NOTE: This UE Steward has not been updated in over a decade, and so it may contain out-of-date information.
The Union Committee for the Town employees of Causewell were prepared for a tough negotiations. They knew that the budget was tight because the town was not getting an increase in aid from the state.
"Let's get right to the point," said Ralph Skolar, the Town Manager. "This year we have a 15 million dollar deficit, over and above the money we owe for the new school. I don't see any pay raises for the foreseeable future. On top of that we have to make some serious changes to your retiree health benefits."
"Wait a minute," said Skylar Higgenbottom, the Chief Steward. "I've never heard of this 15 million dollar deficit. Where did this come from?" It's a new government law, a GASB regulation," said Skolar. "We have to get our OPEB's under control and real quick."
In unison the negotiating committee said, "What the heck are you talking about?"
At the Union caucus Sklyer said, "You know this sounds like something my wife was talking about. Over at Rockbottom Widgets the company claimed they had to eliminate the retirees' health insurance because of something called FASB."
Who and What are FASB and GASB?
FASB, the Financial Accounting Standards Board and GASB, Governmental Accounting Standards Board are part of an organization called the "Financial Accounting Foundation," a non-profit organization. The trustees of the Financial Accounting Foundation pick the governing boards for both FASB and GASB.
Here is the mission of FASB according to their web site:
The Financial Accounting Standards Board is the private-sector organization empowered to establish financial accounting and reporting standards. Although this function legally resides with the Securities and Exchange Commission for public companies, the SEC has traditionally provided the private sector with the opportunity for self-regulation. Since 1973, the Commission has relied on the FASB for standard setting.
GASB is the public sector counterpart and it sets financial accounting and reporting standards for all forms of public governments.
The 11 Trustees of the Financial Accounting Foundation represent some of the biggest corporations in America. Represented on the board are:
- Frank C. Minter, Retired Vice President and Chief Financial Officer, AT&T International;
- Philip D. Ameen, Vice President and Comptroller, General Electric Company:
- Paul C. Wirth, Global Controller, Morgan Stanley:
- Edward W. Kelley, Jr., Former Governor Federal Reserve System.
The rest of the Board is made up of a few academics and other representatives of financial services corporations.
So, essentially we have representatives of corporate America setting the standards by which corporations and the public sector do their bookkeeping.
How do FASB and GASB regulations affect our pensions and retiree benefits?
Both FASB and GASB issue what they call "statements" which essentially are new rules that all accountants have to follow.
In December 1990 FASB issued Statement #106 which replaced and expanded upon a previous rule called FASB 81. It stated that retiree health benefits had to be considered as deferred benefits that were earned by employees while they were working. This means that employees are earning and paying for the health insurance benefits that they will receive after they retire. Because of this, employers have to say how much it will cost them each year that an employee works to pay for that employee's future benefit.
Most retiree health and life insurance benefits in both the private and public sector are paid for by employers as the bills come due. They don't set aside money to pay for future costs, like they must do for pension plans. It is a pay as you go system.
This FASB rule doesn't require that employers actually set aside money in a bank account to pay for these retiree health benefits, but if they don't, they have to count this as a yearly liability. This provides employers with the excuse to end retirees' health benefits, saying they don't want to overburden their companies with debt.
In the 1980s after FASB 81 was issued, many companies, especially non-union companies, ended the health insurance and life insurance for retirees. Millions of retirees lost benefits they were counting on.
In June of 2004 the Governmental Accounting Standards Board issued Statement 45, which essentially applied the same standards as FASB 106 to the Public Sector.
Like the private sector, retiree health insurance is handled on a pay as you go basis. Towns or cities appropriate each year enough money to pay for the health insurance they provide to retirees. The assumption is that the town or city will always be there, so there is no need to set aside the money. GASB 45 is changing this.
GASB 45 also relies heavily on an acronym, "OPEB" which we will hear a lot about in the future. What is an OPEB? It is the new jargon for "other post employment benefits." In plain language this refers to retirement benefits other than the pension. Mainly it is health insurance and life insurance but it may cover other things.
What has been the immediate effect of GASB 45?
Towns and states now have to report huge liabilities for future payments towards retirees' health insurance. The fear is that additional liabilities will affect the bond ratings for cities and towns, making them borrow money at higher interest rates. In a time when the Federal government is cutting aid to cities and towns so they can spend billions on tax breaks to the rich, two ongoing wars and homeland security, this creates another crisis for municipalities.
GASB 45 also puts in language that they expect cities and towns to begin to set aside money for these OPEBs.
Already some cities and towns are talking about reducing or eliminating health insurance for retirees as a way to reduce or eliminate these new liabilities. Even where unions are able to stop this, we will see millions of dollars that could be usefully spent diverted into banks, into new trust funds that will be set up to pay for OPEBs.
What Else is FASB Planning To Do?
As if all this was not enough, FASB is currently discussing more rules concerning defined benefit pension plans.
Currently when companies report how much money they actually have in their pension plan, that is the value of the stocks and bonds they own, they present an average, spread out over 5 years. This smoothes out the ups and downs of the stock market. This five-year average is supposed to present a truer picture of the value of the pension plan. The amounts of money companies have to put into their plans each year is determined by the value of the plan.
FASB wants to make companies present yearly figures on what their pension plan is worth at that exact moment. This may create a situation where the value of the plan changes dramatically, thus yearly changing how much money a company will have to put into their plan.
Currently assets and liabilities of a pension plan are reported on in a footnote in a company's annual report. FASB wants to put pension plans into the regular calculations. Overfunding of a plan will be reported as an asset and underfunding as a liability. Most companies will show liabilities, thus lowering their annual earnings and hurting the banks and rich people who own most of their stock. Pressure will build to eliminate the liability by eliminating the retirement plans.
An article from an Associated Press business reporter makes clear how this will affect some companies.
The most widely cited example is General Motors Corp., which has been staggered by both slowing sales and mammoth obligations to workers and retirees. If General Motors was forced to accurately show its true benefit costs on its balance sheet, the company's book value — the difference between its assets and liabilities — would have been cut from $27.7 billion in 2004 to a negative $18.5 billion, according to Credit Suisse estimates.
Points to Remember
All companies and all public sector governments are faced with these FASB and GASB rules, so no one has an advantage over anyone else.
Setting aside money, though strongly suggested by GASB, is not mandatory.
Many employers are proposing to eliminate these benefits for future retirees, not current employees. This is usually just the first step, once it's gone for some, the rest will surely follow.
Political action is needed. These financial accounting rules are supposed to promote honest bookkeeping, to eliminate Enron-type scandals. Instead they are being used to promote and enforce a corporate political agenda, the ending of retiree health benefits.