WASHINGTON - In an effort to boost disclosures for non-pension, health care, and other post-employment benefits, the National Federation of Municipal Analysts is urging issuers to release as much supplemental information in annual financial statements and bond offering documents as necessary "to effectively explain and communicate" their specific OPEB situation and funding approach.
In a draft white paper released yesterday, the NFMA also is calling for issuers to comply with the Governmental Accounting Standard Board's Statement 45 by including estimates of their OPEB liabilities and a list of assumptions used to arrive at those estimates in their disclosure documents.
The paper asks issuers to go further by providing an executive summary and a copy of their most recent actuarial report to assist market participants in assessing their precise OPEB liabilities. The liabilities are difficult to determine in part because of the time lag "that naturally occurs in producing actuarial reports," the NFMA said.
GASB 45 took effect on a phased-in basis beginning with the largest states and localities' fiscal years beginning after Dec. 15, 2006. It requires governments to report their overall unfunded actuarial accrued liabilities for OPEBs, as well as their annual OPEB costs. Historically, most governments have accounted for OPEBs on a pay-as-you-go basis, reporting only the cost of OPEBs for a particular year.
The NFMA is seeking comments on the white paper through June 30.
The paper includes appendices that provide a summary of GASB 45 requirements, a brief study showing the effects of the reporting standards on governmental financial statements, a glossary and a copy of GASB's "plain English" summary of its Statement 45.
In a conference call, Kristin Stephens, chair of the NFMA's GASB 45 subcommittee and the director of municipal research at UBS Financial Services Inc. in New York, said that disclosure of governments' assumptions - such as the discount rate or assumed rate of return on investments, as well as the medical inflation rate, employee turnover, and retirement and mortality expectations - are key to the analysis of their OPEB liability estimates. They "should be clearly presented in official statements as well as financial reports," she said.
Asked how OPEB disclosures could be standardized if issuers are adopting widely different methods of estimating their liabilities, Gregory Clark, director of HVB, which is a member of UniCredit, said two factors are easily comparable among different issuers: the discount rate and estimated trends in health care costs.
"There may be some other parts of the analysis that will lend itself to some kind of standardization, but those are two of the big ones," he said. Clark added that the NFMA is not aware of any issuers that are not complying with GASB 45's requirements.
On the need for supplemental disclosures, the NFMA said in the white paper that it expects "a great deal of variation" on an issuer-by-issuer basis, "at least until GASB 45 requirements have had a chance to take hold."
But, the NFMA said, "any steps an issuer takes to address an OPEB liability, such as setting up a qualifying OPEB trust or creating OPEB reserves, have wide-ranging implications that are extremely important to the credit analysis of local governments and their OPEB obligations."
While OPEB estimates should not be treated as anything more than estimates because they're arrived at differently by each issuer, they are nonetheless important analytical tools for many reasons, the NFMA stressed.
"From the standpoint of market participants, simply quantifying the OPEB liability as a financial obligation forces government officials to consider this amount when contemplating decisions that affect the future financial health of their jurisdiction," the white paper said. "The requirements created by GASB 45 also provide credit analysts with at least an indication of the direction of the OPEB liability and contribution efforts over time."
In the appendix study of the effects of GASB 45 reporting on governmental financial statements, the NFMA compares California unfavorably to New York City.
In California's case, the state announced in 2007 that it had an estimated unfunded actuarial accrued liability of $47.88 billion and recommended an annual required contribution for fiscal 2008 of $3.59 billion based on a 4.5% discount rate, which in turn reflected the state's interest earnings on its short-term pooled money funds.
But in its fiscal 2008 budget, California set aside just $1.38 billion for pay-as-you-go OPEB spending, $2.21 billion less than its recommended contribution. Had the state instead set aside more that year for future OPEB liabilities, it would been able to invest those funds for a longer term, which would have allowed the actuarially assumed rate of return to be higher - increasing the discount rate and lowering the long-term amount of state contributions needed, the NFMA said.
"If California fully funded its ARC, an actuarially assumed discount rate of 7.75% could be used," NFMA wrote, adding that this rate would have reduced their overall OPEB estimate to $31.28 billion from $47.88 billion.
In contrast, New York City, which estimated $53.5 billion in unfunded OPEB liabilities, implemented GASB 45 a full two years before the reporting requirements required it to, the NFMA said.
The $53.5 billion was counted as a one-time charge in its fiscal 2006 financial statements and the city deposited $2 billion in a retiree health benefits trust fund in fiscal 2007 to offset future annual OPEB expenditures, with another $500 million budgeted for fiscal 2008.
The set-asides were "a down payment for benefits currently funded on pay-as-you -go basis," the NFMA said.