In the “old days”, the full cost of providing RETIREE MEDICAL BENEFITS wasn’t widely appreciated. Overall retiree health benefit costs were small, and they were often far in the future. Many employers just “threw them in” to the benefit package. By the late 1980’s, many employers began to understand the true cost of providing these benefits. Medical inflation had become an important issue. Retiree populations were growing. Early retirement (before Medicare coverage) became more and more common. They began to realize that even retirees paying the “full” premium were not covering their actual cost. And the Financial Accounting Standards Board (FASB) was formulating its policies on recognizing the cost over an employee’s career, culminating in FASB Statement No. 106 for Other Post-Employment Benefits (OPEB).
As a result, most private employers have altered their plans to control costs: changing the plan’s Medicare coordination, adding service requirements, restricting eligibility or capping employer contributions. Pre-funding the benefits has not been an attractive option in most cases – so not many private employers have done it.
Now the Governmental Accounting Standards Board (GASB) completed their OPEB project in 2004, with Statements No. 43 and 45. These require cost recognition similar to FAS 106, but with a bit more flexibility. The statements take effect in 2007 for larger governmental employers, 2008 for midsize and 2009 for smaller units. But earlier measurement of the liabilities makes sense for most governmental employers – especially for labor negotiations and funding decisions. Pre-funding the benefits is much more attractive for governmental units than for private employers: the tax disincentives don’t apply, and funding may allow a more favorable measurement of the OPEB liabilities.
Jim van Iwaarden prepared the first retiree medical study for a Fortune 500 company in 1986, and our consultants have worked with government employers on their OPEB issues since the mid 1990’s. Click here for our GASB 45 / OPEB informational site, and here for a brief article on GASB and postemployment benefits for school districts and other government employers.
You can follow current retiree health topics on the OPEB section of our retirement plan blog.