Senior Vice President and Actuary, The Segal Company


Pre-funding

Kathleen Reilly

retiree health benefits, which some states are considering in light of new accounting rules, would typically be as much as seven times more expensive than the current pay-as-you-go mechanism, Kathleen Reilly, senior vice president of The Segal Company, said.

A recently released Governmental Accounting Standards Board rule says that the public sector should account for the future cost of current employees' retiree health benefits in its financial records. Such expenses have generally been acknowledged only in footnotes - in large part because they are difficult to project accurately and, unlike pensions, are not guaranteed by law - and the new rule will add massive liabilities to the books of public employers. Some critics have said this would imperil the debt ratings of states, cities and counties and, as a result, could lead public officials simply to drop retiree health benefits.

Some states and localities are considering pre-funding to avoid having an unfunded liability, Reilly noted, but that means having to find millions, even billions, of dollars more each year. While issuing bonds are one option, Reilly noted that this amounts to trading "soft" debt for "hard" debt, and it gambles that no health care reform will be enacted that would eliminate employer-provided retiree health care. Other governments are considering changing plan eligibility, benefits and cost sharing as a way to minimize costs.

Reilly offered three pieces of advice for determining how to respond to the new rule:

• balance the cost of the retiree health benefit with its value in attracting and retaining employees;
• approach stakeholders to find and identify reasonable design and financing solutions;
• find the appropriate mix of solutions, including redesign, cost containment and pre-funding.