GASB-45 Policy Brief
Compiled and Written by: Kimberly D. Geyer
Mars Research and Retrieval Services, www.marsrrservices.com
May 22, 2006

The “Government Accounting Standards Board” also known as GASB established and improved standards of state and local governmental accounting and financial reporting in June of 2004. Section 45 as contained in GASB requires that governments must account TODAY for future costs of guaranteed medical benefits for retirees. These federal regulations impact all state and local governments, who are employers, inclusive of all States, counties, municipal, and local school districts, requiring these agencies to report their costs and obligations pertaining to health and other benefits such as dental, vision, hearing, life insurance, and long term disability which are also recognized as “other post-employment benefits” or OPEB’s. One of the most significant differences noted in GASB-45 and very much unlike the past, is the process utilized as the “pay as you go” method of expensing retiree benefits, is no longer permitted once GASB-45 takes effect. Governmental entities will need to determine the level of liability that exists within their respective operating system. While this is an issue that is not limited specifically to school districts, the purpose of this informational policy brief is to provide a summarization of a complex process and to correlate provisions as contained in the regulations and their implications for school districts, in general. Intermediate Units, as well as, all Vo-Technical Schools will be held to the same standards of GASB-45 of 2004, as all 501 Pennsylvania school districts.

GASB-45 is another federal unfunded mandate as the process to determine a school district’s level of liability will certainly incur costs through administrative time, energy, and efforts related to resources in order to be compliant. The administrative process of gathering extensive employee information related to years of service, mortality data, and present value of money, will be time consuming, required, and factored into determining the obligated cost value estimates. How the standards are implemented is up to the local school district, but will most likely require school districts to hire actuaries to determine present value obligation for existing employees, as well as, the total dollar payout for the next 25-30 years for existing, as well as, retired employees. The GASB-45 regulations indicate the procedures and processes on “how to” account and report the other post employment benefit related obligations, in lieu of the requirement to fund.

Once liability determinations are made to account for the respective district’s obligation under a full operational process of GASB-45, the level of potential of unfunded risk will manifest itself, for both retirees and also for present employees. Districts will come to increase their attention and focus on their current and future reserve fund balances in an effort to reduce liability. This standard applies to all governmental entities. School districts, as well as, all entities will be surprised to initially discover what their liabilities will be and that those costs could exceed those of the state itself over a period of thirty years. School districts and taxpayers are going to learn through these obligations and unfunded liabilities that they can no longer afford to keep paying retirees their post retirement health benefits and that the post retirement health benefits estimates will far exceed those employees currently employed. People in general are retiring earlier and living longer and healthier lives based on medical and technology enhancements enriching longevity long past retirement age.

Companies such as GMC, IBM, and other big American Companies are seeing the value of retirees investing their own savings into their own private investment accounts that the employee can draw from post retirement. It is no longer economically feasible for school districts, government entities, nor companies to continue funding based on generous, long term promises, decades previously made when negotiating employee contracts when the amount of funds to cover those promises can not be guaranteed under any circumstance. In a very true sense, most school districts across the country negotiate employee contracts based on what they believe the local taxpayer’s are capable of funding…..there is some truth and logic to that statement, in which collective bargaining is based on conjectural estimates when negotiating employee contracts. I have not learned of one district across the country that negotiates their employee contract based on funds already accrued and earmarked for salaries and benefits without referendum. For this very reason, and one of many in a faceted policy debate, unions nationwide oppose referendum or voter approval. Levels of governments attempting to change the current climate in order to be fiscally efficient and accountable are meeting fierce union opposition nationwide and at all levels, as they wish to protect the retiree benefits and pensions they are entitled to under the current system.

Depending on the size and revenues of the school district, the compliance dates for GASB-45 are as follows:

· For school districts with revenues of $100 million or more, the standard is effective beginning with the 2007-08 school year.
· For school districts with revenues between $10 million and $100 million, the standard goes into effect for the 2008-09 school year.
· For school districts with revenues less than $10 million, must implement GASB-45 beginning with the 2009-2010 school year.
· However, it should be noted that GASB is encouraging early implementation for all school districts.

History across our country in the economic-business world has experienced numerous key events that led to the establishment of such federal and now state accounting guidelines. In 2000 & 2001, the Securities and Exchange Commission began an inquiry into various company’s claiming losses in light of investors and employees anxious of the stability of such companies. In other American companies, such as Ford, IBM, General Motors, USAir, Inc. to name just a few, it was common practice of employers signing generous health care guarantees for worker’s retirements but not accounting for the future costs with “no consideration of the potentials” nor expectation of an actual declining stock market in 2000-01 generating less revenues to keep up with the escalating costs of health care and shortfalls in pension funds. In essence, these costs have now come due and are severely damaging the profitability of these companies. School districts are no different. Though they are not in business in the sense to generate a profit, they are a business in the sense they provide a service (meaning education) through programs to “consumers” (meaning students, families, and taxpayers). School districts do not reap profits but they do incur costs and when the bills eventually become due and the money is unavailable, they must be paid by higher taxes or reduced services. In this case applicable to school districts, meaning loss of programs, services, and loss of personnel. GASB- 45 has the potential to cost the taxpayer higher taxes or reduced school or government services….or both. GASB-45 also has the potential to give all levels of government a reality check to enable local, county, and state boards to make better decisions based on accurate numbers which one would suspect to be a natural and expected occurrence for accountability purposes.

