New Rules Will Cause State and Local Governments to Account for Their Retiree Benefit Promises

As Michigan’s largest private employers try to cut back, they have been addressing the promises they made in more prosperous decades to fund retiree health care costs and defined benefit pensions. The results have uniformly led to cuts to or elimination of those benefits. Now comes the turn of state and local governments.

The Government Accounting Standard Board is set to implement new rules next year that will require states, municipalities and other governmental entities, such as school boards, to actuarially account for their future benefit obligations. Many units of government already perform this type of analysis. However, recent conversations I have had with numerous council people, trustees and city managers seem to indicate this type of review is uncommon. More importantly, many governmental entities have not heard of the rule change.

Unfortunately, the analysis will show almost all the contractual obligations, especially for retiree health care benefits, are woefully unfunded. While there are no current provisions to mandate funding for these obligations, the shear size of the costs will put tremendous pressure on every aspect of government budgets. Often, to fund future payments at the promised level, budgets will have to shift from present operational priorities (vehicles, equipment, roads, etc.) to benefit costs for past employees. In Michigan, most levels of government have been reducing employee levels. As we have seen in the private sector, the shrinkage of employment numbers aggravates the problems.

Oakland County’s unfunded health care obligations were reported in July to be $453 million, Macomb County at $400 million and the City of Detroit came in at a staggering $7 billion in long term health care debt. The State of Michigan may have as much as $30 billion dollars in future promises.

The consequences of these promises were often obscured by the failure to require any present funding. For many years both management and labor indulged themselves by reaching agreements on benefits while knowing the bills would become due on someone else’s watch. The new accounting rule will not remedy the problem, but will graphically illustrate the gap between the available funds and the astronomical unfunded debt. Unlike private industry, the promises to public employees are taxpayer obligations. But, just as in the private sector, the revenues available, tax funded or otherwise, can never cover the difference.

It is critical that both public labor and management act with due haste to reconcile their obligations. The new regulations should prompt some fiscal clarity. The alternative is a completely predictable financial meltdown with thousands of people relying on benefits that they will never receive.