Jolt 45, Part 2: Y'all, Meet GASB

Constant Readers,

In my last post in this series, I told you about the City's generous retiree medical benefits and how we are about to have to answer for all those promises. Obviously, one component of any plan to deal with this issue will require scaling back future City employee retiree benefits. For those of us in the private sector, the whole notion of retiree medical coverage after any amount of service is foreign. Like when, in high school, I first learned that yankees get a "Ski Week" in addition to Spring Break. Dude, WTF? A whole nother week off? That's crazy talk!

And that's because private employers don’t really offer retiree medical anymore. And here's why: because in 1990, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS) 106. The directive mandated that accounting norms henceforth require private employers to start disclosing the actual current cost of promised retiree health care benefits. Until that time, private companies were doing what the City is doing now: reporting only the cost of what we are paying this year for employees who are currently retired. (This method of accounting is called "pay as you go" or "pay go".) According to one study, the percentage of private employers with 20 or more employees offering retiree healthcare benefits went from 66% in 1988 to 35% in 2006 (page 5).

Accounting standards for public entities are controlled by the Governmental Accounting Standards Board (GASB). And they issued the public entity equivalent to FAS 106 in 2004 - called GASB 45. It went into effect in SF December 15, 2006. Now, GASB is not a governmental entity and technically we don’t even have to follow the accounting rules doled out by this cadre of nerds. But really we do.

Because we here in San Francisco love to issue bonds even more than we love Barry. A municipal bond is loan that is secured by City assets.  A bond is also like a credit card in the sense that the amount of interest the City pays back is based upon the City's credit history and good standing with the gods of the rating agencies. (For you and me, its Equifax, Experian and TransUnion; for the City its Moody’s, Standard and Poor’s, and Fitch.) Investors look to the ratings (just like a bank issuing a credit card) to help determine the interest rate we will have to pay back. And since the rating agencies and basically all investors want us to be following the GASB rules, we gotta.

Specifically, GASB sets forth a system of accounting that will make today's books reflect retiree medical promises to current employees. If they are not retired yet, why do we have to do this? Because, if the City tells you today that "after 5 years of service, you get 100% retiree coverage," you now have a "vested right" that is legally enforceable. Meaning you can totally sue and win if the City decides to renege on that promise.  The notion behind GASB 45 (and FAS 106) is that, if we are giving out something that has an absolute present-day value, we need to be putting that on the books.

The scary part is that, our generous benefits, combined with the explosion in health care costs has resulted in a 4 billion-dollar obligation on our financial statements that was heretofore nonexistent.  Its gets worse, too: remember that we just approved a $180 million dollar bond, and we'll be voting on an $800 million dollar bond in November (page 14). So, at the same time that our financial picture is looking grim, investors and ratings injuries are digging around to determine the terms of ginormous debt obligations.

Yeah.

"Oh shit" was my reaction, too.

I was not hopeful about the chances of our City leaders doing something unpopular (paring back future benefits) for a cause that is unsexy and whose real benefits will not be felt for many years.

However, in an alarmingly reasonable turn of events, Supervisors Elsbernd and Peskin, along with the Mayor's Office and unions representing City employees have come up with a compromise Charter Amendment that will get the City on track to better financial health. My next post in this series will dig into that proposal - which changes things around so City employee benefits inspire less laughter and indignation.

It is scheduled to be voted on at the Board of Supervisors tomorrow.

--Melissa

 

Comments

[vansmack]

Wait wait wait. About the "They pay us less now, but we get more later" argument of Gov employees?

Anyhow, I think I'd rather hear about your weekend...do anything exciting this weekend?

--Whatever you think employees are owed, it doesn't change the fact that our finances look like hell because we have been putting off paying for the "get more later".

You can read about my weekend at Spotswood's blog. In addition to what is there, I also: (1) started a bar fight at 5 am, (2) played about 20 hours of Rock Band, and (3) ate half a pizza. Basically, the usual stuff that happens when I hang out with my friend Derek. -Melissa

[Greg]

Finally! Someone else is saying it too!

I am so freakin' sick of people peddling these bond campaigns as "vote for money for (insert worthy cause here)" when it's not "more money" it's BORROWED money. And yet if you say that people just stare at you and say "But don't you want to have more puppies and unicorns that the new money will pay for?"

And this is just at the local level. The state's voters love to load up on these credit card bonds for all sorts of stuff, then wonder why it is we have a budget crisis!

Thanks for writing this in such a way I can show it to people and say "um, yeah see here's the thing.." and they'll get it. rock on!

gsd

[Tiffany]

Milliman just updated their GASB 45 help Web site. The site includes information about GASB Statements 43 & 45, an online glossary, FAQs, and a free tool for public employers to determine if their entity is eligible for the GASB 45 AMM and to use the Milliman GASBhelp™ tool. I found the site quite informative; it answers questions, such as:

* What does GASB 45 require employers to disclose on their financial statements?

* Do I have GASB 45 liability -- OPEB liability?

* What are potential consequences of not following GASB 45?

* Does GASB 45 require OPEB prefunding?

Visit the site at www.gasb45help.com »