HILO —It’s called the county’s “annual required contribution” toward future health care and other benefits for retirees, but experts seem to agree annual payments technically aren’t required. HILO —It’s called the county’s “annual required contribution” toward future health care and
HILO —It’s called the county’s “annual required contribution” toward future health care and other benefits for retirees, but experts seem to agree annual payments technically aren’t required.
HILO —It’s called the county’s “annual required contribution” toward future health care and other benefits for retirees, but experts seem to agree annual payments technically aren’t required.
Those same experts also agree, however, ignoring the payment will only result in it mushrooming as time goes on, making future payments even more difficult and possibly damaging a municipality’s credit rating.
GASB 45 obligations came to the forefront of discussions on the county budget last month when Mayor Billy Kenoi announced he planned to postpone the payments for the second consecutive year in order to balance the county’s $365.3 million budget. Hawaii County last year deferred a $20.3 million annual payment; it’s not known what this year’s obligation will be, although it’s likely to be higher.
The County Council has scheduled a public hearing on the budget for 5 p.m. Tuesday at the West Hawaii Civic Center.
County officials on each side of the debate point to the experts to bolster their own perspective, most notably Kenoi, who thinks a second consecutive deferral is justified, and County Council Chairman Dominic Yagong, who thinks the county should meet its obligation every year.
The payments are known as GASB 45 for the form number on the reporting form of the Governmental Accounting Standards Board, the independent, not-for-profit organization formed in 1984 that establishes financial accounting and reporting standards for state and local governments.
Municipal governments with $100 million or more in annual revenue, such as Hawaii County, were required starting in 2006 to report these estimated payments as a liability on their balance sheets. Any contributions against the liability must be put into a separate irrevocable trust account, which can pay interest.
“It’s kind of a misnomer. They’re not required to actually build up the trust,” notes Chris Grabrian, a consulting actuary for Minneapolis-based Van Iwaarden Associates, one of several experts contacted by West Hawaii Today. “But if you’re not going to contribute, then you’re going to start growing a liability out there.”
Grabrian estimates perhaps 20 percent to 30 percent of governments are currently contributing into GASB 45 accounts, an estimate confirmed by others in the field.
Kenoi defends his decision to postpone payments. Hawaii County has already deposited $61.6 million into its account over four years, according to Deputy Finance Director Deanna Sako. She said only Hawaii County and Kauai show GASB 45 payments have been made on their comprehensive annual financial reports. The City and County of Honolulu, Maui and the state don’t show any payments.
“It’s a liability that we have to be mindful of, but we are in a good position today, and that’s why we can defer our GASB 45 without affecting our credit rating,” Kenoi said Friday. “The county of Hawaii is in good fiscal shape, and we’re proud of that.”
But not paying on the account makes future payments larger because the discounted rate is based upon when the future liability is funded, explained one expert. For example, current payments on a future liability could be discounted as much as 8 percent, while that discount could go down to 4 percent when the payment is made closer to the projected liability, a lot of money when it’s applied against hundreds of millions of dollars. It’s much cheaper in the long run to put the money aside as soon as possible, he said.
Credit ratings can also take a hit.
One of the major bond rating agencies, Fitch Ratings, acknowledged a government’s credit rating could suffer if it defers payments to its GASB 45 account. The county’s bond rating determines how much interest the government has to pay to borrow money.
“Reality dictates that an entity may opt to defer (GASB 45) funding in times of budget stress. However, indefinite deferrals are damaging to credit quality,” said Fitch in its June 2005 special report, “The Not So Golden Years — Credit Implications of GASB 45.”
“An absence of action taken to fund (GASB 45) liabilities or otherwise manage them will be viewed as a negative rating factor,” the advisory continues. “Long-term deferral of such obligations is a sign of fiscal stress that will be reflected in ratings.”
Reporting the liability seems to be the key. Even in tight budget times, governments need to be aware of their liability and incorporate it into their future plans, said Benjamin Y. Clark, assistant professor for Public Budgeting, Finance and Administration at Cleveland State University’s Maxine Goodman Levin College of Urban Affairs.
“Primarily what GASB 45 requires is that municipalities have an actuarial accounting of how much they will owe, recognize the cost of the benefits when they occur, and provide information that will allow those inside and outside of the government to understand the potential demands on future cash flows,” said Clark. “So while these governments don’t necessarily have to put money away because of GASB 45, they do have to recognize the size of the hole they are in. Sure they can wait until after the recovery is in full effect, but they will likely always have pressing demands on resources — so when do they start?”
That’s Yagong’s concern.
“Mayor Kenoi can spin it whichever way he wants. But the bottom line is the payment has to be made,” Yagong said. “Is that the legacy he wants to leave behind?”
Governments can also take steps to reduce their liability, Joanne Fontana, a consulting actuary in the Hartford, Conn., office of Milliman, a global consultancy, wrote in a January 2011 article for “Accounting Today.” She did not return a telephone call for further comment Friday.
“Changes in benefit levels, adjustments in eligibility criteria, putting retirees into a benefit plan with separate self-sufficient premiums, or partial funding arrangements can not only make the GASB 45 liability lower, but can help ensure that promises to employees of future (GASB 45) can be made good on,” Fontana wrote. “While many small government entities are not able to set aside enough money to fully fund the (annual required contribution) each year, steps can be taken to ensure the viability of the retiree health program.”
Yagong, who’s challenging Kenoi for mayor this year, compares deferring GASB 45 payments to not putting money aside for a child’s education.
“Sure, you don’t legally have to do it,” Yagong said. “But eventually, someone is required to pay for it. In essence, you’re stealing from the future.”
