Implementing GASB 43 and 45

The implementation of GASB Statements 43 and 45 will require governments to report long-term liabilities and costs from their post-retirement medical programs that may have been previously undeclared.

Perhaps more importantly, the various rating agencies have declared that they will be looking closely at these statements, and the existence of large unfunded liabilities may hamper governments in their attempts to obtain future financing.

Challenge

New GASB Rules Put Spotlight on Unfunded Liabilities

In addition to the national health care crisis, the public sector faces the challenge of the Governmental Accounting Standards Board's (GASB) recent guidelines on accounting for retiree health care.

Currently, most governments pay for retiree health care on a pay-as-you-go approach, i.e., paying an
  amount each year equal to the benefits distributed or claimed in that year.

Beginning in fiscal year 2006 and 2007 GASB Statements 43 and 45 will require pensions and
  governments to follow an actuarial approach, from an accounting standpoint. This entails paying
  an amount (or rather, reflecting an amount on the government's financial statements) that is expected
  to be sufficient, if invested now, to finance the costs of post-employment benefits for employees.

New Plan Designs Needed

To address the problem of providing retiree medical benefits while recognizing the financing and accounting issues faced by plan sponsors, new types of plan designs need to be considered to deliver the needed benefits.

Some features of the traditional Defined Benefit approach to providing retiree medical benefits deserve to be integrated into the new benefit structure, including:

Lifetime benefits

Professional management of pooled investments

Tax advantages to the sponsor and employee.

Incorporating these elements into a system which still requires the sponsor to allocate an affordable and stable level of contributions remains a challenge.