In Wisconsin, school district retiree pensions are administered by the Wisconsin Department of Employee Trust Funds. The assets of the 540,000 member Wisconsin Retirement System are managed by the $81 billion State of Wisconsin Investment Board. The WRS is the 9th largest US public pension fund and the 22nd largest public or private pension fund in the world.
In addition to pensions, Other Post Retirement Benefits [OPEB] have been issued by the state’s various school districts in varying amounts, extent, degrees, and periods of time over many years and remain the responsibility of the districts.
Typically they included retiree health care and dental insurance, were funded on a pay-as-you-go basis, and were not a major line item in school district budgets.
However, hyperinflation in health care and insurance costs made OPEB liabilities a considerable burden on districts and their taxpayers.
• Health care costs rose 6.9 per cent in 2007 – twice the inflation rate.
• Health care represents 16 per cent of the Gross Domestic Product
• Costs have risen four times faster than earnings since 2000
Although most districts have limited their OPEB benefits to current employees contrasted to historic levels, they remain responsible for benefits hired under previous contracts.
The rising costs and proportionate share of burden of OPEBs on district budgets prompted a change in the rules for accounting these liabilities.
In August, 2004, the Governmental Accounting Standards Board [GASB] issued
Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. In an accompanying news release, the board explained that the new rule generally would require state and local government employers, such as school districts, to account for their OPEB benefits in the same manner as they account for their pension liabilities beginning December 15th, 2006.
The pay-as-you-go approach, in which the cost of benefits is not reported until after employees retire, was replaced with a requirement that governments report annual OPEB costs and total unfunded actuarial accrued liabilities on their balance sheets.
As a result, Statement No. 45 effectively highlighted the unfunded actuarial accrued liabilities – the difference between a government’s total obligation for OPEB and any assets it has set aside to pay them – of the state’s 1400 governmental units, including the school districts. Statewide, estimates of such unfunded liabilities range to over $17 billion, with the great majority being the responsibility of school districts.
Finance officials were cautioned that the new unfunded liabilities could lead to lower bond ratings and higher borrowing costs, yet school districts outside the City of Milwaukee had few options for funding the liabilities.
This situation led to action in the legislature, where passage of 2005 Assembly Bill 167 [pdf] by both houses led to the enactment of 2005 Wisconsin Act 99, School District Investments for Post-Employment Benefits [pdf] on January 4th, 2006. According to a Wisconsin Legislative Council Act Memo [pdf], existing statutes restricted “the manner in which a school district may invest its funds and to whom it may delegate its investment authority.” The act “expands the investment authority and delegation of investment authority for all school districts” with respect to funds held in trust for post-employment benefits.” Funds must be invested in accordance with the Wisconsin Uniform Prudent Investor Act s. 881.01 Instead of spending money from operating funds, benefits would be paid from a trust. Also, for the first time, districts could hire fund managers to operate the trusts and to make investment decisions.
With the new law, investment companies saw a new opportunity to market a product to meet the needs of districts that wanted to account for their current and future OPEB costs and to prevent an erosion of their credit ratings.
Stifel Nicolaus & Company introduced a product called the GOAL Program [Government OPEB Asset & Liability Program]. The program was outlined in a nine page document and presentation by David W. Noack, Senior Vice President of Stifel.
In addition to pensions, Other Post Retirement Benefits [OPEB] have been issued by the state’s various school districts in varying amounts, extent, degrees, and periods of time over many years and remain the responsibility of the districts.
Typically they included retiree health care and dental insurance, were funded on a pay-as-you-go basis, and were not a major line item in school district budgets.
However, hyperinflation in health care and insurance costs made OPEB liabilities a considerable burden on districts and their taxpayers.
• Health care costs rose 6.9 per cent in 2007 – twice the inflation rate.
• Health care represents 16 per cent of the Gross Domestic Product
• Costs have risen four times faster than earnings since 2000
Although most districts have limited their OPEB benefits to current employees contrasted to historic levels, they remain responsible for benefits hired under previous contracts.
The rising costs and proportionate share of burden of OPEBs on district budgets prompted a change in the rules for accounting these liabilities.
In August, 2004, the Governmental Accounting Standards Board [GASB] issued
Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. In an accompanying news release, the board explained that the new rule generally would require state and local government employers, such as school districts, to account for their OPEB benefits in the same manner as they account for their pension liabilities beginning December 15th, 2006.
The pay-as-you-go approach, in which the cost of benefits is not reported until after employees retire, was replaced with a requirement that governments report annual OPEB costs and total unfunded actuarial accrued liabilities on their balance sheets.
As a result, Statement No. 45 effectively highlighted the unfunded actuarial accrued liabilities – the difference between a government’s total obligation for OPEB and any assets it has set aside to pay them – of the state’s 1400 governmental units, including the school districts. Statewide, estimates of such unfunded liabilities range to over $17 billion, with the great majority being the responsibility of school districts.
Finance officials were cautioned that the new unfunded liabilities could lead to lower bond ratings and higher borrowing costs, yet school districts outside the City of Milwaukee had few options for funding the liabilities.
This situation led to action in the legislature, where passage of 2005 Assembly Bill 167 [pdf] by both houses led to the enactment of 2005 Wisconsin Act 99, School District Investments for Post-Employment Benefits [pdf] on January 4th, 2006. According to a Wisconsin Legislative Council Act Memo [pdf], existing statutes restricted “the manner in which a school district may invest its funds and to whom it may delegate its investment authority.” The act “expands the investment authority and delegation of investment authority for all school districts” with respect to funds held in trust for post-employment benefits.” Funds must be invested in accordance with the Wisconsin Uniform Prudent Investor Act s. 881.01 Instead of spending money from operating funds, benefits would be paid from a trust. Also, for the first time, districts could hire fund managers to operate the trusts and to make investment decisions.
With the new law, investment companies saw a new opportunity to market a product to meet the needs of districts that wanted to account for their current and future OPEB costs and to prevent an erosion of their credit ratings.
Stifel Nicolaus & Company introduced a product called the GOAL Program [Government OPEB Asset & Liability Program]. The program was outlined in a nine page document and presentation by David W. Noack, Senior Vice President of Stifel.
0 comments:
Post a Comment