Group warns on selling bonds to cover healthcare

A group representing finance officers for U.S. state and local governments plans to advise its members not to sell bonds to cover the future costs of providing healthcare benefits to retirees.

The Government Finance Officers Assn.’s debt committee approved the recommendation Thursday at a meeting in Washington, a month after new accounting standards took effect requiring local governments to disclose their liabilities for promised retiree health benefits. The committee’s proposal will go to the 16,800-member association’s full board in March.

U.S. state and local governments face $500 billion to $1 trillion in unfunded liabilities for retiree health costs that must be disclosed under the new accounting rule, according to Standard & Poor’s estimates. Governments may have to increase spending, cut costs or borrow using taxable bonds to cover the liability, S&P; has said.

“State and local governments should not use bonds to solve the problem,” said Patrick Born, chief finance officer for the city of Minneapolis and chairman of the debt committee. “They have to address what is driving costs, and that is hard to do.”

The debt committee’s recommendation “urges governments to exercise considerable caution” when considering borrowing to fund the liability because of the risks that come from the unpredictable costs of benefits and the need to create a trust to invest the proceeds with the goal of making a return high enough to cover the expenses.

The 25-member committee approved the proposal with no opposition.