilities. From there, elected officials could decide how to subsidize such funds. “It's a complicated concept. We have to measure it, then we have to decide the right thing to do,” said Rust. The city, the state and companies such as Aon are waiting to see how bond issuers will react to the new disclosures.

Radford said the state's public employees board will select an actuary in September, then receive new liability estimates about four months later. The developments will come as the state Legislature gets into full swing. “I'm guessing unions, retirees and politicians will all weigh in,” he said. “There'll be a lot of players.”