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					April 30, 2003


Mr. David Bean
Director of Research
Project Numbers 22-2E & 22-2P
Governmental Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116

Dear Mr. Bean:

The undersigned public employee associations, unions, retiree organizations, and public
retirement systems represent over 16 million active and retired public employees. Most are
eligible for retiree health benefits and other benefits in retirement (i.e., life insurance,
disability, etc.) from state and local government employers or public pension plans. We are
writing to express our deep concern that the proposed accounting changes will unduly
jeopardize essential benefits for millions of governmental employees and retirees. Our
comments below center on basic retiree health care benefits, as they are the most expensive
and most important benefit covered by the OPEB Exposure Draft.

Perhaps GASB believes that this technical accounting issue, if equally applied to all
jurisdictions, will leave all employers in relatively the same financial position as they were
before the accounting change. However, nothing could be further from the truth. Both
public employers and employees will be adversely affected by the proposed standards.

Public employers that currently provide retiree health care programs as part of their benefit
package will experience a jump in their annual operating expenses for a benefit that has not
typically been pre-funded. Some experts predict that localities would have to add 10% to
their annual payroll to meet the OPEB standard. This annual cost and the reporting of
future year liabilities in their financial statements could adversely affect their bond rating,
and will increase the cost of government. Unlike the private sector whose employers can
raise prices for their products and/or issue new stocks to pay for additional benefits, public
employers rely on tax revenues and bond issues to provide needed services. Given the
current budget crisis, states and local governments are limited in their revenue generating
David Bean, Director of Research
April 30, 2003
Page 2

Moreover, governmental employers operate in a balanced budget environment. Doubling
up the cost of retiree medical benefits by requiring these governmental employers to
recognize both the cost of current retirees and the cost of future retirees will artificially
trigger state law constraints on spending. This premature recognition of retiree liabilities
will force many responsible jurisdictions to cut or completely discontinue retiree medical

Hundreds of thousands of educators, firefighters, police officers, scientists and more
entered into a covenant with the public many years ago: In exchange for their dedicated
and long-term public service, their income and health care needs would be met in
retirement. These individuals met their obligation to state and local governments, and rely
on their employers to keep the promises made decades ago. If the proposed change in
accounting rules compel governors, legislatures, mayors and city councils to void the
promises made by their predecessors, the cost of retiree health care will be shifted to those
who can least afford it. This places seventy, eighty and ninety year old firefighters,
educators and others in the untenable position of having to pay the entire cost of retiree
health care. As most retirees are unable to return to the workforce, they will bear the entire
cost of health care or drop coverage and eventually rely upon Medicare and/or Medicaid
for this coverage.

We believe that the proposed OPEB standards cannot be issued in a vacuum. They must be
written within the context of past promises made to current retirees and those near
retirement, the current economic conditions faced by governmental units, the requirement
for accuracy in accounting standards, and the reality that surrounds the availability of
retiree health care benefits for public employees. The failure of the rules to recognize any
of these factors will have unintended consequences.

To mitigate the harmful effects of the proposed OPEB standards, we recommend the
following changes for serious review and consideration.

1. Postpone Implementing the Standards Until Their Impact Has Been Further

Implementation of the proposed standards will likely result in a sudden, significant, and
sustained fiscal shock to governmental finances, accompanied by a reduction in health care
benefits for governmental retirees. Although the exact magnitude is unknown, discussions
with knowledgeable benefit professionals suggest that public employers may have to pay
up to an extra 10% of payroll each year to meet the Annual Required Contribution (ARC).
This would be a severe fiscal shock, especially given the current financial situation of
many governments and depressed investment markets. This, in turn, could seriously affect
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April 30, 2003
Page 3

state and local government credit ratings, increase their costs of borrowing, and further
limit the provision and quality of governmental services. Moreover, the resulting likely
reductions in retiree health care benefits could potentially result in millions of retired
governmental workers paying thousands of dollars more per year at a time when their
income is limited.

