SAN DIEGO -- So-called "Other Post Employment Benefit" liabilities, particularly retiree healthcare, could overtake pension liabilities as an issue for municipalities and investors, according to panelists at The Bond Buyer's California Public Finance conference.

Even as cities are working to comprehend the Governmental Accounting Standards Board's Rules 67 and 68 for pension liabilities, there are plans to add direction for OPEB as well, said David Vaudt, GASB's chairman.

"The most expensive component of OPEB is retiree healthcare. Pensions may be underfunded, but often retiree healthcare is not funded at all," Vaudt said. "Stay tuned, we will have something from GASB that mirrors the rules issued on pension liability."

Vaudt also said that GASB is preparing explanations of the rules regarding pension liabilities in layman's terms so that cities and counties will be able to easily explain the new rules to constituents and the media.

Moderator William Glasgall, program and editorial director of the Volcker Alliance, said many people he had spoken to at the conference confessed that they did not understand the new rules.

Attorney Lolly Enriquez of Richards, Watson, & Gershon said the firm already includes information about pension liability in financial reports it prepares for their clients, and those are included as part of offering documents.

Eric Hoffmann, a Moody's Investors Service senior vice president, said the rating agency doesn't have a metric for measuring OPEB as it does for pension liability; it looks at OPEB in a more holistic way.

"Maybe GASB is a little ahead of us on that," he said.

He noted that labor unions appear to be using OPEB cuts in bankruptcy cases, notably Stockton's, to say that they have already sacrificed, and saying bondholders should, too.

Moody's, like others, viewed a recent oral ruling in the Stockton case by U.S. Bankruptcy Judge Christopher Klein that pension funds could be impaired in bankruptcy favorable for investors. Enriquez said a strict interpretation of Klein's ruling is that federal bankruptcy law trumps state rules.

The consensus seems to be, according to panelists, that Klein's ruling will not result in a rush to bankruptcy court for struggling cities and counties, because of the expense and the bar for showing insolvency has to be higher than demonstrating unfunded pension liabilities, Enriquez said.

One panelist estimated it cost the trio of California cities who have entered bankruptcy upwards of $10 million in court costs.

"Unions are coming to the conclusion that it is better to negotiate a haircut than have one imposed," said panelist Mary Lewis, San Diego's chief financial officer.

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