Few Public Sector Employers Understand Financial Implications of GASB Standards, Says Aon Consulting

CHICAGO, Aug. 15 /PRNewswire-FirstCall/ -- With city, state and county governments facing hundreds of billions of dollars in non-pension obligations to retirees, the majority of public sector employers have started to address new accounting standards to manage these liabilities. But few employers understand all the changes necessary to reduce their expense under these new rules, according to a survey by Aon Consulting, the human capital consulting firm of Aon Corporation .

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Underscoring the magnitude of these liabilities, an Aon Consulting recent analysis found the retiree healthcare obligations for the state of New Jersey could total $58 billion. Under the Government Accounting Standards Board new rules(1), public sector employers must determine how they will fund these other post employment benefits by an established deadline based on employer revenue (see chart on page 2).

The Aon Consulting survey of 118 public sector employers who offer non-pension retiree medical benefits focuses on how these organizations are preparing for and addressing GASB compliance throughout Aon's recommended three-step process:

1. Conducting a baseline actuarial valuation 2. Determining funding options 3. Making plan design changes

"Gathering the data and understanding the financial impact of the new GASB accounting standard will require significant time and resources," said Phil Peterson, director of the survey and Aon Consulting's Public Sector national practice leader. "In many cases, the weight of the financial expense required under the new GASB standard will affect the public entity's budget and/or require retiree benefit changes. Both often require legislative and regulatory changes, renegotiating rates with insurance carriers and possibly renegotiating union contracts."

Baseline actuarial valuation

The survey found that 85 percent of employers have completed or are in the process of completing the baseline actuarial valuation, and 67 percent are in the process of creating or have implemented a formal plan for the implementation and management of OPEB obligations. Thirty-three percent have not begun the process, but 84 percent of those who have not, say they intend to do so.

(1) The GASB rules require public sector employers to annually expense on their financial statements OPEBs earned today that will be paid later. The previous method used a pay-as-you-go approach.

"Creating a formal plan is crucial to stay on track for two reasons. First, employers can evaluate and explore funding and plan design options by the GASB compliance deadline. Secondly, employers can communicate with and educate employees and other constituencies on the changes," Peterson said.

The need to comply with GASB standards varies depending on the employer's revenue, as reflected in the chart below:

GASB Standard Applies for If Revenue Is: Fiscal Years Starting After: Dec. 15, 2006 More than $100 million Dec. 15, 2007 Between $10 million and $100 million Dec. 15, 2008 Less than $10 million Funding options

The new GASB requirements have motivated 63 percent of employers to consider changes to their funding strategy, the survey found. The funding vehicles of choice include a Voluntary Employee Benefits Association, a Health Reimbursement Account and/or a Section 115 Trust.

"While there is no legal requirement for employers to set aside money in an investment vehicle, there are certain financial incentives to doing so," Peterson said. "Funding these obligations in advance, rather than applying a pay-as-you-go approach, can reduce the OPEB expense as much as 60 percent.

"Funding can mean a generally higher discount rate for the employer, and as a result, can reduce the OPEB liability. But according to the GASB survey results, nearly 80 percent of employers do not know what their discount rate is or should be," Peterson added. "Knowing the range of discount rates an employer can use is valuable information for understanding the extent of their exposure under the new GASB requirements."

Additionally, 53 percent of respondents indicated they were not considering financing methods to procure the money needed to fund their OPEB obligations. The remaining 46 percent of employers that are considering financing methods prefer the following three choices:

-- General purpose bonds -- OPEB obligation bonds -- Revenue increases through other means such as tax increases, change in assessment structure, use of endowment funds, and/or use of a special capital campaign.

"It's interesting that 103 -- or 87 percent -- of employers that offer retiree medical benefits chose not to respond to this particular survey question, implying they are unclear on how they will finance their OPEB obligations," Peterson said.

Plan design changes

As a result of the new GASB standards, 66 percent of employers are not considering making any changes to their plan design to reduce OPEB costs.

"Plan design changes can result in significant cost reductions in OPEB liabilities. For example, plan design changes that reduce the rate of future medical inflation by just 1 percent can reduce OPEB liabilities by more than 10 percent," Peterson said.

The remaining one-third of respondents who are considering plan changes prefer the following plan design modifications:

-- Revise eligibility requirements (50 percent) -- Increase retiree cost sharing before age 65 (40 percent) -- Eliminate coverage for future hires (38 percent) -- Change to a defined contribution plan (31 percent) Ends For more information, contact: Sara Carlson 312.381.5045 sara_carlson@aon.com or Rahsaan Johnson 312.381.2684 Rahsaan_johnson@aon.com About Aon

Aon Corporation (http://www.aon.com/) is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 43,000 employees working in Aon's 500 offices in more than 120 countries. Backed by broad resources, industry knowledge and technical expertise, Aon professionals help a wide range of clients develop effective risk management and workforce productivity solutions.

Aon Consulting Worldwide (http://www.aon.com/hcc) is among the top global human capital consulting firms, with 2006 revenues of $1.282 billion and 6,500 professionals in 117 offices worldwide. Aon Consulting is reshaping the workplace of the future through benefits, talent management and rewards strategies and solutions. In August 2006, Aon Consulting was named the best employee benefit consulting firm by the readers of Business Insurance magazine.

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