by Lantz Simpson, SMCFA President

The accounting practices of government agencies are almost universally based upon “cash accounting,” that is, pay-as-you-go.  GASB 45 requires that the accounting rules for one aspect of government accounting—retiree health benefits—be changed to an accrual accounting basis.  In accrual accounting, expenses are reported during the period of purchase, regardless of when the payment is made.

In GASB terms, retiree health benefits are called Other Post-Employment Benefits (OPEB).  Accrual accounting assumes that the OPEBs are obligations that have to be provided at the time of purchase, even though the OPEB for an employee retirement health may not be used for many years, and thus doesn't really have to be paid for until then.

At SMC, full time faculty with ten years of service have an OPEB guaranteed in the collective bargaining agreement.  When OPEB faculty retire, they are eligible to receive the PERS medical plan for retirees.  The plan became part of the CBA in 1979 and the District has funded the plan on a pay-as-you-go since then.

So why, you ask, is GASB suddenly requiring that OPEB be booked using accrual accounting?  The reason given is that it is more accurate in actually assessing future liabilities, and in this case, future costs of medical care, which seem to keep rising faster than previously expected – i.e. when they were originally contracted for by the District years ago. GASB 45 is presented as a way to adjust to the current reality of exorbitant health care costs, which will, it expects, cost even more in the future.

But what it actually does, right now, is create a huge liability for all government agencies who sponsor OPEBs.  Under GASB 45, this new liability – on the order of a trillion dollars nationwide -- must be calculated using GASB actuarial guidelines and then must be carried on the books.  And in order to offset this new liability, new assets in the form of an irrevocable trust must be created that meets with GASB rules. (Harvard Study)

The original GASB 45 statement did not address trusts, but a subsequent staff guidance report does, requiring that each government agency develop an OPEB plan, which is a trust that has the specific criteria of irrevocability of contributions and dedication of plan assets to paying benefits.  SMC has done an actuarial study that claims a $70 million OPEB liability over the next thirty years.  GASB 45 rules require that SMC's first fully funded contribution to its OPEB trust for next year would be about $4.5 million.  

If SMC does not prefund OPEBs according to GASB requirements, then in a few years a huge liability could be sitting on SMC's books which could possibly cause problems with the college getting a favorable bond rate if the college were to propose and pass a future bond issue – assuming nothing changes in the cost trends of health care.

In the steady state universe of the GASBites, prefunding through an OPEB irrevocable trust would guarantee that the OPEBs would be there when the time comes, and would thus ensure the existence of future OPEB obligations. Or so they say.  There's no real evidence that this is true, and given the time frame involved, all of it is speculation that ultimately results in one thing definitely happening right now and for the next few years, and that is the control of large sums of money going from governments to private financiers. However low the load on an irrevocable trust, on a trillion dollars it adds up to real money, and someone is going to get it.

Further, I have heard no argument that pay-as-you-go has failed or is in imminent danger of failing, despite the supposed rapidly rising costs.  Marty Hittelman of CFT and the LACCD has an interesting white paper on this very issue.  Health care paid by SMC has gone up in the last ten years, from about .9% of the general fund to about 1.3% of the general budget.(Hittelman Study)   In the same time period cost of administrators went up from 3% to 4% of the general fund.  Perhaps  we should prefund their salaries as well.

In any case, things change quickly these days, and with a universal, Medicare-like health plan for both the nation (AFT) and California (Keuhl)  both being strongly pushed, it is reasonable to think that in 3-5 years the actual cost of medical care might not keep rising, as predicted, but might actually begin to fall.

In sum, in a constantly changing universe, GASB 45's demand of a long-term rigid financial commitment to a speculative future cost seems beyond quixotic; it seems suspicious. Who is really benefiting from the implementation of GASB 45 and the thousands of irrevocable trusts containing the $1 trillion?  If you follow the money, in the famous phrase from All the President's Men, back from who will gain by the actions seemingly demanded by GASB 45, it suggest the public interest is not necessarily what's being served by this GASB gambit.

An irrevocable trust must have a trustee who administers the trust.  If SMC is both the grantor and the beneficiary of an OPEB trust, the trustee must be a third party.  Trustees receive fees and commissions paid for out of the trust itself for managing the trusts and its assets.  Who will be the trustees of the trillion dollars?  People in the same profession as the persons who sit on the GASB board—Wall Street investment bankers and lawyers, CEOs of large accounting firms and other corporations.  In other words, the private financial interests who control GASB stand to gain substantially from the implementation of GASB 45. It's  good business.  Think Halliburton.

The effects of GASB 45 are already clear.  When similar rules were implemented in the 1990's by GASB's brother FASB in the private sector, corporations began defunding and even obliterating their OPEB plans by using the bankruptcy laws.  It is clear to this old union leader that the REAL purpose of GASB 45 is to attack and destroy the OPEBs of future government workers by creating an atmosphere of fear and hysteria through the use of accounting tricks (accrual accounting) and intimidation (bad bond ratings).  For those current government workers who will retain their OPEBs, the financial interests behind GASB will benefit through the gravy of trustee commissions on a potential pool of $1 trillion. They win either way.

But that's not enough for them. GASB recently proposed that current pension disclosure requirements for governments and governmental pension plans should follow the same accrual accounting standards for health benefit OPEBs. (GASB Press Release) We all remember the failed attempt by Gov. Schwarzenegger to eviscerate public pensions in California.  Who needs Arnold when you have GASB?

Our colleagues in the AFT have passed a lengthy resolution speaking to many of these issues, including calling on Congress “to enact legislation to protect and enhance active employee and retiree healthcare by delaying the implementation of GASB OPEB regulations until Congress investigates the impact of these changes on public employees.” (AFT Resolution)

So am I persuaded that SMC needs to prefund GASB now?

No.  There are too many other factors affecting prefunding, too many other questions that need to be answered.  Can SMC afford to prefund out of the general fund now or ever?  Are there alternative means of prefunding?  How would prefunding OPEBs affect collective bargaining?  Would prefunding OPEBs for current employees lead to ending OPEBs for future employees?  Would a large booked accrual liability really affect our bond rating significantly?  Do we as a public institution want to be party to this trillion dollar grab by Wall Street interests?  Do we encourage GASB to go after pensions by going along with GASB on health benefits?

Or do we do everything we can to oppose GASB and its growing power over the public sector – while supporting progressive legislation, like Sen. Keuhl's single-payer health plan – which far more efficiently solves the problem GASB addresses.