PARS GASB 45
An Overview of Retiree Health Care

In addition to pension benefits, many employers, including public agencies, often pay for health and dental insurance for their employees and eligible family members after retirement.

Costs for retiree health benefits have been rising rapidly - increasing faster than both inflation and the overall growth rate of government spending. Public agencies often offer a wide variety of health benefit programs. Some agencies offer health coverage until retirees (and, in some cases, family members) reach the age of eligibility for Medicare - usually age 65. Some provide benefits to supplement Medicare after age 65.

Unlike pensions, retiree health benefits have rarely been pre-funded. Almost all public entities in the United States pay for retiree health benefits in the year the benefits are used by retirees. This is referred to as the “pay-as-you-go” approach, and it differs from the pre-funding model used for most pension benefits - where most costs are funded in advance during employees’ working years and invested until paid to retirees. This “pay-as-you-go” approach has led to the accumulation of massive financial liabilities to pay for future retiree health benefits. These liabilities will be quantified under new government accounting rules that came into effect in 2007-08.

GASB 45: New Accounting Rules

The rules that govern how governments account for retiree health benefits are in the process of changing. The Governmental Accounting Standards Board (GASB) establishes accounting rules for state and local governments (and related entities, such as public universities and retirement plans). Audited financial statements of governments prepared according to GASB rules are most closely scrutinized by investors in state and local bonds and the rating agencies that make judgments on the likelihood those bonds will be paid off as required. The board was created in 1984 as a parallel to a similar board that governs corporate accounting.

To bring governmental accounting standards more into line with those of the private sector, GASB has implemented a series of accounting rules (known as statements) concerning governmental liabilities related to retirement benefits. In 2004, GASB released Statement 45 (GASB 45) concerning health and other non-pension benefits for retired public employees. These benefits are collectively known as “other post-employment benefits,” or OPEB. Retiree health programs are, by far, the most costly of these benefits.

GASB has no power to change how governments fund retiree health, pension, and other benefits. Instead GASB governs the rules that auditors must follow in providing opinions on the reliability of government financial statements.

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