GASB 45 to force local governments to review promises

Public employee unions have negotiated two great long-term benefits: pensions and retiree health care. In the end, both are equal in their value. Both benefits are guaranteed by the taxpayers, so no pre-funding is required to ensure the payments of benefits.

However, public-employee unions view the two benefits differently. They fight to ensure adequate pre-funding levels of pension benefits, and they fight to hide the costs of the second benefit. Retiree health-care benefits, totaling well over $300 billion for the state and local governments, have not been pre-funded.

Far worse than the lack of pre-funding is the lack of any standards at all for awarding and ensuring the benefits are received. Most are required by union agreements and these are usually clearly written.

However, management and other non-represented employees generally piggybacked on the union agreements with a sort of “back of the napkin” approach. In the thousands of very small local government units in California, managements have been pilfering lifetime health benefits through sleigh of hand approaches, such as late-night board meetings with a few new words in a contract.

The Legislature has not implemented any state standards for the provision of retiree health benefits. Therefore, every single local government unit–and there are 8,000 of them in California–has created their own standards and operating procedures when providing billions of dollars of retiree health benefits.

The Sacramento County Office of Education is one such local agency. Early in 2006, they engaged the services of Sjoberg Evashenk Consulting Inc. to review this area. Kurt Sjoberg, a co-founding partner of the firm, was California’s first state auditor and served in the auditor general’s office for over 10 years. His firm was engaged to review previously granted “employee compensation packages, related fringe benefits, and retirement benefit agreements reach over the past few years that pose significant budgetary and policy implications.”

Basically, what Sjoberg found in his review was that there were few, if any, effective budget practices at the SCOE. The office has an annual budget of $75 million and over 700 employees. In particular, the review found that “budgeting is conducted with a pooling mindset such that although specific amounts are appropriated to particular areas and programs, as expenses occur, dollars may be spent from other sources or moved to cover other items.”

The full report can be found at http://www.capitolweekly/net/pdf/Education Report.pdf.

Retiree health benefits lend themselves to great difficulty in budgetary allocation. Even the state of California does not allocate its $1 billion annual expense to separate accounts as it created its own budgetary account.

When you can’t properly allocate a cost to a manager, program or budgetary line item, no one owns it and no one tries to control the cost. When an employee works on a particular program for one month, you can allocate the salary and pension costs of that employee to the program–but how do you allocate the “earned” retirement health benefit when no one wants to put a number on it?

No vesting period required. The Sjoberg Evashenk review found, to its surprise, that the SCOE had not adopted or employed a vesting plan for retiree medical benefits. The office “granted employer-paid medical benefits to any employee eligible to retire.” Currently SCOE is providing 273 individuals with post-retirement medical benefits and at least 20 of these retirees worked for SCOE for fewer than 5 years.

The Sjoberg Evashenk review indicated that the SCOE was authorized by state law, Government Code 22895, to establish a vesting period. However, the office was required to take action and never did.

Benefits mysteriously increased over time. The Sjoberg-Evashenk review found that the current SCOE staff indicated that “prior administrators set most decisions relative to benefits, personnel, and accounting and finance, and verbally directed the implementation of these decisions to pertinent staff. We could trace some actions through letters or notations that were needed for external or ancillary purposes, while many other issues we researched could not be fully traced or verified.”

The review found that for many years, the retiree health benefit was paid at the rate of $200 a month. In the last two years, the benefits were increased 94 percent to $389 a month. The review found that “while no formal decision was made to uncap contributions, the current Superintendent states that when this issue was presented to him early in his tenure regarding the 2004-2005 fiscal year, staff represented that it is SCOE policy to provide retirees with sufficient increases in benefits to cover the increase in the one-person Kaiser coverage, yet, no evidence has been discovered to support this position.”
Earlier this year we indicated in this column that many “retiree health care” obligations could be challenged in court on the basis of flawed documentation. If taxpayer groups selected the right cases, they may be able to topple the whole concept of paid “retiree health care” at the public’s expense.

Cashing out the benefits. A powerful upward incentive to increase benefits is the ability of many local government employees to cash those benefits out on a dollar for dollar basis. Well over 40 percent of SCOE’s 700 employees cashed out at least some of their benefit package, thereby increasing their salaries by up to $4,500 annually. These payments were counted as salary when pensions were calculated, thereby adding substantial payments into the future. No evidence of medical coverage was required for the cashing out of benefits.

The report’s words are simply stunning. “Neither our review team nor SCOE staff could locate any formal documentation of this decision or the parameters for this option (cashing out); rather, the extent of the evidence consists of handwritten notes on benefit option forms included in some long-term employee files and related changes in compensation amounts that are reflected on payroll registers.”

Many employees can profit by the fact that governments pay more for health
insurance that individuals do. A 25-year-old employee can purchase a Kaiser medical package for $98 a month instead of the SCOE’s $389 a month package and substantially profit from the difference. Governments always pay list price! Individuals generally figure out a way to pay a lot less!

By mixing up the benefit and allowing a cashing out of the benefits, the SCOE, as many other local governments do in California, thoroughly mixes up the accounting. In allowing a cashing out of the benefits, management and employees have a powerful incentive to pick the highest cost medical benefits. Hence, SCOE’s payment of list price.

A few years ago, we thought pilfering at small local government units consisted solely of a free trip or two and the possible over-billing on mileage reimbursement. The Legislature acted on those issues with stringent guidelines and disclosure rules. Those were small dollars. Little did we know that the really big dollars were in the non-cash items.

Ken Mandler teaches a monthly workshop on How to Land a State Job. The workshop focuses on a variety of tactics and strategies designed to make the state job process an effective one for you. The workshops are three and one-half hours and include over 400 pages of information for your review. The cost is $84. The next workshops are scheduled Saturday, December 16, 9 a.m. to 12:30 p.m.; and Tuesday, January 16, 6:30p.m. to 10 p.m. You can sign up by calling (916) 443-6788 today!