A December 2004 Standards & Poor’s report indicated GASB would uncover much higher costs that would “seriously strain operations” or uncover conditions or a climate in which governments “are unwilling to fulfill these obligations” which could hurt government’s credit ratings. The actual GASB does not have the authority to place sanctions or enforce the law against school districts and intermediate units that fail to comply with the processes and regulatory procedures, but, those who do not are likely to see their bond ratings lowered making it difficult for them to borrow money in the event they may need to.

· Knowing all governmental entities are going to have to determine the level of liability that exists, many are hiring actuaries to determine the full extensive picture. In the event you do need to hire an actuary, please be sure the individual is “qualified” and knowledgeable in GASB-45’s provisions.

· State School Board Associations and statewide, as well as, national firms will be providing “GASB 45 Solutions” Programs to provide access to qualified actuaries and provide strategies and consultation to boards of government.

· School Boards and the general public, should recognize and understand it will take an acute level of time to ascertain and compile all the necessary information together to develop proper actuarial studies of risks and premiums.

· School districts need to read, study, consider, and discuss how they are going to implement the government accounting standards.

· School districts need to consider and evaluate existing district wide policy and the need to develop new policies related to the government accounting standards.

· School districts will need to frequently meet with their school solicitor to discuss the provisions as contained in the government accounting standards and their implications for the collective bargaining agreement as contained in their respective school district. For example, districts will need to determine what factors they want their actuary to calculate when developing the actuarial studies, as well as, cost value obligation and determination of liability.

· In determining the liability, school districts will need to compile a complete employee census of both retirees and current district employee sectors.

· Options may include contributing more funds into the irrevocable trust each year to reduce future liabilities.

· Options may include “pre-funding” (setting aside money to cover these future costs).

· Options may include avoiding a large liability balance sheet which again is related to and can be accomplished via the “pre-funding” option.

· Options may include an actuarial valuation every two to three years depending upon the size of the two employee sectors (retirees & present employees)

· Options may include what other states are doing:

1. Not giving excessive benefits to workers and contracting out services when applicable without violating collective bargaining agreements.
2. Moving toward from “defined benefits” retirement plans to “defined payments” plans not just for health care, but, also pensions.
3. Not giving more money through tax increases.
4. Contracting Out and Privatization when and if applicable without violating collective bargaining agreements.
5. Explore joining health care consortiums to keep health care premium costs down or encourage employees to pick their own provider.
6. Explore innovative ways to consolidate purchasing power and be more efficient with resources.

My own final recommendation to all policymakers at all levels of government disseminating through this new process is what I call the “Four R’s”.

These are my own self-made rules to making policy applications that I utilize in all facets of my life:

1. Read (Read to learn by being thorough and read the provisions of GASB to understand them, as well as, their process).

2. Reexamine (Examine your starting point where you begin before your actuarial valuation and then again afterwards when receiving your studies’ results).

3. Reevaluate (Based on the results from the studies, examine the data, and make application. Do what is necessary to be fiscally prudent and fiscally sound. This may often times lead to modifications of existing practices. Reevaluation often leads to alterations and changes.)

4. Refine (A constant process of all the above three steps. Effective Policymakers are always “refining” and looking for innovative ways to refine what they currently do or practice within their respective place of business to improve accountability and efficiency of resources. Effective leaders in highly effective organizations are always in the process of refinement…..it’s a never ending process that is forward thinking and out of the box thinking.

Effective leaders are always striving to do better for the good of the Institution and not themselves).

I had accepted an invitation from a fellow professional colleague from out of state, knowing my broad interest in the policy issues affecting Pennsylvania and all states, to attend a policy conference on GASB-45 in Chicago May 16-18, independent from my school board role. I attended on my own time and at my own expense to learn what information I could in my effort as Mars Research & Retrieval Services to provide accurate information for policymaking at the local and state levels here in Pennsylvania. I hope you find this cutting-edge information beneficial to you in your professional capacity here in Pennsylvania.

This is just the beginning of what will be said of GASB-45 here in Pennsylvania and its implications for local school districts and all governmental entities. As with all new policy, implications, some sooner than others will manifest themselves and new challenges will spurn on the need for new and innovative solutions in meeting those potential challenges.
It is significant for local and state policymakers to communicate to one and other as we disseminate through this new process. More importantly, it is crucial that we openly communicate with our local public taxpayers within our respective districts and inform them of the process and mandates as imposed upon school districts and our obligation to fulfill the requirements as we strive to an ongoing policy that emulates and furthermore exemplifies fiscal soundness.

Kimberly D. Geyer
Policy Analyst of Mars Research & Retrieval Services
www.marsrrservices.com
724-799-1195

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