In addition to the jump in payroll costs, we estimate that the cost of actuarial, legal and
accounting fees for OPEB fulfillment compliance could approach $10,000 to $20,000 per
employer or retirement system. This large sum could even exceed the actual cost of the
retiree health care benefit for small jurisdictions with only a small number of employees
receiving benefits. Many public jurisdictions could not afford to meet the standard, even if
it were applied once every three years. Although staff has proposed a simplified method
for smaller plans, that method is still too complicated to be performed by in-house
personnel in small jurisdictions and therefore will require outside professionals.

Although the Exposure Drafts cite anecdotal evidence to support certain conclusions, it is
our understanding that a detailed study into the effects of these changes has not been
conducted. Given the serious effects the proposed standards could have, not conducting
such a study is imprudent at best. Furthermore, the extremely short comment period
provided for the Exposure Drafts effectively precludes individual jurisdictions from
conducting their own studies. We therefore strongly recommend that GASB conduct a
study of the potential impact of the proposed standards on the finances of state and local
governments, as well as on retiree health care benefits. Such a study should evaluate the
potentially harmful impact of these standards as well as ways to mitigate such effects.
GASB should not act before it has thoroughly analyzed how its accounting change will
impact these jurisdictions.

2. Revise the Standards to Better Reflect the Nature of Retiree Health Care Benefits

GASB’s proposed standards rest on the supposition that retiree health care benefits and
defined pension benefits are sufficiently similar so that the same standards should apply to
both for measuring benefit costs and related liabilities. However, retiree health care
benefits are fundamentally different from pension benefits. Whereas participants in
pension plans have a legally protected right to their accrued benefit once they vest, no such
protection exists for participants in most retiree health care plans.

If the OPEB is terminated, the liability is eliminated. Pensions can be terminated, but the
benefits that were earned for past service must be paid. Clearly, retiree health care and
pensions are not comparable liabilities. Retiree health care can be taken away at any time
David Bean, Director of Research
April 30, 2003
Page 4

like any gratuity, while the creation of a pension plan typically creates a recognized long-
term liability.

In many cases, employers have reduced or eliminated retiree health care benefits in
response to fiscal pressures. According to the U.S. General Accounting Office, while an
estimated 60 to 70 percent of large employers offered retiree health care coverage during
the 1980s, fewer than 40 percent did so by 1998. (GAO/HEHS-98-133) A later report by
the GAO suggests that at least part of this decline resulted from adoption of FAS 106 in
1993. (GAO-010374) If a similar decline occurs in the public sector as a result of the
currently proposed OPEB standards, which we believe will happen, millions of
governmental employees and retirees will be affected.

Retiree heath care benefits are often subject to change at the discretion of the employer.
Actuarially valuing them in the same way as pension benefits will likely overstate their
costs and related liabilities. To better reflect the discretionary nature of these benefits, we
recommend that GASB alter the standards to allow expected future plan changes and
expected future limits on plan sponsor costs to be included in the terms of the OPEB plan
as understood by the plan sponsor and plan members.

We recognize that GASB has considered and rejected this approach on the grounds that it
does not provide the most objective means for projecting the future costs of promised
benefits. However, many elements of actuarial valuations rely on professional judgments
regarding future events. Moreover, the proposed standards currently do allow professional
judgments regarding other elements of the substantive plan, including future patterns of
cost sharing. Furthermore, inclusion of expected future plan changes and expected limits
on employer costs would better reflect the discretionary nature of retiree health care

3. Grandfather Current Retirees and Near Retirees from the New Standard

Rather than let the proposed OPEB accounting rule changes be used to punish current and
soon-to-be-retirees, GASB should provide a longer transition period to a new method that
would recognize current economic conditions and the time needed to pre-fund a
meaningful benefit for future retirees.

Fairness dictates that 20 year and over career workers as well as current retirees should be
permitted to continue under the current pay as you go accounting and financing rules. This
rule could be called the grandfather rule. We propose that the actuarial cost for retiree
health care for any active worker with 20 or more years of service, or within five years of
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April 30, 2003
Page 5

eligibility for early retirement benefits and all retirees at the time of implementation be
waived from the new OPEB rule.

