Empowered Municipality

Accounting for Post Employment: Liabilities for Municipalities

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That approaching wave of pension debt is a lot bigger than it looks. While the State struggles to get a handle on this, unfunded post retirement plans for school districts and municipalities around the Commonwealth present a unique challenge for local decision makers.

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In 1984, the Pennsylvania State General Assembly responded to a then impending financial crisis through Act 205. This act classified the severity of municipal pensions' distress, combined each municipality's separate pensions into one pension, reduced some benefits, and required funding plans to eliminate liabilities. Compliance and progress was encouraged with a goal of municipal organizations encouraged to pay off their liabilities over a 40 year period.

Fast forward to 2009 and now 2010, Our pensions system is still in crisis, and the stakes are higher.

Larry Eichel, the Project Director for the Pew Charitable Trusts Philadelphia Program commented that, "while the City of Philadelphia's employee benefits are generous, their retirement health care befitis are not. Prior to the stock market crash, their pension funds were at approximately 55% and after, they are around 50%. Pittsburgh is in even worse shape with their funding in the 30% range."

But pensions are not the only issue. There are other post-employment benefits which have to be accounted for as well.  According to Steve Kaczmarek, a Principal at the actuarial consulting firm of Milliman, Inc., "Public sector groups that offer post employment benefits like retiree health care are implementing GASB statement 45 by conducting valuations and including the results in their financial statements." These rules are set by the The Government Accounting Standards Board (GASB), which develops consistent standards for governmental accounting and developed new rules to account for post employment liabilities.

The GASB 45 Rule requires all municipal entities to measure and report the following:

• The value of benefit payments “promised” to retirees for future years

• Retiree benefits promised to active employees that were earned during the current year
• Retiree benefits promised to active employees for their services in previous years
Previously, plan sponsors were only required to recognize the cost of retiree benefit payments for the current year (e.g., the premiums they paid during the year for their current retirees) on their financial statements.

Are municipalities required to fund post retirement benefit liabilities? "Well no," responded Kaczmarek. "The statement requires that municipalities measure and report their liabilities and while some are starting to fund them through a trust others are unable to afford doing so at this time."

These audits affect the ability of a municipality to borrow and the rate they can borrow at. This is a major consideration in todays financial marketplace.

"What most municipal managers don't know, especially smaller ones is that for entities with 100 or less employees, there is an Alternative Measurement Method which can significantly reduce the costs of a typical valuation, which often costs $8,000-$12,000," Kaczmarek continued. "There are more than 89,000 municipal entities in the United States, including school districts and I estimate that 50,000-60,000 have 100 employees or less and will quality for the Alternative Measurement Method."


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