Gilroy – When it comes to paying for retiree health benefits, Gavilan College hopes to find safety in numbers.
In coming months, the school will place $2 million to $3 million in a statewide investment trust to start covering the projected costs of health care for future retirees. The move comes in response to new accounting standards that could expose major financial liabilities at community colleges and other public agencies nationwide, some of which have failed to set aside enough money to pay for retiree benefits.
In government parlance, such costs are known as “unfunded liabilities” and they often do not appear in an agency’s annual budget. Now, the Governmental Accounting Standards Board, a nonprofit group that issues best practices nationwide, is calling on public agencies to start explaining how they will finance such costs. To meet the new standards, agencies must calculate retirement health care benefits for current employees and report the figure each year as a debt obligation, no different than if they borrowed money for a new ambulance or library.
Though Gavilan has never reported such figures in its budget, the school has hedged its bets by regularly setting aside money to pay future health benefits, according to Gavilan College President Steve Kinsella. Less conscientious public agencies may be in for a rude awakening.
“Suddenly, what agencies may find is that they have a multimillion dollar obligation that’s not reported anywhere,” Kinsella said. “And it’s going to have an impact on your financial obligations, because every year you have to pay for the costs of those benefits.”
Some agencies with newfound debt could be saddled with a bad credit rating, which spells higher interest rates when looking to borrow for new buildings, road improvements or other projects.
While all local and state agencies are expected to comply with the new guidelines by 2008, community colleges have jumped to the forefront of the issue, according to Ray Giles, vice president of operations for the nonprofit Community Colleges League of California.
“The quicker you start paying the debt, the cheaper it is,” Giles said. “If you wait until 20 years down the line, that’s a huge number. But if you spread the cost out over 30 years, it’s much cheaper to pay off.”
Kinsella has been selected to head a Joint Powers Authority, or JPA, that will advise community colleges across the state on how much they should be contributing annually toward retiree health benefit obligations. The group has set up an investment trust with Union Bank of California to invest funds set aside by the 19 community colleges in the JPA. The group, which includes San Diego community college district, the second largest in the state, expects to have $20 million invested by the end of 2006.
The public investment pool frees the colleges, traditionally limited to buying low-yield and low-risk government bonds, to put their money in stocks and other investments that could bring bigger returns. Kinsella said that such investments will help schools weather an unexpected hit in retirement costs.
In the last fiscal year, Gavilan College paid $440,000 in retirement health benefits to its 62 retirees, including medical, dental, and life insurance, according to Kinsella. The school pays full health benefits until the age of 65 for any employee who works for 10 years and retires after 55. After that, Medicare picks up health care costs for retirees.
“Employees have a tendency to retire in bubbles,” he said. “One year you may spend $440,000. In the next year if it goes up to $640,000, then you have some problems. … If we can’t squeeze $200,000 out of our budget, we can go to the investment pool to get us through that bubble.”