New rule may settle fate of state surplus

Retiree benefit accounting change could force Md. to set aside millions


Just when Maryland's budget picture is finally improving, state lawmakers are faced with a little-known accounting rule change that could force them to set aside hundreds of millions of dollars a year for employee retirement benefits that are decades away.

This eat-your-spinach dictum from the nonprofit Government Accounting Standards Board requires state governments to acknowledge the long-term costs of health benefits for current workers after they retire, as well as those for today's retirees. Such expenses have crippled ill-prepared private-sector employers such as Bethlehem Steel and General Motors.

Bond rating agencies are responding to the change, which takes effect in 2007, by pressuring states to set aside money for those costs, rather than paying for them on a year-by-year cash basis, as most now do - Maryland included.

FOR THE RECORD - An article in yesterday's editions about possible changes in the funding for Maryland government retiree health care misstated the benefits for former workers. The state provides a prescription drug benefit for retired government employees.
The Sun regrets the errors.

The result is that in order to maintain its exemplary bond rating, which saves taxpayers money in interest costs, Maryland could be compelled to squirrel away millions - no one knows how much - in a way that might or might not save money in the long run.

"We just have to start paying more for what we already have," said Warren Deschenaux, the General Assembly's chief fiscal analyst.

The accounting change adds a new wrinkle to an evolving debate over what to do with tax revenues that are coming in faster than expected in the state's $24 billion budget. Gov. Robert L. Ehrlich Jr. has talked about an election-year property tax break, and other leaders, such as Comptroller William Donald Schaefer, want pay increases for workers.

But pressure from Wall Street could force the state to use the excess funds for what amounts to a ledger-book entry - which pays far fewer political dividends.

Red ink on the books

The new standard - adopted last year after more than a decade of study - will bring government accounting in line with the private sector by treating retirement health benefits as part of the compensation workers earn while they are actively employed. Rather than putting the money for those benefits in a worker's paycheck, the state effectively gives those employees an IOU, to be paid in the form of health insurance subsidies when they retire.

The accounting rule change means governments will have to tally up the value of those IOUs and list them as red ink on their books. The change was needed, said Karl Johnson, a project manager for the Government Accounting Standards Board, because the pay-as-you-go systems most states use may be less feasible as baby boomers begin to retire.

Both Moody's Investors Service and Standard & Poor's, two prominent bond rating agencies, have said they will treat those obligations like debt and, if states don't take steps to address the issue, could lower their credit ratings.

"What rating agencies have said is they don't expect us immediately to address this issue ... but, ultimately, we will need to save money to pay for that health care," said state Budget Secretary Cecilia Januszkiewicz.

The impending change has sounded alarms among advocates for retirees and public workers. When private companies were required to make similar disclosures in 1990, many of them cut benefits to eliminate a drag on their balance sheets.

Steven Kreisberg, the collective bargaining director for the American Federation of State, County and Municipal Employees, which represents state workers in Maryland, said the union is worried that politicians, like CEOs 15 years ago, will see the large price tag associated with these benefits and cut them.

"It will be distorted by some folks who are just hostile to public employees and public employment benefits," Kreisberg said.

He added that the union considers Ehrlich among that group, in large part because of the governor's attempt last year to charge current employees more for health care against the General Assembly's wishes.

But Januszkiewicz said the state is in a very different position than private companies that cut or curtailed benefits after being forced to list their costs. Governments are more stable than private companies and have less flexibility in altering their promises, she said.

"The government is not going out of business," Januszkiewicz said. "And the health care that is available is set within statute."

According to an AARP report on the issue, 41 states offer some kind of retiree health insurance, and 30 of them, including Maryland, fund the benefits on a pay-as-you-go basis.

According to the report, Maryland's benefits are in some respects among the most generous, with retirees paying just a fraction of the premiums charged to former employees in other states. But unlike many states, Maryland does not offer retirees a prescription drug benefit.

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