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Correction to This Article
A Jan. 30 Metro article on retirement benefits for public employees misstated the date on which the District assumed responsibility from the federal government for pensions and other post-employment benefits. It was Oct. 1, 1987, not in 1997.

Costly Change Looming for Retiree Benefits

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By Bill Turque
Washington Post Staff Writer
Monday, January 30, 2006

State and local governments in the Washington region will soon be forced to show for the first time how much it will cost to provide health care benefits to their current and future retirees, a commitment with a price tag in the tens of billions.

The disclosures will be the result of a rule handed down in 2004 by the Governmental Accounting Standards Board (GASB), a little-known but influential private body formed to improve financial practices in the public sector. The rule, which takes effect at the end of this year, carries no legal weight. But the board's findings are closely watched by Wall Street and the bond rating agencies that assess the financial health of state and local governments.

That means the rule is likely to have far-reaching consequences, finance experts and local officials say. Governments, school boards and other public bodies throughout the country will be compelled to report what they owe retirees for health care over the next 30 years -- and to begin setting aside additional millions of dollars to pay for it.

It will take two to three years for the full effects of GASB 45, as the rule is known, to play out. But officials say it could lead to reduced benefits for retirees. Governments that don't have a plan for fully funding their obligations could have their bonds downgraded, limiting their ability to borrow at favorable rates and costing taxpayers millions in additional interest payments for new schools, roads and other capital improvements.

"It's a big deal, and it will have a big impact on our financial statements," said Gail Francis, deputy finance director for Prince George's County.

Parry Young, public finance director for Standard & Poor's Corp., said many governments will be able to absorb the effects of GASB 45 with relative ease. Some, he warned, especially those providing extensive health benefits, will face "painful decisions," forced to choose between funding critical services now and investing in needs that will have to be met decades down the road.

It is no secret that many states and localities face huge obligations -- above and beyond pensions -- to former employees, mainly in the form of medical coverage, including for prescription drugs, and life insurance. The long-term cost of these benefits, however, has traditionally been treated as a fiscal "don't ask, don't tell," missing from official financial statements.

Most jurisdictions cover such costs year to year on a "pay as you go" basis. Maryland, for example, will spend about $300 million on health care in the fiscal year that ends June 30 for its 66,400 active employees, 55,600 retirees and their dependents. Fairfax County has budgeted about $10 million for its 32,000 government and school employees and the 2,100 retirees enrolled in its health program.

Under GASB 45, governments have until July 1, 2007 (the beginning of fiscal 2008), to start carrying on their books the full cost of retiree health benefits over the next 30 years. They must also have a plan for meeting those obligations.

Some state and local governments have started to calculate what they owe, and the numbers are enormous: $20 billion in Maryland, $5 billion in Virginia (which offers workers more modest post-employment benefits), $2 billion in Montgomery County and $826 million in Fairfax. The District, which didn't assume responsibility for pension and health benefits from the federal government until 1997, faces a relatively tame $509 million.

These figures are only snapshots, officials caution. As health care costs increase, so will the numbers. In 2000, for example, Maryland's "unfunded liability" for retiree health care was $3 billion.

"The numbers start to get very large very quickly," Young said.

So quickly, finance experts say, that it will be virtually impossible for most jurisdictions to meet the requirements of GASB 45 under the pay-as-you-go method. Maryland, with one of the nation's more generous packages of health benefits, would have to increase its annual payments from $300 million to $1.9 billion.

Most jurisdictions are likely to "pre-fund" their obligations by placing money in a trust and letting it grow over time through returns on investments. Fairfax has set aside $10 million. Last year, the District took $138 million from its healthy $1.2 billion surplus to begin meeting the GASB rule. In his proposed budget for fiscal 2007, Maryland Gov. Robert L. Ehrlich Jr. (R) includes $100 million for compliance.

Some officials say the other probable consequence will be cuts in benefits. A Maryland task force that studied the issue concluded in its report last month that reduced benefits -- most likely for younger workers -- are all but inevitable.

"It will be very difficult for the state to sustain the current level of retiree benefits for all employees and retirees into the future," said the report by the panel, co-chaired by state Sen. Edward J. Kasemeyer (D-Baltimore County) and Del. Mary-Dulany James (D-Harford). The General Assembly is likely to appoint a commission to study the matter more closely, almost certainly kicking the whole politically sticky issue past the November elections.

Ehrlich administration officials said they are prepared to do what is necessary to comply with GASB 45 and maintain the state's top bond rating. "We are a triple-A state, and we intend to keep that rating," said Cecilia Januszkiewicz, Maryland secretary of management and budget. "We'll have to decide what can and should be done."

Maryland state employees, smarting from steep increases in prescription drug co-payments last year, worry that GASB 45 will eventually prompt the kind of wholesale reduction in benefits that private-sector workers began experiencing in the 1990s -- triggered, at least in part, by a similar change in accounting procedures.

"As public employees, we felt we would be immune from that," said Curtis Johnson, president of the American Federation of State, County and Municipal Employees Local 266. Johnson, an admissions coordinator at Spring Grove Hospital Center in Catonsville, Md., has 32 years of state service.

The current health plan, which pays between 50 and 90 percent of covered medical and hospital costs, depending on the package selected, costs Johnson $90 a month from his annual salary of $30,000. Much more than that would be a hardship, he said, especially as a retiree with a projected $913 monthly pension.

"I'll be in a world of trouble," said Johnson, 53.

"We're infuriated that they would even consider it," said Royce Treadaway, 46, also a union leader and a market analyst for the Maryland Port Authority in Baltimore. Treadaway, who makes $44,000 a year, said one of the attractive trade-offs of the comparatively low salaries in government service are benefits that are more secure than those in the private sector. Should that change, she said, it would be "degrading and appalling."

Gino Renne, president of United Food and Commercial Workers Local 1994, which represents about 6,000 Montgomery and Prince George's employees, said changes in accounting standards were used as "an excuse" by the private sector to cut benefits. Rather than focus on cuts, he said, the issue for state and local governments should be how to contain the growth of health care costs.

"All the parties have to be more creative," Renne said.


© 2006 The Washington Post Company

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