Written by: Gail Beal, Senior Vice President, Keenan Financial Services

New accounting standards for unfunded public agency health and welfare retirees benefit liabilities become effective this year, resulting in unpleasant surprises for cities and other public agencies. Instead of prior standards that allowed disclosing the net liability as a note, Governmental Accounting Standards Board (GASB) Statements 74 and 75 will require the net retiree liability take its place as an expense on financial statements. The newest standards apply to financial statements for fiscal years beginning after June 15, 2016, so most California public agencies will have an effective date of July 1, 2016. For many entities, unfunded retiree health and welfare benefits spell an instant deficit at the bottom line.

The more technical details of the new GASB standards are outlined in a recent Keenan Briefing. Among the challenges local governments can expect to encounter include more rigorous auditing processes and more proactive scheduling of actuarial valuations; credit impacts affecting bond ratings; and greater public concern as taxpayers are on the hook for these liabilities.

Some local governments are working proactively to drastically reduce their non-pension retiree benefits liability, including garnering the participation of their bargaining groups to support mutually beneficial solutions. But many agencies are just now suffering the “sticker shock” of sudden increases in their unfunded liability. Because the new accounting standards require unfunded liabilities to use less favorable assumptions for investment returns, expenses for promised benefits to retirees have jumped significantly.

Keenan recently hosted a webinar to assist California public agencies to understand the new GASB requirements, strategic considerations and approaches for mitigating their liabilities. Mary Beth Redding, Vice President and Actuary from Bartel Associates, LLC, presented the session oriented to cities, counties and special districts.

Watch the webinar on-demand and download the presentation slides.

The issue of unfunded retiree benefits affects us all – whether we work for a public agency or live in a community served by a local government or public education agency.

Gail Beal is Senior Vice President, Keenan Financial Services and works with public agencies throughout California, advising on retirement planning programs.