Being a resident of Michigan means municipal bankruptcy has been a hot topic around these parts thanks to Detroit. Turns out that the problem of legacy costs is far more prevalent than anyone imagined just a few years ago. What I find most interesting is the solutions proposed to deal with it. First, a little history.
Accounting practices are guided by the Financial Accounting Standards Board(FASB) which basically sets the guidelines for the private sector under the authority of the Securities and Exchange Commission(SEC). The Governmental Accounting Standards Board(GASB) is the public sector equivalent. Both the FASB and GASB issue statements, which are rules accountants must follow.
In dealing with costs associated with retiree health and pension benefits, the FASB was the first to the plate way back in 1984 with Statement 81. It was 20 years later that the GASB followed the lead of the FASB on accounting for legacy costs with GASB 45. The big change was going from what is called pay-as-you-go accounting in which costs are accounted for only when they are actually paid to a system that accounts for unfunded liabilities in the future. This is what opened the Pandora’s box on the scale of the legacy cost problem across the country.
Perspective is an important aspect of assessing retiree legacy costs. Take this union newsletter for example which asks the question “WHY ARE THEY OUT TO GET OUR RETIREMENT BENEFITS?” The union likes pay-as-you-go and really dislikes accounting for future liabilities.
By requiring companies to account for future costs of retiree health insurance and life insurance, FASB 81 created a paper liability – that is, made it look like these future costs were additional debt owed by the company.
Really? Made it ‘look’ like future costs were debt? Yes sir, that’s some typical liberal spin for you. Yes, it is quite common in the business world to have to actually account for ALL costs related to operating a business whether past, present or future. Just a nasty little detail when determining profitability but that concept doesn’t seem to factor in anymore. Not in the bailout world we live in.
Here’s one more example for you from the liberal la-la land of California. It’s entitled “Issues in Retiree Health Coverage“.
The two primary culprits of reductions in retiree health coverage were: 1) escalating health costs and 2) FASB 106, which required private sector companies to “book” the actuarial liability of employer paid retiree health coverage. Because of the cost, private sector organizations reduced or dropped retiree coverage entirely.
Perspective again. It’s considered ‘evil’ to actually be transparent with true costs and thus adjust your business accordingly. Who is at fault? Is it the business being fiscally responsible to insure sustainability or is it the long-time trend in this country to make unsustainable promises to employees without having to account for them?
Earlier this year, a study was completed determining the legacy costs for Michigan municipalities. This illustrates just how widespread the problem of legacy costs has become. Bridge magazine has an excellent article breaking down the situation in Michigan municipalities – http://bridgemi.com/2013/11/detroit-coming-to-a-city-near-you/.
I read through it and also the comments. Ah, the big government solutions rear their ugly head. Here’s one commenter’s take.
If the country opted for a Canadian style single payer system, all these legacy health care costs go away and not just for government entities, but also for every business.
Isn’t that great? Just go hog wild with Obama’s single-payer agenda and all will be solved! Can it really be that easy? Of course not. You know, the FASB and GASB get skewered for their burdensome regulatory practices, and probably rightly so, generally due to necessity issues. But transparency is the true ‘evil’ here. Nobody likes having their books so exposed.
Same goes with this commenter, and a great many other supporters, who propose to just wipe away all legacy healthcare costs by going to government run healthcare. One problem. You can’t eliminate costs. You can hide them as accounting practices have done for decades previously, but they always catch up some day. Switching to single-payer is just this. The costs are spread to be borne by all federal taxpayers rather than just a municipality. Healthcare is never free. Even if you subscribe to the notion that it is a right, it still isn’t free.
So single-payer may ‘eliminate’ the legacy cost paper debt of municipalities concerning healthcare, but it’s still a debt and all debts are always paid by someone. Usually we say it’s either the lender or the borrower who pays the debt, but in this case it’s a third-party.
And one way to manage that debt will be to ration both the quantity and quality of healthcare. That’s where single-payer will take us.
There is another theory on addressing legacy debt. Bonding it out. Rather than forcing retirees to accept benefit cuts or playing accounting tricks as switching to single-payer, bonds still ensure that the municipalities eventually pay their obligations. However, once again there is no free lunch. Selling legacy bond debt increases the overall cost to a municipality by extending the payment period thus forcing it to be absorbed by future generations.
The reason it is so appealing to municipalities is that it’s yet another kick-the-can philosophy by pushing off problems to future generations. Also, Helicopter Ben over at the Federal Reserve has got interest rates so artificially low it is irresistible to politicians looking for the least painful way out.
The bottom line to all of this is that benefit promises made to employees are a true cost. Who pays or when it’s paid is negotiable. There is one common area of agreement amongst all of the stakeholders. Meaning the politicians, accountants, business leaders and retirees receiving the benefits. The easiest way out is to simply pass the cost along to our kids and let them deal with it. Whether it’s Obamacare or the eventual single-payer or the yet to come pension reforms, they are all simply gimmicks to transfer costs. Period (sorry to steal your line Mr. President).