Why GASB rules might spur governments to change retirement benefits

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WASHINGTON – State and local governments may be spurred to trim unfunded obligations for some retiree benefits as a result of the ongoing phase-in of new accounting standards, but it’s unlikely to happen because of ratings downgrades.

Analysts at Moody’s Investors Service and Fitch Ratings told The Bond Buyer they don’t expect any surprises from the new reporting requirements being implemented under Governmental Accounting Standards Board (GASB) Statements 74 and 75.

The standards apply to Other Post-Employment Benefits, or OPEB, which mostly pertain to retiree health benefits, but also can include dental, vision, disability and death benefits.

“We do expect, and I think it’s happening already, that as governments take note of the presence of this liability on the accrual balance sheet, some are going to make policy changes in their OPEB,” said Doug Offerman, senior director of Fitch Ratings.

Marcia Van Wagner, vice president and senior credit officer of Moody’s Investors Service, said GASB is following the same phase-in plan it used for pensions. That means benefits plans adopting the new standard the first year followed by local and state governments the second year.

With the phase-in partially completed, Moody’s issued a report on Oct. 17 that surveyed the data reported by the plans and some early reporting by local governments.

“The new reporting is not really resulting in a sea change,” Van Wagner said, adding that the increased transparency will be valuable going forward.

“The differences generally speaking are not radical differences,” she said. “However, the new reporting does provide a better basis for comparison and a lot more accuracy. In and of itself, we are not really expecting the new reporting to result in any ratings changes.”

Offerman at Fitch agreed. “It’s pretty unlikely that there will be ratings changes,” he said. “We partly need to see what the information will look like. It’s important to recognize it’s an accounting change. So it’s changing the way numbers are reflected in financial statements but it’s not fundamentally changing the nature of the obligation.”

Offerman, however, said he expects some local and state officials to use the new data to implement cost-cutting benefit reductions.

“In general we view OPEB to be a much more flexible obligation than pensions and typically doesn’t have the same legal protection that pensions have,” Offerman said. “We’ve noted that even in communities with what we consider to be fairly strong collective bargaining environments, there has been the ability in some cases to make in some cases material changes to OPEB. So we think of it as a fundamentally different obligation in most places.”

S&P Global said in a March report that it expects that OPEB liabilities could increase “markedly” under the new GASB standards. However, states that participate in cost-sharing for OPEB plans could see a one-time reduction in their liabilities because of a new requirement each governmental unit to report its proportionate share of the overall cost.

OPEB benefits tend to be the most generous in larger communities and states on the East Coast and in California while other communities don’t offer any OPEB benefits, Van Wagner said.

The Moody’s report highlighted case jurisdictions with high OPEB benefits. “Future retirees are driving steep increases in projected retiree medical benefit costs for the Los Angeles Unified School District (Aa2 negative), where OPEB benefit payments are also projected to more than double in the next decade,” the report said.

The Moody’s report also cited the University of California, which it rates Aa2 stable, where actuaries project OPEB benefits will be offered “to more than 86,000 people by 2027, compared to roughly 62,000 in 2018. With the steady climb in the number of individuals expected to receive retiree medical benefits, plan actuaries project that the university's OPEB costs... will more than double by 2027."

Some communities have successfully reduced OPEB benefits the report said, citing the city of Glendale, Calif. (Aa2 stable) as an example. In addition, South Dakota (Aaa stable) stopped offering retiree health benefits several years ago and now has zero OPEB liability, Moody’s said.

OPEB cost reductions also helped in the fiscal recovery of Wayne County, Mich. (Baa2 stable) and Wisconsin (Aa1 stable) removed retiree health benefits from the collective bargaining process in 2011, Moody’s said.

However, the report also noted, “The Illinois Supreme Court ruled in 2014 that constitutional protections of pension benefits similarly apply to OPEBs provided by the state's retirement systems. Similar to pensions, legal disputes over benefit changes continue to clarify the extent to which OPEBs are legally protected in any particular jurisdiction."

“Just last month, retirees filed a lawsuit against the State of Maryland (Aaa stable) that challenges OPEB benefit changes implemented as far back as 2011. A key area of focus in OPEB-related litigation includes whether or not governments have signaled clear intention to grant a contractually protected benefit in authorizing legislation, employee handbooks and/or other collective bargaining documents.”

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Government finance Accounting methods Employee benefits Public pensions GASB Moody's Fitch Washington DC