Council OKs plan to prepay retirement costs

The rule, issued by the Governmental Accounting Standards Board (or GASB), requires governments to detail how much money will be necessary to pay for retirement benefits if they are pre-funded while future retirees are still employed. Ideally, the benefits should be paid from money set aside in special accounts now, but many governments, including the state of Maryland and Montgomery County, pay benefits out of each year’s budget for already retired workers. The accounting board says the pay-as-you-go format distorts actual financial outlooks because future obligations do not show up on financial statements.

To meet the county’s full pre-funding goal, $31.9 million has been set aside in the county executive’s recommended fiscal 2008 budget, the first year of the five-year plan. That includes payments for public schools, Montgomery College, Maryland-National Capital Park and Planning Commission and county government employees. The payment is in addition to the pay-as-you-go expense for fiscal 2008, which begins July 1.

Pre-funding payments would increase until the $240 million goal is reached in fiscal 2012.

‘‘This is what good government does,” said Jennifer E. Barrett, the county’s finance director. ‘‘Current county employees should be comforted that money is set aside for future payments. For retirees, it means the same thing. There is similar comfort that the money is set aside. A real important part of people’s personal financial planning is what they can rely on in the future.”

GASB affects all county residents, not just county employees or retirees, Barrett said.

‘‘People should care about this because it is a large draw on resources that are competing for various things in the budget,” she said. ‘‘It has an impact on where residents’ tax dollars are going, but we’ve managed it. It’s funded in the budget.”

Health care costs

‘‘[GASB] was brought on by rising health care costs,” said Mark Lynne, director of Health and Welfare Practice for Bolton Partners, an actuarial and benefits consultant firm in Baltimore that has worked with Montgomery, Anne Arundel, Howard and Baltimore counties. ‘‘The accounting community has been putting the pressure on making the public sector’s financial statements truly reflect actual costs.”

Bond rating agencies also play a role. GASB does not require governments to actually pre-fund the retirement expenses, just to have a plan for doing so, but the rating agencies are expecting its higher-rated jurisdictions, such as Montgomery, to prepay their plans, said Lynne and Barrett.

‘‘If it weren’t for [rating agencies], I’m not sure this would be much of an issue at all, but they are sending out signals that they want public sector agencies to put on their books that they have some plan,” Lynne said. ‘‘If they see a five-year plan in established counties, they are usually going to give you a break.”

For counties such as Montgomery and Baltimore, which have AAA ratings from all three major credit rating agencies, maintaining that status is essential. The AAA rating allows the county to borrow money at lower rates. A drop in rating could lead to higher borrowing rates.

‘‘Our concern was that if we didn’t take action it would have jeopardized our triple-A bond rating,” said Donald I. Mohler, Baltimore County spokesman.

Baltimore County officials have already decided to set aside the full pre-funding amount for its county government employees for fiscal 2008.

‘‘We have been out front on this issue. We started one year ahead of time by setting aside $103 million [in fiscal 2007] for pre-funding,” Mohler said.

To meet a similar obligation this year, Baltimore County notified its employees that the traditional 30-year retirement has changed to 35 years and that an early retirement provision would be eliminated for all employees hired after July 1. Baltimore County is also in talks with its employee unions to restructure health care benefits.

Union reaction mixed

For localities not used to squirreling away retiree benefit funds, satisfying GASB requires measures such as budget cuts and postponing projects to funnel money into pre-funding accounts.

In dealing with expected revenue constraints and GASB requirements, Montgomery County Executive Isiah Leggett (D) used both budget cuts and project delays in his $4.1 billion budget proposal. He also tabled negotiations on health care and retirement benefits with the police and government employees unions because the sides could not come to an agreement.

‘‘Unions are very concerned about this because they see it as leading to benefit cuts, which is true in some places,” Lynne said. ‘‘But some are realizing that this is a good thing.”

Montgomery County teachers union President Bonnie Cullison said GASB is definitely on the minds of her members. ‘‘We’re certainly talking about it. We understand the county has to be allocating money judiciously to meet the operating needs,” she said.

Cullison’s concern is with the county’s timing.

‘‘If the County Council does not feel that we have enough to pay for operating budget needs, then we need to look at more time for GASB,” Cullison said. ‘‘If we can do five years and meet the needs of the operating budget without having to make cuts, then five years is an acceptable schedule.”

County government employees union President Gino Renne said the union’s actuaries understand the GASB requirements, but are not ‘‘ringing the alarm bells.”

‘‘In my opinion, GASB 45 is being used by some officials to make or perpetuate the argument that times are tight,” Renne said. ‘‘The County Council will try to set the stage for recessionary bargaining, but every time there have been fiscal constraints, unions have stepped up and resolved the problems. We just feel that there are different ways to deal with this.”

John Sparks, president of the county’s firefighters union, does not foresee a benefits cut.

‘‘I thin there is a lot of overreaction to [GASB 45],” Sparks said. ‘‘I think everyone will understand it better a year from now. We’ll get through it.”