Localities setting up trust funds

Local governments are shifting large chunks of money into trust funds to pay for their retirees’ health coverage as a federal deadline approaches.

The most likely effect of a new federal accounting rule will be that governments will set up trusts to pay for current and future retiree health benefits. But more than 20 percent of employers said they are likely to raise employee costs as well, according to a survey conducted by human resources firm Mercer Health and Benefits.

The Government Standards Accounting Board, an independent organization that sets the rules for proper accounting, has issued a new rule that requires governments to list the full costs of retirement benefits, such as health care and pensions, on their balance sheets starting in July. Many governments have been paying for health care costs as the bills come in, which does not reflect what the future costs will be.

Nine percent of the respondents said they will do nothing except report the future costs, but 21 percent said they are likely to increase retiree contributions.

“Generally governments want to keep current retirees as close to where they are as possible,” said Steve McElhaney, co-author of the Mercer survey. “The changes governments will make will probably be to future retirees.”

That could mean an increase in the amount employees pay for health care coverage or a reduction in benefits, such as no longer covering dependents or spouses.

“I think there will be a lot of governments that change their system from a defined benefit plan to a defined contribution plan with medical savings accounts,” said Tim Firestine, the director of finance for Montgomery County.

Mercer has estimated that state and local government obligations for promised retiree health benefits over the next 30 years amount to $1.4 trillion nationwide.

While the new accounting rule does not force governments to come up with a plan to address future health care coverage payments, a failure to do so would hurt their bond and credit ratings, limiting their ability to borrow at favorable rates. High borrowing rates usually result in a higher cost to taxpayers for new schools, roads and other infrastructure improvements.

“Interestingly, none of the respondents indicated they will likely accept a lower bond rating,” Mr. McElhaney said. “And most will not be able to afford the pay-as-you-go method.”

That means governments are starting to stockpile money in trusts to pre-fund their retiree obligations. Washington-area government officials say it is unlikely health care benefits will change.

But “we are all in the discovery stage,” said Cecilia Januszkiewicz, Maryland secretary of management and budget.

A spike in the cost of prescription drugs coupled with the increased longevity of retirements has led to staggering amounts governments owe for current and future health care coverage.

Maryland estimates that the cost of future and current retiree benefits is $20 billion, by far the highest amount in the Washington area, which is mostly because of the generous health care benefit package state employees receive.

Virginia, which offers retired workers a defined contribution health benefit, estimated its costs at $2 billion. The District of Columbia, which began assuming health and pension benefits from the federal government in 1987, is looking at around $509 million in health care costs.

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