State-mandated implicit rate subsidies

Several states (Minnesota, Iowa, Indiana and Florida) have a “mandated” implicit rate subsidy.  That means almost every public-sector employer in these states has an OPEB liability.

Each of these states has a statute that says public employers:

  • must allow retirees to stay in the health plan until age 65, and
  • can’t charge them any more than active employees.

Health plan members in their early 60’s cost more than younger members.  The difference between their cost of coverage and what the employer can charge them is known as the “implicit rate subsidy”.  It’s a real cash outlay, even though it’s usually hidden as part of the health insurance premium.

On cash-basis accounting there’s no need to identify the implicit rate subsidy; it’s already in the premium.  But on GASB’s accrual basis, we need to recognize the cost of post-retirement benefits while employees are still working.

The good news is that we can take credit for the cash outlays against GASB’s annual OPEB cost.  Some employers’ OPEB costs actually drop when they shift to an accrual basis.

We’ve been compiling a state-by-state summary of mandated implicit rate subsidies.  We’ll post that when we’ve found all we can, and open it up for comments.

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