Copyright© 2004 by School Services of California, Inc.

Volume 17                   For Publication Date: December 17, 2004             No. 24

 

Ask SSC . . .  

Are Limited Obligation Bonds a Good Way
to Finance Retiree Health Benefits?  

  1. We are looking at Limited Obligation Bonds as an instrument to finance our retiree health benefit liability. We would like to get your opinion on this concept. A company out of San Francisco has assisted us with the refinance of a COP and is recommending this. There are some who are of the opinion that the whole retiree health benefit issue in schools is going to implode and that the state will have to do something. We have always taken a proactive approach to debt management, so that is really not our style. Last year we paid off $5 million on one COPs and refinanced at a lower interest rate. We are also setting aside money each year to quicken the payoff of the second COP. Neither of these instruments was put in place during our watch.

We are also working with our auditors to develop a method to charge categorical programs for retiree health benefits.  

A.                 First, let me tell you that I have not received any information on the specific program you are considering. Having said that, I can't comment on the specific financing transaction, but I can give you what I think is a good context for your decision.  

Let us start with a recitation of some facts as we know them:  

1.                  We now know that GASB 45 requires recognition of the obligation for post-retirement benefits, but it does not require immediate funding.

2.                  We know that the obligation is real; the bills will arrive for years to come and must be paid.

3.                  We know that the cost of post-retirement benefits has risen, and will likely continue to rise, much faster than school district revenues.

4.                  We know that it will be cheaper to set aside funding today and let it grow over time than it will be to "catch-up" later when the obligation is larger.

5.                  We think that districts that do not set up a funded reserve for this obligation will sooner or later be penalized in the credit markets.

6.                  We think that sooner or later GASB will come to the realization that, just as corporations must pre-fund retiree benefits, public agencies should do the same.

7.                  We know that the obligation to provide post-retirement benefits is attributable to service during the years prior to retirement and that the cost should be charged to those periods and not left for students attending in future years to pay.  

Having said all that, it makes sense to us for districts to begin to set aside funding for this obligation, whether GASB requires it or not. Nonetheless, it will be difficult to set aside significant levels of operating funds during these difficult times. So, it seems to us that, particularly in this low interest environment, it may possibly make sense to use tax-free debt to pre-fund at least a portion of the obligation. However, there are both legal and financial issues that need to be considered.  

Whether a particular plan works for you is best determined by your legal and financial advisors.

 

—Ron Bennett and Jerry Twomey, CPA