The economic recession since 2008 have left many public organizations in the US with extraordinary budgetary difficulties; and underfunded pension/OPEB (Other Post-Employment Benefits) play a critical role leading to that trouble. For the state employers who sponsor OPEB, under-budgeting problem arises for several reasons. First, the current accounting practice is that they account for these costs on pay-as-you-go basis, meaning the expenses are paid out as incurred. Even though GASB requires OPEB liability disclosure in the financial statement, the employer could be in large deficit no pre-funding was set up to offset OPEB liability, especially at the time when retirees begin to draw these benefit. Second, according to many state employers, health care premiums increases on a regular basis and are difficult to predict, so they are hesitant to prefund OPEB plan. To solve this problem, our team suggests two solutions, one short-term and one long-term. In the short-run, increase employee and employer contribution to pension funds to help cover OPEB. Part of the additional contribution goes OPEB funding. In the long-run, provide tax incentive for employers who decide to fund OPEB. Feasibility of each solution shall be discussed in details in the paper.
The economic recession since 2008 have left many public organizations in the US with extraordinary budgetary difficulties; and underfunded pension/OPEB (Other Post-Employment Benefits) play a critical role leading to that trouble. The number of employees serving state and federal government in U.S is approximately 20 million. Their well-being after retirement is dependent upon the pension plan and other post retirement pension benefit. However, most states and public facilities in America are suffering from not being able to provide sufficient pension allowance and benefits after retirements to current retirees. According to recent data from Forbes Data 2012, Illinois represents worst-case scenario off all states in which net pension plan asset is $95 million in deficit . This problem is like a powerful time boom. Eventually there will come the last straw that broke the camel’s back. For the purpose of this research paper, our group would like to shift our attention toward other post-employment benefits: what is the general accounting practice that GASB requires for government/non-profit entities in terms of disclosure, and what led to the suffering of many states to meet that obligation when retirees begin to draw benefit. On that ground, we would also like to suggest one short-term and one long-term recommendation to the state government with the hope to slow down the deficit and in the long run, and to ensure the well-being of our people. Before going further into researching OPEB and suggesting recommendations to solve current problems, we need to understand what it is and what the current disclosure requirements are. Since our recommendation is made for the state and local governments, we assume that it is geared toward public organizations such as schools, hospitals, public utility companies (electric, water, gas…) that operate with government funding. These organizations are not necessary non-profit - they still receive revenues from sales of goods and services - so the scope of research could potentially extend to private sectors; the only difference is the organization that regulates the accounting for pension/OPEB between public and private sector (GASB - Governmental Accounting Standards Board versus FASB - Financial Accounting Standards Board). So what is OPEB? As the name suggests, OPEB are postemployment benefits other than pensions. Over the course of employment, state employees are compensated in a variety of forms in exchange for their services. OPEB, in addition to pension allowance, is one form of fringe benefit that employees earn and vest over a certain period of time. OPEB generally takes the form of health insurance and dental, vision,...
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