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Starved for a GASB/FASB Solution
This entry was posted on 2/14/2008 12:14 PM and is filed under Program Management, Health Care, Benefit Financing and Accounting, GASB 45.
Last month, our “Views & Vents" column for Employee Benefit News took on GASB (and FASB, its private-sector counterpart, which
had helped make company-sponsored retiree health care extinct). As GASB rolls out, I foresaw hope for a change. Governments employ public safety officers,
teachers, and nurses. They would never
accept dedicating a career to public service, only to be left without retiree
health care. Over time, I argued, resistance
to GASB would surely reach critical mass – and eventually free us of these
deadly accounting standards.
You'd think there'd be a
groundswell of props for a return to affordable retiree health care. But most of the feedback, on this site and EBN.com, has not
exactly been supportive.
Liability Management Makes Sense
Some of you say there's nothing
wrong with having to account for, and prefund, employer liabilities. Take pension plans. Promises of lifetime income are expensive,
long-term propositions. It’s prudent to
recognize and arrange to cover these obligations. Anything less would be financially negligent.
Okay, I'll grant you that. But, if liability management is so great, why
don't we apply it to other important aspects of our lives? Like food. We all have to eat, and can expect to do so
for a long time.
"Bread and Butter" Economics
Consider "FAMSB" (the
Family Accounting Standard Board). It
all starts with a young household that spends $150 a week on groceries and restaurant
meals (a fairly modest estimate).
Next, add some reasonable
assumptions about such things as cost trends in food and dining, family
patterns, and general inflation. Finally,
let's project these expenses over 50 to 60 years, the couple's expected lifespan. The present value of the calculations would
be about $4 million.
Under FAMSB, couples must
account for the full value of this future liability. So they have a choice. They can either place $150,000 each year into
an irrevocable trust that can be used only for future food expenses. Or, if they don’t have the money on hand, they
can carry $200,000 in "unfunded liability" on the family's financial
statements.
Imagine trying to borrow money,
for a car or education, when you’re showing an extra $200,000 in debt. And, by the way, this amount will go up annually. When recalculated in 2009, the unfunded
liability will increase by at least $200,000, as it will in subsequent years. This eating-expense debt will quickly exceed debt
the couple owes for everything else, including their home.
Let's Be Reasonable
Of course, this example is absurd. No family spends $4 million on food, no
matter what the "reasonable" assumptions. And, if dining expenses ever did reach
unacceptable levels, a family would simply make changes. Like buying less red meat, and more chicken
and vegetables. Or eating out less
often, at more cost-effective restaurants.
Or, if they wanted, by shifting other expenses (like movies) into the
food budget.
The point is, no one would move passively,
straight into bankruptcy (or go there directly) just to stay in step with actuarial
projections. They’d make common-sense decisions
as they went along. They would be
reasonable.
And that’s where GASB (and FASB,
for that matter) go wrong. They're unreasonable.
Assuming Your Benefits Away
Start with actuarial
assumptions. For decades, health costs outpaced
CPI by about 250% – and retiree trend is even higher. According to the Society of Actuaries,
"the cost for retiree medical benefits payable in 50 years' time may be 7
to 28 times larger than the current cost, depending on the assumed annual rate
of increase . . ."
Even using optimistic
assumptions, today’s typical $7,000 premium for a 55-year old would increase to
between $13,000 and $17,000 at age 64.
That's a total of $100,000, or more, just to get to Medicare. What employer would cover that? Or even
try?
All Liabilities are Not Created
Equal
But this scenario situation, say
some, is precisely what GASB/FASB is set up to prevent. If employers knew how expensive
postretirement commitments were, they could make "adjustments" (read:
reductions) to head off future problems – like the need to raise taxes (governments)
or compromise other forms of debt repayment.
It’s the same logic behind having employers prepay pension plans, an
arrangement to which no one objects.
Sounds great – till you realize
that pension plans and health benefits are, well, different.
Pensions are guaranteed. Once earned, benefits can never be reduced or
taken away. But health coverage is solely
at an employer's discretion. Employers
can raise costs, reduce coverage, or even terminate it, if they want. Like any other cost of doing business, health
benefits are always subject to change.
Plus, pension obligations are limited
to a specific formula, for which the future value is discounted (to reflect
earnings). Not health care. Medical costs are both open-ended (based on
what services people use) and inflated.
In fact, says the Society of Actuaries, assumptions of future cost
growth are so great they've “[led] to the fallacious position that the whole of
the U.S.
economy [will] ultimately be consumed by healthcare."
The Ultimate Solution
As I see it, GASB is
well-intended, but operating in an accounting vacuum isolated from basic
business realities.
There's nothing wrong with
educating employers about long-term liabilities and encouraging them to manage
their commitments. GASB probably sees
their rulings as tools to help governments make better decisions going
forward. I get that.
But (and I'm talking to you,
too, FASB), forcing employers to use accrual-based accounting for non-qualified
benefits is too much. It's like making couples
prefund future eating expenses by $200,000 a year – an amount just as difficult
for some governments to find.
We know how the private sector
has dealt with this pressure – by discontinuing retiree health care. No benefit means no liability, and no need to
prefund.
Similarly, we wouldn't have to
worry about liability for food – if we could just eliminate food.
Sad to say, but terminated
people, like terminated benefits, is the ultimate accounting solution.
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