Fall 2006 issue of Horizons

INDUSTRY PUBLIC SECTOR The Cost of OPEB - Financial Reporting Converges with Reality

Jeff Winter, CPA

Rodney Rice, CPA

Retiree medical costs are probably the largest long-term financial challenge facing state and local governments. It is estimated that the cost of paying future medical benefits for our retired civil servants could exceed $1 trillion. This cost is twice the existing unfunded pension liability, which is estimat- ed at $500 billion. Pension benefits are at least partially funded and have been addressed through accounting standards as well as sound actuarial practices and, although costly, are no surprise to government officials. On the other hand, state and local gov- ernments currently are not required to advance fund or account for future retiree medical benefits and therefore may not fully understand the reality of those future costs. These costs will vary widely based upon the provisions of each employer's plan. The GASB was very timely and on point when it began the process of issuing the post-employment benefits other than pensions (OPEB) standards to address the accounting and financial reporting of these liabilities. GASB Statement No. 45, which will be effective for the majority of 2007 financial statements, was issued to provide more complete and reli- able financial reporting regarding the costs and financial obli- gations governments incur by providing OPEB. Post-employ- ment health care benefits, the most common form of OPEB, are a very significant financial commitment for many govern- ments. Elected officials may be surprised by the magnitude of these future obligations. Under current standards, governments typically follow a “pay-as-you-go” accounting approach, in which the cost of benefits is reported as incurred. However, this approach is by no means comprehensive and reports only a limited amount of information about the government's future obligations.

When governments implement Statement 45, many will report, for the first time, annual OPEB costs and their unfund- ed actuarial accrued liabilities for past service costs. This report will encourage improved accountability and provide a better base for officials and management to make informed policy decisions about the types of benefits provided and potential methods of financing those benefits.

53 • summer 2006 issue