Employers and their unions can continue to negotiate over the combination of increased
cost sharing, employer and employee contributions and plan design changes that would
balance plan costs and revenues for the grandfathered group. Health care expenditures for
this group would continue to be reported on a pay-as-you go basis. The OPEB standards
would apply only to active employees with sufficient work years left in their careers to
earn a meaningful benefit.

4. Phase-In the Standards by Extending the Initial Amortization Period to 40 Years
   for the First 10 Years, Falling to 30 Years Thereafter

Given the potentially severe fiscal shock that the standards could have on governments and
retirees, it would be helpful to include provisions that phase in the standards and mitigate
that shock as much as possible. Toward this goal, we recommend allowing a 40-year
amortization period for the first 10 years after implementation, falling to 30 years
thereafter. This is the same provision used to phase in the pension standards set out in
GASB Statements No. 25 and 27.

We recognize that the Board considered and rejected this provision on the grounds that it
was only offered to pension plans because of special circumstances. Prior to the pension
standard’s implementation, Accounting Principles Board Opinion No. 8 permitted
amortization periods for pension plans up to 40 years. The temporary extension of the 40-
year amortization period was provided to avoid sudden and large changes in contribution

However, OPEB plans face very similar circumstances. Under current governmental
accounting standards, employers are not required to measure the long-term cost of OPEB
benefits or amortize any unfunded liabilities related to the obligations. Under the proposed
standards, governmental employers will, for the first time, be required to measure an
unfunded actuarial liability and amortize that liability over a limited period of time.
Because many of these plans are entirely unfunded, amortization of the unfunded liability
will result in sudden and large changes in contribution rates. Consequently, it would not be
inconsistent to allow an initial 40-year amortization period for OPEB plans.
David Bean, Director of Research
April 30, 2003
Page 6

5. Phase-In the Standards by Allowing Employers in the Process of Establishing
   Trusts to Use Investment Return Assumptions Reflecting a Diversified Mix of

The proposed standards provide that the investment return assumption should be the
expected long-term investment yield on plan assets, given the nature and mix of current
and expected investments. For funded plans, this yield would reflect the long-term yield
for the diversified mix of equity and long-term fixed income securities held by the plan.
For pay-as-you-go plans, the yield would most likely reflect short-term fixed income
securities. The standards further provide that for assets to be considered plan assets, they
must be held in trust.

These provisions offer incentives for funding OPEB plans through established trusts.
However, the process of establishing the trust could take several years. Under the proposed
standards, an employer who is in the process of establishing a trust would apparently be
required to use an investment return assumption reflecting short-term securities, even
though the decision to hold the assets in trust had been made. Under these circumstances,
the actuarially determined costs and obligations would overstate the costs and obligations
represented by the administrative decision.

We therefore recommend that the standards be revised to allow employers who are in the
process of establishing trusts to use the long-term yield on the trust’s expected asset
allocation. This would help to eliminate the fiscal shock of implementation and better
reflect the costs and obligations represented by the administrative decision.


In light of the above discussion, we urge you to reconsider implementing the draft OPEB
accounting standards until you have studied the potentially staggering effects these
changes could have on governmental entities and their active and retired workers.

We also urge you to take steps to mitigate the financial shocks such changes would have
by better reflecting the nature of retiree health care benefits and phasing in the OPEB
David Bean, Director of Research
April 30, 2003
Page 7

We call on you to revise the proposed standards so they better meet their stated goal of
accurate governmental accounting without endangering retiree health care benefits for
millions of public workers.

Respectfully submitted,

American Federation of Government Employees, AFL-CIO
American Federation of State, County & Municipal Employees,
American Federation of Teachers, AFL-CIO
Communications Workers of America
Education Minnesota
Fraternal Order of Police
International Association of Fire Fighters
International Brotherhood of Police Officers, AFL-CIO
Missouri State Employees’ Retirement System
National Association of Government Employees, AFL-CIO
National Association of Police Organizations
National Association of State Retirement Administrators
National Conference on Public Employee Retirement Systems
National Council on Teacher Retirement
National Education Association
New York State United Teachers, AFT/AFL-CIO
Service Employees International Union, AFL-CIO
United Food & Commercial Workers