Paul Musgrave has a post on a new accounting rule that could have a significant impact on state and local governments.
Under a new accounting rule, governments soon must start recognizing their long-term obligations to pay for retirees’ health benefits — and, for the first time, publicly disclose what it would cost each year to fund that liability.
PERF and TRF at least have long been underfunded. I don’t know how much of the shortfall is attributable to health benefits and how much is attributable to other things. Mr. Musgrave points to liability for lifetime health benefits for ex-legislators, a controversial plan (also see here.)
As for the consequences of the accounting change:
[t]he new rule doesn’t require governments to set aside any money to fund the long-term obligations — only to report what those obligations are.
But the change will shed new light on their long-term liabilities. And credit-ratings companies have told governments they expect the retiree health-care liability to be dealt with in some fashion. “We’re looking to see that governments don’t ignore it and look to control the growth of the obligation,” said Richard Raphael, an analyst with Fitch Ratings.
How the ratings agencies respond will have big consequences for local and state governments, which borrow heavily from the public markets and need to maintain good ratings to keep borrowing rates low.
The accounting change will affect most big governments starting in fiscal 2008, which generally begins on July 1, 2007. It stems from a rule passed last year by the Government Accounting Standards Board, the independent advisory board that sets accounting standards for state and local governments.
I wonder if this might have a side effect of making government keener to do what it can to control the spiralling costs of healthcare in the country. I don’t know what, exactly, can be done, but this will hit them where they live.
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