Blog - New Year Has Public Agencies Seeing Red Ink

 Keenan Blog

New Year Has Public Agencies Seeing Red Ink

January 03, 2018

Governmental Accounting Standards Board (GASB) accounting rules for pension and retiree health benefit liabilities are fully in effect for the 2018 fiscal year. Because of this, the bottom lines of many public agencies and school districts throughout California and the nation are falling into negative numbers by many millions of dollars. The GASB standards no longer allow local governments and public educational agencies to simply disclose pension and other postemployment benefit liabilities in management notes in their financial statements. These liabilities must now be recognized as expenses on the balance sheet.

While some agencies have set aside money to pay for them in the future, an enormous amount of these promised benefits are unfunded. Stanford Institute for Economic Policy Research finds California pension liabilities are rapidly approaching $1 trillion. According to the American Legislative Exchange Council, the funding ratio of California public pensions fell more than 2.5% to 32.9% from 2016 to 2017.

Health care liabilities subject to GASB rules are a fraction of the pension costs, but still total well over $80 billion throughout the state. But of more concern, future retiree health care liabilities are less than 1% funded. For individual school districts, cities, counties, transit districts or local jurisdictions, the result will be a tremendous amount of red ink spilling across their financial statements.

The impact within local agencies and districts, as well as for all taxpayers, could be significant. On a per-household basis, these liabilities are estimated to be over $75,000!

Local governments and school districts are looking at ways to reduce their unfunded liabilities. Agencies are realizing that taking action now will ultimately cost less than continuing on the current course as costs for health care and retirement benefits accelerate. The most successful efforts to begin challenging these overwhelming financial hurdles have involved the cooperation and open communication between all the stakeholders, from employee organizations, management, and the public. Joint participation leads to discovering solutions for each public agency that acknowledges the concerns of all parties and arriving at a well-supported outcome.

About Gail Beal
Gail Beal is Senior Vice President, Keenan Financial Services and works with public agencies throughout California, advising on retirement planning programs.