Accounting for Retiree Benefits

It is probable that states and cities will soon be recording the full cost of health care promised to public employees once they retire.  New Government Accounting Standards Board principles urge officials to record all health care liabilities on their balance sheets instead of pushing a portion of the debt to foot notes.  Most states currently treat these costs as an operating expense.

According to a new report from nonprofit Pew Charitable Trusts, adjustments to health care liability accounting are expected to show that U.S. states will be reporting a shortfall of at least $645 billion, on top of the $1.1 trillion that states need to pay for promised pension benefits.

The magnitude of promised retiree benefits for state and city employees is not new news.  But the more transparent accounting requirements for promised health care benefits is new.

Investors should be aware of a potential impact on municipal bond ratings and prices.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®