MINNEAPOLIS —The Governmental Accounting Standards Board is preparing to release a draft statement on other post-employment benefits that will "mirror" the board's new pension standards, GASB chairman David Vaudt told government finance officers.
The draft guidance will be approved by the board later this month, and GASB hopes to release it by the end of June, Vaudt said Sunday at the Government Finance Officers Association's annual conference here.
OPEB are health care and other benefits promised to retirees besides pensions. For most state and local governments, OPEB primarily consists of retiree healthcare, Vaudt said.
Just as GASB's new pension standards require state and local governments that offer defined-benefit pension plans to report a net pension liability in their financial statements, the OPEB draft guidance would require governments to recognize a net OPEB liability, he said.
GASB's new pension standards for governments are effective for fiscal years beginning after June 15. Vaudt said the OPEB guidance "follows a lot of the same logic," as the pension guidance.
The draft reporting requirements may increase the size and annual expenses of governments' OPEB. State and local governments' OPEB liabilities could exceed their net pension liabilities because municipalities generally don't set aside money to pay to their OPEB promises, Vaudt warned.
Meanwhile, Jean-Pierre Aubry, an assistant director at the Center for Retirement Research at Boston College, said the center looks at state-administered OPEB plans and has found that total reported OPEB liabilities are often significantly lower than pension liabilities, which could be because retirees are often shifted to Medicare after a few years and OPEB benefits can be more easily changed than pension benefits.
At a session at the GFOA conference on Monday, Aubry described some of the findings of the center's initiative relating to local governments and pension plans.
The research has found that local governments participate in state plans. Many plan sponsors have made reforms, and the severity of changes related to the severity of the pension problems, Aubry said.
However, many local governments will face challenges from the new GASB pension standards. Under the standard, employers that participate in cost-sharing state plans will have to report their portion of the plans' unfunded liability on their financial statements. Many localities participate in state plans, so they will see increased reported unfunded liabilities because of the new requirement, Aubry said.
Current pension costs are not insurmountable for most local governments. And pension issues play less of a role in cities being fiscally challenged than management factors such as how balanced budget provisions work, and economic factors such as foreclosure rates and population changes, Aubry said.
"Yes Detroit has pension issues, but Detroit also has a lot of other issues, " he said.
Frank Shafroth, director of the Center for State and Local Leadership at George Mason University, said that issues about pensions stemming from municipal bankruptcy cases could go to the U.S. Supreme Court. Most state constitutions say that pension obligations are contracts that are binding. But the judge overseeing the Detroit bankruptcy case, Steven Rhodes, said federal law can trump the Michigan state constitution.
It is particularly important for state and local government officials to demonstrate to Congress that they can handle their pension issues over the next few months, Shafroth said. This is because former New York lieutenant governor Richard Ravitch, who is advising Rhodes, is likely to testify before the Senate Banking Committee over the summer and ask Congress to repeal the Tower Amendment of the Securities Exchange Act of 1934, which bars the Securities and Exchange Commission from requiring governments to file disclosures with it before issuing bonds.
Repealing the amendment would give the SEC the authority to regulate municipalities' ability to issue debt. As a result, the SEC would be able to tell an issuer it can't issue bonds because its pension liabilities are too large, Shafroth said.
It would be difficult for Congress to make changes to the Tower Amendment this year since there has been a lot of gridlock, Shafroth said. In addition, state and local governments can be expected to strenuously fight such an action. However, because of the potential for congressional and Supreme Court action relating to pensions, "this year, more than any other year in the history of the United States of America, is going to determine the future of municipal finance," Shafroth said.
