Now it’s on the other major component of public retirement – health insurance – and the unfunded liability associated with the future costs of retiree healthcare. Recent developments have intensified the focus on this issue.

“For two years, we’ve been reporting on GASB (Governmental Accounting Standards Board) and its requirement, known as Statement 45, that state and local governments disclose their liability for future retiree healthcare costs,” says Association President Ralph White. “Since officials here follow the policy, among public employers nationwide, of paying current insurance costs but not setting aside funds for the future, we anticipated that the liability would be substantial.”

Our forecast proved correct when the Commonwealth announced the state’s liability for future retiree healthcare costs. According to the analysis, issued by State Comptroller Martin Benison, the state’s liability for these costs is pegged at $13.287 billion.

This figure drops to $7.562 billion, if the Commonwealth decides to prefund these costs in a healthcare liability trust, similar to the Pension Reserves Investment Trust (PRIT) Fund. According to Benison’s report, the annual required contribution (ARC) to such a trust would be $702.9 million in the first year.

“Massachusetts isn’t alone in facing this issue,” continues White. “GASB’s impact is pervasive, affecting states and towns throughout the country.

“It should be noted that the Commonwealth is among the first group of states to officially calculate and report the cost. Others have liabilities far greater than us, for example, California with a $40 to $70 billion cost estimate, Michigan at $25 to $30 billion and a $20 billion liability for Maryland.

“Now we must tackle the more difficult question, namely what to do about the cost before next July. With that deadline less than a year away, we must push forward for an answer.”

Editor’s Note: State government and municipalities with revenues of $100 million or over must comply with GASB’s Statement 45 on July 1, 2007; municipalities, whose revenues are between $10 and $100 million, must report on July 1, 2008, and those with less than $10 million in revenues must do so on July 1, 2009.

RDS: Initial Funding Source

Statement 45 also requires states and municipalities to disclose what actions, if any, they have taken to address their future healthcare costs, meaning for the Commonwealth, what it plans to do about its $13 billion plus liability. GASB does not mandate that the annual contribution (for example, the state’s ARC of $702.9 million) actually be made.

“While simply reporting the cost and doing nothing about it remains an option, officials would have to determine that such a decision will not have a negative impact on their bond rating and ability to borrow money,” comments Legislative Liaison Shawn Duhamel. “If they decide to establish and fund a healthcare liability trust, some authorities contend that they can put aside less money than the funding schedule calls for and still maintain their bond rating.

“For that reason, our legislation for state and local healthcare liability trusts allows officials to exercise their discretion as to the amount they actually set aside. What the legislation also requires is that the state deposit any federal retiree drug subsidy (RDS) payments into the trust and authorizes municipalities to do the same.” Editor’s Note: As of July 31 (the end of the formal session), H4655, which creates a state healthcare trust, and H4887, which authorizes cities/towns to establish a similar trust, are in the House Ways and Means Committee.

For some time, our Association has held the position that the RDS payments could be an initial source of funding for the healthcare trust. Our opinion has now been supported by Comptroller Benison’s report, which takes special notice of a directive on RDS recently issued by GASB.

According to the Comptroller, GASB spells out how the state and local governments should account for the RDS payments in the context of reporting their healthcare liability in accordance with Statement 45. As a result of the GASB directive, the Comptroller’s report concludes that there are “two sources of funding of the expense (Annual Required Contribution), one being the federal government,” by way of the RDS payments.

“This is exactly what we been calling for,” exclaims Duhamel. “And, the state should not be alone in this approach. Communities should also be following the Comptroller’s conclusion and using any retiree drug subsidies as an initial source of funds for deposit into their (healthcare liability) trusts.”