MUNICIPAL BONDS FACE CHALLENGE FROM NEW RETIREE HEALTHCARE BENEFITS ACCOUNTING RULE

FROM A DIFFERENT MUNICIPALITY

The Author is currently visiting his hometown in Indiana. On Monday the New York Times had a front page article on a new government accounting rule that will force governmental units to account for how they will pay thhe promised healthcare benefits of retirees. It is predicted that when the costs of these promised benefits are addressed, these costs will lower the creditworthiness of some governmental units. And as the creditworthiness falls, so will the ratings of municipal bonds.

The Author posted on this subject back in December and will repost today.

NEW ACCOUNTING RULE REQUIRES LOCAL GOVERNMENTS TO ACCOUNT FOR THE COST OF RETIREE HEALTH BENEFITS.
STICKER SHOCK WILL SICKEN TAXPAYERS.
ACTUARY FULL-EMPLOYMENT ACT

A new government accounting rule, Government Accounting Standards Board Rule 45 (in case you are a citation fetishist), will require large governmental units like cities and states to account for the cost of healthcare benefits for retirees. Smaller governments will have an additional two years to comply. The numbers aren’t pretty. Governments will have to slash benefits, raise taxes, both, or worse. Face lower credit ratings for their municipal bonds as costs for retiree healthcare benefits goes onto the books.An article in December 11th’s New York Times, “The Next Retirement Time Bomb” gives a full and chilling treatment of this new government accounting rule and the staggering costs of liabilities that most governments never calculated. Here is one example from the Author’s former state, Minnesota.

DULUTH. 5O DEGREES IN JULY. SHOULD ACTUALLY BE NAMED “DULL-UTH”

Below are the first three paragraphs from the NY Times article:

“Since 1983, the city of Duluth, Minn., has been promising free lifetime health care to all of its retired workers, their spouses and their children up to age 26. No one really knew how much it would cost. Three years ago, the city decided to find out.'“It took an actuary about three months to identify all the past and current city workers who qualified for the benefits. She tallied their data by age, sex, previous insurance claims and other factors. Then she estimated how much it would cost to provide free lifetime care to such a group.’“The totals came to about $178 million, or more than double the city's operating budget. And the bill was growing.”Ironically, retiree health benefits were given to Duluth employees to save money. In place of employees accumulating huge blocks of sick time and comp-time that they cashed in upon retirement, the city offered retirees a deferred benefit.

Pennywise and pound foolish, as the aphorism goes.

But not to pound on Duluth too hard. Duluth has the foresight to at lease calculate its liability. Most governmental units have no idea what they may be obligated to pay out.Most municipalities fund retiree health benefits on a “pay as you go” basis. The bill comes from the insurer or from the health plan administrator and the cities pay it month by month or year by year. The new rule does not require that governmental units set aside funding for the obligations. But the rule does require that they “lay out a theoretical framework for the funding of retiree health plans over the next 30 years, and to disclose what they are doing about it”, states the New York Times article.

THERE IS NOTHING LIKE THE GOOD OLD DISCIPLINE OF THE MARKET TO RUIN A MUNICIPAL BOND SALESMAN’S GOOD TIME

One of the safer investments for income investors are municipal bonds, debt issues by cities, states and governmental units to pay for public buildings, schools and public projects. Municipal bonds are also attractive to high income investors because they are free from federal taxes, and often free from state taxes. They are safe because they are backed by either specific revenues or the taxing power of the city or state. But municipal bonds, like other bonds, are rated on their creditworthiness. If a city would have a huge unfunded liability, it would negatively impact its credit rating and the value of its bonds“If they [governments] fail to put money behind their promises to retirees, they may feel the unforgiving discipline of the financial markets. Their credit ratings may go down, making it harder and more expensive to sell bonds or otherwise borrow money”, says the New York Times article.

GOVERNMENT EMPLOYERS WILL DROP RETIREE HEALTHCARE BENEFITS, JUST AS PRIVATE SECTOR EMPLOYERS DID IN THE 1990s

The New York Times article also compares the effect of GASB Rule 45 to a similar rule adopted for private sector employers in the 1990s. States the Times article:Today, only one in 20 companies still offers retiree benefits, according to Don Rueckert Jr., an Aon actuary. The rate for large companies is less than one in three, down from more than 40 percent before the private-sector accounting change, according to Mercer Human Resource Consulting. General Motors and Ford are among the big companies that still offer retiree health benefits. But G.M. recently persuaded the United Automobile Workers union to accept certain reductions, and Ford is seeking similar cuts.

The moves of these employers to drop retiree healthcare benefits is just one more symptom of America’s profligate healthcare costs and clear evidence of the weakness of the employer-funded healthcare system. And it is a rational economic response to costs that employers cannot control, and cannot afford.

WE JAM ECONO IN THE DESERT OF THE REAL!