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By: Edward J. McManimon, III
Matthew D. Jessup      
 McManimon & Scotland, LLC

For the most part, since New Jersey does not require its 566 municipalities to account and prepare financial statements pursuant to generally accepted accounting principles and the related Governmental Accounting Standards Board ("GASB") rules and statements (New Jersey municipalities still use the modified accrual system) why should GASB 45 present any special concern now for New Jersey municipalities?  The New Jersey Division of Local Government Services is in the process of analyzing this issue and developing guidelines on the impact and implementation of this GASB statement.  In the meantime, there is much to consider.

GASB 45 Statement

On August 8, 2004, GASB issued Statement No. 45 entitled, "Accounting and Financial Reporting by Employers for Post Employment Benefits other than Pensions", commonly now known as "OPEB".  This statement essentially requires that state and local governments account for and report the annual cost as well as long term obligations and commitments related to post employment healthcare and other non-pension benefits in the same manner as they account for and report pension obligations.  It does not require funding of such liability but establishes disclosure requirements for information about the plans that the government participates in, what the funding policy is (pay-as-you-go, long term debt or combination) and the actuarial valuation calculations.

Effective Date

The actual effective date for the statement requirements are phased in.  The determination of the threshold amount listed below are calculated based on the municipalities total annual revenues as of the close of the fiscal year ending after June 15, 1999.  The schedule for implementation of the rule is as follows:

Phase 1            Governments with $100 million annual revenues or more - first fiscal year
                          after December 15, 2006

Phase 2            Governments with $10 million to $100 million annual revenues -first fiscal                             year after December 15, 2007

Phase 3            Governments with less than $10 million annual revenues -first fiscal year                             after December 15, 2008.

Historical Access by New Jersey Municipalities to Credit Markets Even Without GASB Accounting

Even without an accounting system that mirrors the rest of the country, New Jersey's municipalities have nevertheless been the beneficiary in the credit markets of significant state oversight, strong budget and audit requirements and conservative statutory limits on the amount of capital debt that may be incurred.  Credit ratings for municipalities throughout New Jersey remain high and access to the bond market remains strong.  So why should New Jersey's municipalities or their regulators bother to be concerned about GASB 45?


With all this in mind, there are many reasons why it is important, even critical, for municipal finance officers in New Jersey to discuss GASB 45 and help shape the debate over not only what the rules on compliance actually require, but also what they ought to be for New Jersey municipalities.  These reasons include the following:

  1. Ignoring the obligation and liability won't make it go away.  Whether the obligations for OPEB are actually calculated and reported by New Jersey municipalities doesn't mean that those obligations don't exist.
  2. Prior practices by municipalities in negotiating employee benefits have created significant long term liabilities for OPEB the financial impacts of which have rarely been analyzed and remain unknown to the municipalities.
  3. Awareness of the actual long term financial impact and cost of such benefits will or ought to help shape the negotiations by such municipalities regarding such benefits in the future.
  4. As a practical matter, regardless of how the credit rating agencies accommodate and understand New Jersey's accounting system, from this point, they will likely  calculate these obligations and treat them as a liability to be considered in determining the long term credit stability and rating of the municipality.
  5. Regardless of whether there is an actual obligation to fund this liability, it will cause municipalities to consider funding options available to make certain that the municipality has the short and long term financial resources to provide for such obligations.
  6. To the extent that the actual liability once calculated is so large as to be alarming or catastrophic, the municipality and State will be forced to implement changes to insure not only that long term funding plans are implemented to pay such obligations but also that such obligations are not increased blindly in the future.
  7. To the extent that legislation is necessary, it should be considered now.

Private companies saw the long term financial impact and effects of such obligations as well as pensions many years ago and as a result significantly altered their benefit packages to assure the companies continued financial viability and stability into the future.  Most big and small companies now have 401 (k) plans instead of open ended pensions and most have significantly limited healthcare, sick and vacation accrual policies.  GASB 45 once implemented will provide a wake up call regarding the extent of the financial burdens imposed on future taxpayers by the long term, deferred benefits packages agreed to today with seemingly little present consequence financially or politically.  A long term financial impact statement for each such agreement that includes such benefits along with an assessment of the pension benefits and OPEB liabilities will likely follow from an annual reporting requirement of such liabilities.

Without such financial awareness, many municipalities will face insolvency or a tax revolt and could  force the consolidation of a large portion of New Jersey municipalities.  It's also likely that the biggest problem will be the large municipalities not the small ones, so the large municipalities are not likely to be the anchor around such consolidation.

