Benefit Plan Blog

As new accounting rules for post-retirement benefits sponsored by public employers start to kick in, here is a story reported by Jim Zarroli on National Public Radio's Morning Edition.

Holland & Knight recently acted as bond counsel to the City of Gainsville's bond issue that is believed to be the first bonds in the country sold to fund the liability for a local government's post-retirement medical liability. The bond sale was prompted in part by the new GASB 45 accounting requirements. Click here for a link to Michael L. Weiner's article on the bond sale that appears on the firm's website. Mr. Weiner is an attorney in the firm's Lakeland, Florida office.

This is one in a series of Benefit Basics postings that are intended to provide more extensive and technical background information on current benefit topics than regular postings.

Overview

Employees of state and local governments, including public school districts, public universities and other governmental entities, may be compensated in a variety of forms in exchange for their services. In addition to a salary, many employees earn benefits over their years of service that will not be received until after their employment with the government ends through retirement or other reason for separation. The most common type of these postemployment benefits is a pension. As the name suggests, other postemployment benefits (OPEB) are postemployment benefits other than pensions. OPEB generally takes the form of defined benefit health insurance, dental, vision, prescription drug, or other healthcare benefits. It may also include some types of life insurance, legal services, and other benefits.

The promise made to provide retiree benefits must now be accrued during the working years of employees and recognized as a financial obligation of the employer as the OPEB Cost. This amount needs to be reported on the financial statements of all public sector employers beginning in tax year 2006 for the largest employers while small employers have until 2008 to begin reporting.

Public sector employers, like employers in the private sector, will soon have to start accruing the promise to provide retiree medical benefits during the working years of employees and recognize it as a financial obligation of the employer as mandated by the Governmental Accounting Standards Board (GASB).

These new accounting requirements apply to the financial reports of most public employers which include state and local governmental entities, including general purpose governments; public benefit corporations and authorities; public employee retirement systems; and public utilities, hospitals and other healthcare providers, and colleges and universities.

The credit implications of the new accounting rules are discussed in a new report issued by Fitch Ratings, the international ratings agency. Click here to download a copy of Fitch's Report.