Strategies to Help Government Clients Comply with GASB Statement No. 5

As you may already know, Government Accounting Standards Board (GASB) Statement No. 5, Accounting and Reporting by Employers for Post-Employment Benefits Other Than Pensions, is posing some serious challenges for governments across the country. Recent front page and cover story articles in the Wall Street Journal, New York Times, U.S. News & World Report and Time Magazine, as well as network and cable media stories, address the issues. The rule, which will be phased in beginning December 2006, requires that governments recognize the future costs of providing employee retirement benefits other than pension benefits, as a long-term obligation during the employees’ expected service period. Currently, most government financial statements do not reflect this expense until the promised benefit is actually paid. As a result, most governments are funding these benefits on a pay-as-you go basis, and may not be setting aside enough to meet future obligations.

Impact on Government Clients 
Depending on a government's other post employment benefits (OPEB) plan provisions and the number and ages of retired employees and their dependents, the actuarial estimate of the annual OPEB cost (expense) could be 2 to 12 times larger than the current year’s premium cost. Failure to comply with the new standard, as well as a lack of effort to fund the accrued liability, will be viewed by rating agencies as a sign of financial weakness, which may negatively impact credit rating and the cost to borrow money. As a result, we expect affected governments will try to reduce the financial impact of this new rule by reducing the costs of providing OPEB. A similar situation occurred in the private sector when FAS 106 was implemented in the early 1990’s.

CIGNA Strategies to Meet Government Clients’ Needs
We are well positioned to help our government clients reduce the cost of providing health care benefits through:

• Movement towards defined-contribution based plans. Our full suite of CIGNA Choice Fund product options represents solutions that can help government entities move toward defined-contribution plans.
• Increased cost-sharing provisions that require employees to shoulder more of future costs. Our CIGNATURE product suite provides some of the greatest flexibility in the marketplace to meet customer needs for cost-sharing options.

In addition, other options Governments might consider include:

• Moving assets to a trust set aside to fund pension benefits. When assets are held in trust, the investment return assumption can reflect the expected long-term yield on the underlying investments of the trust. A higher investment return assumption will produce lower liabilities and contributions
• Instituting pre-funding arrangements. In addition to designating assets supporting OPEB plans in a separate trust, governments may want to consider pre-funding benefits through vehicles that enable them to deduct contributions for tax purposes. Examples could include HSAs and VEBA trusts.

Other Issues for Government Clients

• Data needs – relevant to new and existing customers. Actuaries will require specific information to complete their cost estimates. Information required may include:
  • Demographic information for individuals covered by the plan
  • Information about plan design
• Sufficient premiums/claims detail - may require separate reports for pre-age 65 and post-age 65 for both pre-retirement and post-retirement members.