Standard & Poor’s warned that retiree health care benefits are a growing burden for public universities.
“We believe that OPEB [other post-employment benefit] liabilities and pension costs will continue to grow, and in some cases, rise sharply, depending on investment markets and management assumptions,” the agency said. “It is also possible that states which have taken responsibility for [defined benefit] plans could shift some of these obligations back to their public universities.”
A new accounting rule from the Government Accounting Standards Board on public retiree benefits, GASB 45, went into effect in fiscal 2008. It required public universities to set aside more money to cover retiree benefits, which is contributing to universities’ financial troubles, S&P said in a report released this week. .
Standard & Poor’s managing director of public finance, Mary Peloquin-Dodd, said that the major expense-drivers are increasing health care costs, demographic factors, and low interest rates. These are all leading to increased actual and actuarial OPEB costs for universities.
“For the public universities, the gap between their OPEB payments now and their liabilities is growing and this is making their finances look negative,” said Peloquin-Dodd, the primary author of the report.
The universities’ leaders need to address this liability, she wrote, and some are already restructuring their benefits, which could improve their finances.
“A continued growth in liabilities reduces a university’s equity,” the report noted. “Given that our analysis focuses heavily on equity-based ratios, unrestricted net assets and expendable resources will look increasingly negative as well.”
“Many universities with growing OPEB liabilities are also experiencing operating losses,” the report said.
One example is West Virginia University,which has been operating in the black on a cash basis. However, on a full accrual basis, the school posted operating losses in fiscal 2009 and 2010, the report noted.
The actuarial losses continued in fiscal 2011 and are expected to continue in the current fiscal year, said Daniel Durban, senior associate vice president for finance at the university. Before capital revenues, the fiscal 2011 operating loss was $29.2 million, while the fiscal 2012 operating loss is expected to be $45.5 million, Durban said.
Both include the accounted OPEB expenses. Without these expenses, the university would be operating in the black.
Durban said the school’s OPEB expenses are determined at the state level.
“The state has, however, taken several positive steps to curb future increases in the liability,” he said. “In addition, the OPEB issue has been studied by the West Virginia Legislature and legislation was introduced late in the legislative session last year by both the House and Senate that would have addressed funding for the liability at a state level. WVU is hopeful that this legislation will be considered further during the next legislative session.”
At an anticipated $15 billion, the University of California has by far the largest such OPEB liability of all American public university systems. Unlike WVU, the university’s retiree benefits policy is set independently from the state government, said Dianne Klein, spokeswoman for the University of California.
The university’s Board of Regents has already approved changes to the system’s conditions for retirement benefits, she said. The changes should reduce the system’s contributions for retiree health care benefits.
Western Michigan University is another school dealing with retiree health care costs. It has $139 million in OPEB liabilities, 28% of its total liabilities.
Starting in September 2010, new employee retirement ages were pushed back, said Patti Van Walbeck, director of accounting services. Paid retiree health benefits have been eliminated for new employees.
Due to these changes, she added, the school is projecting decreasing OPEB costs starting in the current fiscal year.