Promises, Promises... Governments Will Be Forced to Value and Report Future Retirement Benefits

Corporations aren't the only ones who promised more retirement benefits than they could deliver. There is a new accounting rule requiring government bodies tally up and develop a plan for meeting all of their future retirement obligations, something most have not done. Many won't be able to meet their promises:

The Next Retirement Time Bomb by Milt Freudenheim and Mary Williams Walsh, NY Times: Since 1983, the city of Duluth, Minn., has been promising free lifetime health care to all of its retired workers, their spouses and their children up to age 26. No one really knew how much it would cost. Three years ago, the city decided to find out. ... The total came to about $178 million, or more than double the city's operating budget. And the bill was growing. ... Mayor Herb Bergson [said]. "We can't pay for it," ...

Thousands of government bodies, including states, cities, towns, school districts and water authorities, are in for the same kind of shock in the next year or so. For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag. The usual practice is to budget for health care a year at a time, and to leave the rest for the future. ... [N]ow the accounting rulemaker for the public sector, the Governmental Accounting Standards Board, says it is time for every government to ... come to grips with the total value of its promises, and to report it to their taxpayers and bondholders. The board has issued a new accounting rule that will take effect in less than two years. It has not yet drawn much attention ..., but it threatens to propel radical cutbacks for government retirees and to open the way for powerful economic and social repercussions. ... "It's not going to be pretty, and it's not the fault of the workers," said Mayor Bergson ...

In Duluth, Mayor Bergson said the city actually offered free retiree health care as a cost-cutting measure back in 1983. At the time, Duluth was trying to get rid of another ballooning obligation to city workers: the value of unused sick leave and vacation days. ... Compared with the big obligations the city had to book for that unused time, substituting free retiree health care seemed cheap. "Basically, they traded one problem for another," Mayor Bergson said. ... Frederick H. Nesbitt, executive director of the National Conference on Public Employee Retirement Systems, an advocacy group in Washington. Mr. Nesbitt pointed out that when the accounting rulemakers began requiring a similar change in financial reporting for companies in the 1990's, it was followed by a sharp decline in the retiree medical benefits provided by corporate America. Today, only one in 20 companies still offers retiree benefits.... The rate for large companies is less than one in three, down from more than 40 percent before the private-sector accounting change...

Max B. Sawicky, an economist at the Economic Policy Institute, a liberal research group in Washington, called the new requirement "another straw on the camel's back" for state and local governments already straining under their budget burdens. ... Attempts to balance the competing interests of retirees, active workers and taxpayers are building tension. Ross Eisenbrey, a former Clinton administration official who is now at the Economic Policy Institute... The problem is that people have counted on those benefits, and many have accepted lower salaries in exchange for better retirement benefits, said Teresa Ghilarducci, an economics professor at the University of Notre Dame. If they are close to retirement, ... it may well be too late for them to make up for the loss with their own savings. ...