Although it sounds more like a brand of malt liquor or a famous title from F. Scott Fitzgerald, a new government accounting standard called GASB 45 could force Island towns to open their books and set aside tens of millions of dollars in the coming years for post-retirement benefits for employees.
Approved by the Governmental Accounting Standards Board (GASB) in July 2004 because of growing concern over the potential liabilities of post-retirement benefits for government employees, GASB 45 requires towns, cities, states and other government agencies like school boards to account for post-retirement medical coverage for all its employees.
The new standards require employers to account for the cost of medical coverage, which includes prescription drugs, dental, vision, life insurance, long-term disability and long-term care benefits that are not associated with a pension plan. The rules require towns to identify who is eligible for benefits, how many employees and retirees are covered, and what assets are available to offset that liability.
Before the new accounting standard took effect, most retirement systems — including the Dukes County Retirement Board — funded post-retirement benefits on a pay-as-you-go basis. But the new standard could force towns to set aside money to cover the cost of post-retirement benefits or run the risk of damaging their bond rating and losing the ability to borrow money.
Credit rating agencies are expected to calculate post-retirement obligations and treat them as a liability when determining long-term credit stability and bond ratings. Regardless of whether there is an actual obligation to fund the liability, towns will be forced to consider funding options to be certain their system has the short and long-term financial resources to provide for such obligations.
Noreen Mavro Flanders, Dukes County treasurer and administrator for the county retirement board, said the county retirement system includes 1,009 active employees and 223 retirees. Mrs. Flanders said the retirement board hired the actuarial firm of Buck Consultants to calculate the unfunded liability of all Island towns, as well as other government and public agencies on the Island, including the regional school district and Martha’s Vineyard Commission.
According to the study, Tisbury, for example, will need to book $26.1 million for post-retirement benefits of all the employees currently enrolled in the Dukes County retirement system to meet the GASB standards. Edgartown will need to book $19.3 million, while in Oak Bluffs the number is $16.9 million. In Chilmark the number is $4.1 million and in West Tisbury the number is $5 million.
The Martha’s Vineyard Regional High School will need to book $21.2 million, the county will need to book $11.9 million and the up-Island regional school district will need to book $9.4 million.
The totals are calculated based on a return rate of 3.5 per cent on the money towns have individually invested in the pension fund, plus what it would cost to meet GASB 45 standards in 30 years.
But the figures drop dramatically, the study shows, if the towns join together and invest their money to achieve a higher interest rate of 8 per cent in order to meet GASB 45 standards within 30 years. By that measure, Tisbury’s liability drops to $12.8 million, Edgartown drops to $9.5 million, Oak Bluffs drops to $7.1 million, Chilmark drops to $1.9 million and West Tisbury drops $2.3 million.
The regional high school liability drops to $10.6 million using an 8 per cent interest rate, while county government drops to $5.5 million and the up-Island regional school drops to $4.3 million.
Mrs. Mavro-Flanders said towns currently are not required to fully fund the cost of post-retirement benefits by any certain date. Towns could choose to continue funding benefits on a pay-as-you-go basis, but face the possibility of damaging their credit rating while losing their ability to borrow money.
“I would think [the towns] have no choice. They aren’t going to be able to fund [these post-retirement benefits] overnight, but the sooner the towns start putting money aside the better. They want to stay ahead of the curve,” the county treasurer said.
Daniel Sherman, director and consulting actuary for Buck Consultants, said towns and other government agencies across the nation are currently struggling with the new standards. Mr. Sherman said the rules were created to establish a uniform standard for private businesses and government agencies alike.
“It was not to address some type of crisis, because all it is really doing is forcing towns and cities to show on their books the true cost of their employees [post retirement] benefits, even though you might not be paying it out for another 30 years,” he said, adding:
“All the [towns] will be doing is measuring a promise they have already made to their employees.”
He said it is uncertain how bond companies will react to the new standards.
“This will shine the light on these towns and retirement systems, and who knows what will be revealed. It could single out towns with huge liabilities forcing [the bond companies] to say, we don’t think you can afford this, we have to lower your [bond rating]. Or it might reveal all the towns and cities are in the same boat — and then who knows what will happen. This whole thing is still in a state of flux,” he said.
Island towns are already taking steps to comply with the new standards.
Oak Bluffs town administrator Michael Dutton said officials have been working with their auditors to determine if — and when — the town should start setting aside funds for post-retirement benefits. According to the study from Brooks Consultants, the town needs to come up with approximately $600,000 in next year’s budget in order to meet a tentative goal of funding all its post-retirement benefits and meeting the GASB 45 standards within 30 years.
“We’re going to have to face these expenses at some point. It’s kind of like setting up a college fund for your child; it’s better to start putting money away over time rather then pay the whole bill once they start to matriculate,” Mr. Dutton said.