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Promise comes with a price: Early retirement deals a factor
[April 20, 2008]

Promise comes with a price: Early retirement deals a factor

(Gazette, The (Cedar Rapids, IA) (KRT) Via Thomson Dialog NewsEdge) Apr. 20--Iowa's school districts, cities and counties are not setting aside what may be billions of dollars needed to pay for retirees' health care in the future, new accounting standards are showing.

Local governments generally fund health benefits for retirees on a "pay-as-you-go" basis each year. But an accounting rule that goes into effect this year is requiring officials to project the liability those benefits represent decades in advance.

Whether school boards, city councils and county supervisors start setting aside money each year for that liability is up to them. But the rule is, for the first time, forcing those governmental entities to measure the cost of their promises.

The results have been sobering.

Analysts at the international financial services company Credit Suisse estimate governments across Iowa have promised anywhere from $1 billion to $10 billion in benefits without plans on how to pay for them. They estimate the total liability for those promises across the nation is $1.5 trillion.

Governments that don't save toward the liability leave themselves open to two unpleasant possibilities -- raise property taxes to cover rising costs or, more likely, cut retiree benefits.

"When you promise something in the future and you have no plans to put money aside, you know you have a liability there," said Bob Hopson, a retired actuary in Altoona who's made the projections for at least two dozen Iowa school districts, including a report for Cedar Rapids schools.

Hopson's report estimates the Cedar Rapids school district's liability at more than $26 million, which means the district should be setting aside $1.25 million a year to meet that liability.

In the Cedar Rapids district,

Bob Hopson

Projects school districts' liability

922 employees have retired in the last 10 years. Of those, 372 are still on the district's health insurance plan, which many educators retain until they are eligible for Medicare at age 65. In the Iowa City school district, which has not yet received an actuary's report, 243 employees have retired since 2000. Of those, 83 are still on the district's insurance plan.

In the years between retirement and Medicare, though, retirees cost on average far more than they contribute to their former employers' health insurance plans, even when they pay their own premiums (see related story).

At school districts, the liability is greater, partly because of early retirement deals that help retirees with their health insurance premiums -- more than $1,000 per monthfor some retirees with family plans.

Steve Graham, the Cedar Rapids school district's executive director of business services, stresses that Hopson's report is only a draft and that benefits for retired employees are "annually approved," meaning the board is free each year to cut them.

"We'll be having a lengthy conversation about all the angles," Graham said, noting that the school board intends to discuss the issue in June.

Setting aside money in advance -- or pre-funding the liability -- is ultimately less expensive than pay-as-you-go, because the annual savings earn interest.

"It's just mystical, what compound interest does," Hopson said.

The new standards, established by the Governmental Accounting Standards Boardin 2004, do not require governments to start putting away money for future liabilities. And Hopson stresses it's not a decision that should be rushed into.

The concept of pre-funding, which for now would tack an extra $1.25 million in expenses onto the district's annual budget, is something school administrators approach with a fair amount of skepticism.

"I'm not advocating to anyone that they pre-fund this liability. ... I would need a really, really compelling argument that I haven't heard yet," said Larry Sigel, school finance director at the Iowa Association of School Boards. "At the end of the day, it still costs what it costs." He says Iowa's laws concerning government investments are uniquely restrictive, and he objects on philosophical grounds to setting asidemoney toward the liability.

"Are we a better investor than the private individuals are for themselves?" he said. "Don't take money from the taxpayer that you don't need today." David Zion, one of the analysts at Credit Suisse, argues that when a government doesn't plan for the cost of future benefits by saving a certain amount of money each year, it is, in effect, "borrowing" from employees.

"The obligation's always been there," he said. "All the accounting is doing is it's highlighting that, all right, if you're going to make an estimate of all these promises you've made and what has been earned to date, it's worth 'X.' " In order to arrive at "X," actuaries like Hopson take into account interest rates, rising health care costs and thepotential increase in retirements. They also assume that some employees will not retire until age 65 and that some will not participate in the agency's health insurance when they do retire.

At the very least, Sigel said, having to look closely at the numbers and come up with a projection of the cost of health benefits will help school districts make better decisions in the future. Early retirement deals for teachers, for instance, may be a thing of the past.

¦Contact the writer: (319) 3988273 or [email protected]

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