Few Public Sector Employers Understand Financial Implications of GASB Standards, Says Aon Consulting
15 Agosto 2007 - 4:38PM
PR Newswire (US)
Employers consider new funding strategies but little else to reduce
obligations CHICAGO, Aug. 15 /PRNewswire-FirstCall/ -- With city,
state and county governments facing hundreds of billions of dollars
in non-pension obligations to retirees, the majority of public
sector employers have started to address new accounting standards
to manage these liabilities. But few employers understand all the
changes necessary to reduce their expense under these new rules,
according to a survey by Aon Consulting, the human capital
consulting firm of Aon Corporation (NYSE:AOC). (Logo:
http://www.newscom.com/cgi-bin/prnh/20041215/CGW049LOGO)
Underscoring the magnitude of these liabilities, an Aon Consulting
recent analysis found the retiree healthcare obligations for the
state of New Jersey could total $58 billion. Under the Government
Accounting Standards Board new rules(1), public sector employers
must determine how they will fund these other post employment
benefits by an established deadline based on employer revenue (see
chart on page 2). The Aon Consulting survey of 118 public sector
employers who offer non-pension retiree medical benefits focuses on
how these organizations are preparing for and addressing GASB
compliance throughout Aon's recommended three-step process: 1.
Conducting a baseline actuarial valuation 2. Determining funding
options 3. Making plan design changes "Gathering the data and
understanding the financial impact of the new GASB accounting
standard will require significant time and resources," said Phil
Peterson, director of the survey and Aon Consulting's Public Sector
national practice leader. "In many cases, the weight of the
financial expense required under the new GASB standard will affect
the public entity's budget and/or require retiree benefit changes.
Both often require legislative and regulatory changes,
renegotiating rates with insurance carriers and possibly
renegotiating union contracts." Baseline actuarial valuation The
survey found that 85 percent of employers have completed or are in
the process of completing the baseline actuarial valuation, and 67
percent are in the process of creating or have implemented a formal
plan for the implementation and management of OPEB obligations.
Thirty-three percent have not begun the process, but 84 percent of
those who have not, say they intend to do so. (1) The GASB rules
require public sector employers to annually expense on their
financial statements OPEBs earned today that will be paid later.
The previous method used a pay-as-you-go approach. "Creating a
formal plan is crucial to stay on track for two reasons. First,
employers can evaluate and explore funding and plan design options
by the GASB compliance deadline. Secondly, employers can
communicate with and educate employees and other constituencies on
the changes," Peterson said. The need to comply with GASB standards
varies depending on the employer's revenue, as reflected in the
chart below: GASB Standard Applies for If Revenue Is: Fiscal Years
Starting After: Dec. 15, 2006 More than $100 million Dec. 15, 2007
Between $10 million and $100 million Dec. 15, 2008 Less than $10
million Funding options The new GASB requirements have motivated 63
percent of employers to consider changes to their funding strategy,
the survey found. The funding vehicles of choice include a
Voluntary Employee Benefits Association, a Health Reimbursement
Account and/or a Section 115 Trust. "While there is no legal
requirement for employers to set aside money in an investment
vehicle, there are certain financial incentives to doing so,"
Peterson said. "Funding these obligations in advance, rather than
applying a pay-as-you-go approach, can reduce the OPEB expense as
much as 60 percent. "Funding can mean a generally higher discount
rate for the employer, and as a result, can reduce the OPEB
liability. But according to the GASB survey results, nearly 80
percent of employers do not know what their discount rate is or
should be," Peterson added. "Knowing the range of discount rates an
employer can use is valuable information for understanding the
extent of their exposure under the new GASB requirements."
Additionally, 53 percent of respondents indicated they were not
considering financing methods to procure the money needed to fund
their OPEB obligations. The remaining 46 percent of employers that
are considering financing methods prefer the following three
choices: -- General purpose bonds -- OPEB obligation bonds --
Revenue increases through other means such as tax increases, change
in assessment structure, use of endowment funds, and/or use of a
special capital campaign. "It's interesting that 103 -- or 87
percent -- of employers that offer retiree medical benefits chose
not to respond to this particular survey question, implying they
are unclear on how they will finance their OPEB obligations,"
Peterson said. Plan design changes As a result of the new GASB
standards, 66 percent of employers are not considering making any
changes to their plan design to reduce OPEB costs. "Plan design
changes can result in significant cost reductions in OPEB
liabilities. For example, plan design changes that reduce the rate
of future medical inflation by just 1 percent can reduce OPEB
liabilities by more than 10 percent," Peterson said. The remaining
one-third of respondents who are considering plan changes prefer
the following plan design modifications: -- Revise eligibility
requirements (50 percent) -- Increase retiree cost sharing before
age 65 (40 percent) -- Eliminate coverage for future hires (38
percent) -- Change to a defined contribution plan (31 percent) Ends
For more information, contact: Sara Carlson 312.381.5045 or Rahsaan
Johnson 312.381.2684 About Aon Aon Corporation
(http://www.aon.com/) is a leading provider of risk management
services, insurance and reinsurance brokerage, human capital and
management consulting, and specialty insurance underwriting. There
are 43,000 employees working in Aon's 500 offices in more than 120
countries. Backed by broad resources, industry knowledge and
technical expertise, Aon professionals help a wide range of clients
develop effective risk management and workforce productivity
solutions. Aon Consulting Worldwide (http://www.aon.com/hcc) is
among the top global human capital consulting firms, with 2006
revenues of $1.282 billion and 6,500 professionals in 117 offices
worldwide. Aon Consulting is reshaping the workplace of the future
through benefits, talent management and rewards strategies and
solutions. In August 2006, Aon Consulting was named the best
employee benefit consulting firm by the readers of Business
Insurance magazine. This press release contains certain statements
related to future results, or states our intentions, beliefs and
expectations or predictions for the future which are
forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from either
historical or anticipated results depending on a variety of
factors. Potential factors that could impact results include:
general economic conditions in different countries in which we do
business around the world, changes in global equity and fixed
income markets that could affect the return on invested assets,
fluctuations in exchange and interest rates that could influence
revenue and expense, rating agency actions that could affect our
ability to borrow funds, funding of our various pension plans,
changes in the competitive environment, our ability to implement
restructuring initiatives and other initiatives intended to yield
cost savings, our ability to execute the stock repurchase program,
our ability to obtain regulatory or legislative changes to permit
continuous sales of our supplemental Medicare health product,
changes in commercial property and casualty markets and commercial
premium rates that could impact revenues, changes in revenues and
earnings due to the elimination of contingent commissions, other
uncertainties surrounding a new compensation model, the impact of
investigations brought by state attorneys general, state insurance
regulators, federal prosecutors, and federal regulators, the impact
of class actions and individual lawsuits including client class
actions, securities class actions, derivative actions, ERISA class
actions, the impact of the analysis of practices relating to stock
options, the cost of resolution of other contingent liabilities and
loss contingencies, and the difference in ultimate paid claims in
our underwriting companies from actuarial estimates. Further
information concerning the Company and its business, including
factors that potentially could materially affect the Company's
financial results, is contained in the Company's filings with the
Securities and Exchange Commission.
http://www.newscom.com/cgi-bin/prnh/20041215/CGW049LOGO
http://photoarchive.ap.org/ DATASOURCE: Aon Corporation CONTACT:
Sara Carlson, +1-312-381-5045, , or Rahsaan Johnson,
+1-312-381-2684, , both of Aon Corporation Web site:
http://www.aon.com/
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