Rule Could Hurt Public Sector

January 23, 2006
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GRAND RAPIDS — A new federal accounting rule that goes into effect next year for state and local governments could make it more expensive for municipalities to borrow money and could force these governmental units to cut health care benefits to employees and retirees or drastically raise their share of that cost.

Starting in 2007, local governments will have to include the present dollar value of future health care costs for their current work force and retired employees on their annual financial reports. Those numbers are expected to be huge for many municipalities, even running into the hundreds of millions of dollars for some large cities and counties, at a time when many city, township, county and state governments are wrestling with yearly budget deficits.

The rule, issued by the General Accounting Standards Board, requires public entities to report whether they’ve set aside funds for this future cost, but it doesn’t require them to actually set the money aside.

Still, making this cost public means that the rating agencies will know the future debt load that a municipality is facing. This could lead to a downgrading of its credit rating and make borrowing more expensive. Then, to raise its credit rating, a municipality might cut its health care benefits to employees and retirees in an effort to lower that future debt.

For Kent County, though, the impact of the rule isn’t expected to be anywhere near that severe.

County Fiscal Services Director Robert White told the Business Journal the county makes a flat monthly payment toward a retiree’s health care benefit that isn’t adjusted for inflation, so the cost remains constant.

Of course, the total dollar value can rise as the number of retirees do. Rising health care costs, however, won’t raise that value, because the payment has been agreed to in contracts the county has with the unions that represent its employees.

The amount a retiree receives from the county is based on the length of an employee’s service to the county. White said retirees with 25 years receive $350 a month. Those with 20 years receive 80 percent of that figure.

And here is the key factor for the county: The payment for all retirees ends when they reach age 65. Many municipalities are locked into contracts that require them to provide benefits to retirees for as long as they live. Some agreements also include lifetime coverage for a retiree’s spouse.

White said the county was in the process of figuring out the present-day value of the cost for future health care benefits — and would have that figure soon.

But White felt the number would likely be $10 million to $15 million, which will be a far cry from the amount that many governmental units in the state will be reporting at the end of this year.

The ratings agencies, such as Moody’s Investment Services and Standard and Poor’s, have given Kent County their top-of-the-line municipal rating for years.    

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