The
following is the January “Views & Vents” column for Employee Benefit News.
Over
the past few years, most of my private-sector clients have been wrestling with
tough decisions about post-retirement health care benefits—and awaiting relief
that’s taking awfully long to arrive.
But
what’s gone around is about to come around. And, when it does, the end may finally be at
hand.
Playing “Chicken” with Retiree Benefits
A
few years ago, the Financial Accounting Standards Board (FASB) changed the rules
for private companies that offered retiree medical coverage. Under these new provisions,
employers couldn’t simply finance plans on a pay-as-you-go basis. Instead, they had to recognize the potential future impact of claims – plus inflation, retiree medical trend,
and a host of other factors. Worse, FASB mandated highly unfavorable actuarial
assumptions – projected over the lifespan of the entire retiree group.
In
“real life,” though, these overstated obligations would never materialize. Any sentient employer would modify plan
design long before such outrageous liabilities were incurred. Plus, future
claim costs wouldn’t be payable until . . . well, the future. Over the coming
decades, companies would presumably adjust benefits based on their changing
business situation. It’s hardly likely that an employer would just sit by
passively while retiree coverage threw the organization into bankruptcy.
Still,
as Tina Turner might ask, what’s logic got to do with it?
A Helping Hand
– Across the Face
Let’s
assume FASB’s intentions were good – that the board merely wanted to help
secure the availability of retiree coverage. But the execution was a disaster.
In essence, employers were forced to account for impossibly inflated future expenses
on today’s financial statements. The impact of such liabilities was
devastating, especially for companies under constant pressure to be profitable.
So
they reacted as one might expect: By
eliminating the source of liability.
Faced
with FASB’s new rules, most employers either terminated or sharply curtailed their
post-retirement medical plans. They had to, since even those that could fund the coverage couldn’t afford to carry
the expense. In the end, FASB’s rules killed off the plans they set out to
protect.
In
fact, the only major group of workers today with ready access to retiree
coverage is governmental employees. That’s because governments haven’t been
subject to these accounting standards. Until now.
Reality Check
Over
the next few years, the Governmental Accounting Standards Board (GASB) is
requiring governments to follow rules like the ones FASB imposed on the private
sector. And as absurd as the standards
are for companies, they’re downright insane
for governments.
After
all, governments don’t produce profits. And their commitments to retirees are
unfixed. As opposed to employee pensions, health plans can be reduced as
necessary – so they don’t affect the “bottom line.”
Moreover,
governments aren’t limited to the revenue on their books. A former CEO of the
City of Atlanta
once told local business leaders, “If my benefit costs go up, I’m not in the
same boat as the rest of you.” As he noted:
“I can raise your taxes.”
The Cavalry
Cometh
Whenever
clients gripe about FASB, I hold out the hope that government’s coming to the
rescue. Once public entities are compelled to comply with GASB, I suggest, the
rules will have to be changed – for
three rock-solid reasons.
- Governments
lack the flexibility of private employers to handle the instantaneous appearance
of multi-million-dollar liabilities. The impact will wreak havoc with
their credit ratings, and be tough to explain, let alone justify, to
taxpayers.
- Governments
will have a hard time cutting benefits. There are too many retirees – and
too many unions.
- In
governments, there are lots of employees with legal access to firearms. Not an ideal negotiating position.
This
situation is tailor-made for employee pushback. And I can tell you that, when
the moment comes, things will turn ugly in a hurry.
Think:
Which mayor or governor wants to be vilified for taking away benefits from retired
schoolteachers? Who wants to turn down
coverage for nurses who’d dedicated their
lives to caring for others? Or deny it
to 62-year-old heroes who have pulled
babies out of burning buildings?
These
are headline, Eyewitness-News-type stories. Imagine endless servings of
firefighters with lung cancer, but no health coverage; or retired police
officers with bum knees, left to suffer after a career of chasing
criminals. It won’t take long for the
public to have its fill.
Eventually,
rather than try to “sell” benefit cut-backs, our elected officials will be pleased
to shift the blame – to the “clueless accountants” who imposed the rules in the
first place. And that will mark the end of the financial straitjacket – if only
for governments. But it will give
private employers (at last!) a fulcrum to unwedge the bigger issue for the rest
of us.
A New Day
at Dawn
I’m
currently working with a governmental entity to explore plan change options
consistent with the GASB rules. As private employers know, the alternatives
aren’t pretty, and my client will certainly be facing some pain, as well as employee-relation
issues.
Of
course, over time, all remaining
governments will be forced to deal with these mandates. And as chickens start coming home, there’ll
be increased pressures on the roost. Once
the affected population reaches critical mass, demand for change will become
impossible to ignore.
For
once, the government may really “be here to help.” Won’t that be special?
Strategic Planning
Associates makes it a practice to come up with creative solutions that reduce costs
without reducing benefits. For more information, click here.
