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The Governmental Accounting Standards Board (GASB) issued Statement 45 in 2004.
Under Statement 45, local and state governments are directed to account for health and other nonpension benefits-also known as "other post-employment benefits" or OPEB-on an accrual basis rather than a pay-as-you-go basis.
Under pay-as-you-go, the cost of employee benefits is not recognized until the benefits are paid, GASB project manager Karl Johnson explained at a public employee forum on Statement 45 sponsored by the AFT, the International Association of Fire Fighters and the National Conference on Public Employee Retirement Systems in February in Washington, D.C.
In contrast, under accrual-basis accounting, the annual cost of employee benefits is recognized as they are earned.
The change to an accrual method produces a much more significant liability on paper-on financial statements.
Johnson said that the objective of Statement 45 is to reflect on paper the financial obligation for post-employment benefits, which are part of an employee's total compensation. The statement does not require full funding, Johnson noted, emphasizing that it simply requires an accounting of the long-term liability.
And it is the accounting of the long-term liability-a dollar figure-that has some lawmakers seeing red.
Thirty-year estimates on state government retiree healthcare cost liabilities reported in the media over the past several months include: $8 billion in Alaska, $70 billion in California, $20 billion in Maryland, $13 billion in Massachusetts, $14 billion in Pennsylvania and $50 billion in Texas.
According to the Associated Press, JPMorgan Chase & Co. projects that the cumulative present value of OPEB liabilities for state and local governments is between $600 billion and $1.3 trillion.
"State and local government attempts to shed retiree medical costs could be bad news for Medicare because many now pay retiree health costs that would otherwise be paid by the federal government," a December USA Today article warns, noting that Medicare has its own unfunded liability, which was $32.3 trillion in 2006.
Implementation of Statement 45 will be staggered. States and large local governments with $100 million or more in annual revenue will be required to show their actuarial liability starting with their 2007-08 financial statements.
Governments with annual revenues of more than $10 million but less than $100 million are to begin reporting after Dec. 15, 2007; and jurisdictions with less than $10 million in annual revenues will begin reporting after Dec. 15, 2008.
