SIDEBAR: Are negotiated retiree health benefits at risk?
The short answer is yes, they are. Currently, retiree health benefits and similar benefits (generally referred to as other post-employment benefits, or “OPEB”) are reported on government financial statements on a “pay-as-you-go” basis. Under new financial reporting rules known as GASB 43 and 45, which become effective in 2007, state and municipal employers must start reporting these benefits on a sound financial and actuarial basis. When similar rules were implemented for the private sector several years ago, the vast majority of the private employers terminated or drastically curtailed OPEB benefits.
Like private employers, state and municipal governments will need to make arrangements to set aside funds for the OPEB benefits they have promised to employees. It is anticipated that the funding requirements will be several times the current pay-as-you-go requirements. Employers who fail to fund benefits in accordance with the new GASB 43 and 45 requirement likely will suffer a downgrade in their credit rating and, as a consequence, it will be more expensive for those states and municipalities to borrow funds.
Employers faced with this dilemma have only a few options to control the size of their OPEB liability. One way is to set aside funds in a dedicated trust fund. Another way is to issue OPEB bonds to fund the liability. The third—and unfortunately most straightforward—way of controlling the liability is via reduction of plan benefits or increases in employee contributions. The good news is that most OPEB benefits offered to public sector employees are guaranteed in the collective bargaining agreement with the workers involved, and cannot be reduced without a change of the collective bargaining agreement. In light of this, states and municipalities are expected to begin the campaign to reduce OPEB benefits in the near future. Unions need to be prepared for this fight and armed with all of the tools and information necessary to refute likely employer arguments.
— Harvey M. Katz is a partner at Brown Rudnick Berlack Israels LLP, New York City, and focuses his legal practice on employee benefits and compensation.