Publicly Managed Health Care In Action

Friday, August 19, 2011

According to CNNMoney the Great Recession officially started in December 2007. And, depending on who you talk to, the recession is not over for many Americans.

One thing is clear, the state of local government, whether city, county or state, and their financial condition are poor; as a matter of fact; many public employee health, welfare, and retirement funds are in dire shape. For example, the state of Georgia and its public employee healthcare plan are facing an $800 million shortfall in 2012 and 2013. The state’s elected officials appropriated funds from the plan to pay for other state expenses. Under the Employee Retirement Income Security Act of 1974 (ERISA) private employers would face potential and significant fines, jail time and possible disqualification of the plan’s tax favored status for such actions.

And Georgia is not alone:

Lisa Colangelo a Staff Writer for the New York Daily News reported on Tuesday, June 21, 2011 that the city of New York was considered using “health care funds to lower job cuts”.  In a June 21, 2011 report by Rick Haglund of the Center for Michigan reports that due to a lack of proper funding over the years, “the state’s unfunded retiree health-care liability stands at $14.7 billion, a figure 77 percent larger than this year’s state general fund budget of $8.3 billion.”

The Pew Center on the States, a division of The Pew Charitable Trusts, reported in February 2010, that the 50 state governments collectively had an underfunded retiree health care and other benefits by some $555 billion as of fiscal year 2008. Approximately 22 of the 50 states have not funded retiree health care at all and one state, Nebraska, does not even estimate their liabilities.

Statement of Financial Accounting Standards No. 106 requires most private businesses to estimate, track, and publish their retiree health care liabilities. FASB No. 106 became applicable for most private companies in 1992. It forced many organizations to calculate (some for the first time) what these liabilities were and to publish them so that investors and others could evaluate the financial impact on the company’s health. Failure to do so can result in a “qualified” annual accounting statement being issued by the company’s auditor’s leading to potential downgrades in the organization’s credit rating.

However, FASB 106 did not apply to governmental organizations, but GASB No. 45, issued by the Governmental Accounting Standards Board (GASB) does apply. Similar to FASB 106, GASB 45 was implemented over a couple of years starting in 2006 and completing in 2008.

What this demonstrates is a failure by many local governments to fully understand the business cycle and its potential risks and impacts on the ability of local governments to provide for and fund employee benefit plans. During times of positive tax revenue inflows, governments made promises without considering the potential risks associated with times of negative revenue inflows. Consequently, governments were caught short when unemployment rose, property and other tax revenues fell, and there were no surplus funds available to cover their liabilities.

Furthermore, it demonstrates the willingness of many public officials to ignore the most fundamental principles of financial management and disregard the potential risks of their actions without any regard to the future consequences of those actions.