New Rule Will Require State, Local Governments To Report Cost of Health Benefits for Future Retirees
The Wall Street Journal on Wednesday examined how a new accounting rule will require state and local governments to report the cost of retiree health benefits that they have promised to current employees. Under the rule, which will take effect in fiscal year 2008, governments for the first time will have to report the estimated annual cost of health benefits for future retirees.
Governments currently only budget for the cost of health benefits for active employees and current retirees and do not have to report future liabilities. According to the Journal, "the new rule doesn't require governments to set aside any money to fund the long-term obligations -- only to report what those obligations are."
The estimated annual cost of health benefits for future retirees ranges from $500 million to $40 billion for some states, and those future liabilities could affect their credit ratings and borrowing rates, the Journal reports.
Richard Raphael, an analyst at Fitch Ratings, said credit rating agencies have recommended that governments "control the growth of the obligation" of health benefits for future retirees.
In response, many governments have considered reductions in retiree health benefits or increased premiums. For example, Alabama, Ohio and Utah have raised premiums for retirees and lengthened the amount of time that employees must work before they become eligible for retiree health benefits.
However, opposition from unions, state laws that require retiree health benefits and disagreements over how to address future liabilities likely will affect the ability of governments to address the issue, the Journal reports (Solomon, Wall Street Journal, 11/23).