OPEB Dilemma

So what is OPEB and why all the fuss?  While it's a bit basic, as noted above, OPEB means "other post employment benefits".  It's to distinguish such benefit from the more traditional post employment pensions.  The cost for those "other" benefits (healthcare, accrued sick time and accrued vacation time) has sky rocketed largely because it became easy to commit to such obligations without a real long term fiscal analysis since the cost for them would arise many years later.  Since most municipalities provide for these costs annually on a "pay-as-you-go" basis, little regard has been paid to actually understanding and calculating such obligations and their effects on future budgets.  Unlike debt service on bonds issued by such municipalities, which is usually presented with a spreadsheet that shows clearly the long term budget and tax effect of such debt, no similar presentation or projection is generally prepared for either pensions or OPEB.  Also unlike debt service which is an actual amount capable of being calculated specifically for each year in the future, pensions and OPEB obligations are at best projections since the timing of retirements, the number of new employees hired, the uncertainty of future costs of healthcare and the uncertainty of the unused sick and vacation accrued amounts are at best only estimates. Now that this liability has become a primary focus of the financial community and credit rating agencies, the financial impact of such obligations will now likely become a critical, even fundamental, basis for that financial community and the credit rating agencies to judge the credit of New Jersey municipalities.

As an example, a recent news article pointed out that the obligations of the State of New Jersey for post-retirement health insurance promised to the thousands of working and retired teachers and public employees in the State system is $78 billion and not the $20 billion it has previously assumed. While some of this disparity may be based on different actuarial calculations and assumptions, it's a staggering amount. Another example of the impact of these liabilities on local governments is noted in the March 7, 2007 Bond Buyer which reported that the SEC recently  "sanctioned" San Diego after concluding that the City failed to disclose to the rating agencies that it has soaring unfunded pension and retiree healthcare liabilities which placed it in serious financial straits.

Funding Considerations and Options

The most interesting aspect of the GASB 45 issue involves whether any action should be taken by local governments to develop a financial plan beyond the annual pay-as-you-go budgeting to fund the identified liabilities for that year in a way that clearly identifies the projected long term obligated amounts and sets forth a real financial model that the municipality can plan for and determine its financial ability and tax and revenue base to pay it.

In New Jersey, this would likely require legislation to effectively provide a viable financial and/or debt and corresponding investment plan to cover these liabilities.  There is an ability under N.J.S.A.40A:10-1 et seq., specifically N.J.S.A. 40A:10-6 and 23, to establish insurance reserves for health benefits for employees and retired employees.  Such reserve funds could be established through the issuance of bonds, but such bonds would likely be taxable under the applicable provisions of the Internal Revenue Code.  As a result, the financial feasibility of funding such future long term and/or currently incurred healthcare liabilities may be no better than the unfunded reported liabilities.  Once reported, whether funded or unfunded, the liability will be what it is whether constituting debt, if funded, or simply a long term identified and reported liability that impacts on the municipality's credit.  There is no similar authorization under current New Jersey statutes to provide a funding option for accrued sick and vacation time.  That may or may not be a substantial liability, depending on steps that an individual municipality may have implemented to cap this expense, but to the extent it is, further legislation would be necessary.

In either case, on a practical basis, some legislative changes will likely be required to provide alternative investment arrangements to deal with any funds derived to provide for such OPEB liabilities.  It was recently reported that the California Public Employees' Retirement System is creating a "trust fund" to help insure that government employers can pay the future costs of their retirees' healthcare benefits.  While the rationale for the "trust" was not explained, it appears likely that the desire is to enable the money in the "trust fund" to be invested in a more diverse way than "public" funds could otherwise be invested.  It is also not clear whether simply creating a "trust" for this purpose makes the moneys contributed by municipalities to the trust would be other than public funds once in the trust.  Variable rate taxable debt with corresponding structured variable or fixed rate investment arrangements through such trusts are being proposed as a way to create viable arbitrage that effectively winds up over time essentially paying for the liability without any substantial depletion of the trust itself.  This obviously requires sophisticated arrangements on both ends and some understanding and management of the risks and rewards involved.  It would also, at least in New Jersey, likely require legislation to insure that such trust funds, if established, are not treated as "public" and thus limited by the provisions of the Local Fiscal Affairs Law, N.J.S.A. 40A:5-15-.1 as to authorized investments of public funds.  A known benefit of the creation of such a trust to fund the OPEB liability is that the discount rate utilized to calculate the liability is increased, thereby decreasing the actual liability.

Since the reporting requirement of GASB 45 is largely related to disclosures associated with outstanding debt of municipalities and other governments, an outstanding issue being discussed and considered by the New Jersey Division of Local Government Services involves the implications of GASB 45 on those municipalities which have no outstanding debt.  There are state mandate and payment responsibility issues that need to be analyzed. 


There is much to consider and certainly no issue has as much impact on the financial viability and credit of New Jersey municipalities as the OPEB liabilities that will be discovered when GASB 45 becomes effective.  What appears on the surface to be a relatively benign pronouncement by the Governmental Accounting Standards Board as to New Jersey will instead have a substantial impact on the budgetary and financial actions of New Jersey's 566 municipalities.

*Reprinted with the permission of the New Jersey Government Finance Officers Association.




*Reprinted with the permission of the New Jersey Government Finance Officers Association.




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