July 29 (Bloomberg) -- Before you can fix a problem, you need to figure out if you have one.

A new accounting requirement is going to force U.S. state and local governments to figure out how much they are spending on ``Other Post-Employment Benefits'' and list it in their comprehensive annual financial statements.

Those ``other costs'' are the health-related benefits, things like medical care and prescription drugs, that some municipalities provide to retired employees in addition to their pensions.

Such costs are now covered on a pay-as-you-go basis. Beginning after Dec. 15, 2006, those costs are going to have to be tallied up in the same way as pension benefits.

This may be a good thing for taxpayers. Some states and localities might be so horrified by their generosity that they will rein in those benefits and stop making promises that are expensive to keep.

This will be a good thing for bond underwriters. Some municipalities will sell bonds to cover their unfunded other post- employment benefit obligations, just as they have for their unfunded pension liabilities.

Other Post-Employment Benefit Obligation Bonds, or OPEBOBS may not have the same ring to it as good old Pension Obligation Bonds, or POBS, but it will still be music to the ears of the bankers who sell bonds.

Some Surprises

These benefits aren't new, said Parry Young, an analyst at Standard & Poor's in a report on the subject published in April.

``What is new is the requirement to quantify the OPEB liability and determine an annual required contribution to amortize the liability,'' he said. The requirement is the Governmental Accounting Standards Board's Statement 45.

States and localities are likely to be surprised by what they find -- ``a potentially significant unfunded liability, because in the vast majority of cases assets have not been set aside to fund these future OPEB costs,'' Young said.

Depending upon how generous politicians have been over the years, the liability for these other post employment benefits could be larger than the unfunded liabilities they have built up in their pension systems.

First Issue

This is where the bonds come in. Gainesville, Florida, earlier this month sold $35 million in Taxable Other Post Employment Benefits Obligation Bonds to pay for the unfunded liability in its retiree health-care plan. This appears to be the first issue to be devoted solely to paying this kind of liability.

The bonds, insured by MBIA Inc., were underwritten by Citigroup Inc. and were priced at par to yield from 4.05 percent in 2006 to 4.71 percent in 2014.

The bonds are taxable, as all such bonds will be, because the municipality will invest the proceeds to make money for the plan, just like pension-obligation bonds. This of course leads to a separate pack of problems, as local governments seek to maximize returns.

The good news is that some states are taking steps to hold the line on these kinds of benefits. More will, ``in part because improved OPEB information will encourage restraint in legislative debates and contract talks where benefits are determined,'' Moody's Investors Service analyst Ted Hampton wrote in a report this week.

Less Generous

Alabama, Hampton wrote, has enacted legislation increasing premiums for smokers and those who retire after a relatively short period of time. Ohio has modified its health-care plan so that full coverage is available only to those with 30 years of service.

Localities are following suit, with Orlando, Florida, and Arlington, Texas, reducing the percentage of employees' health- care premiums they will cover, and raising the length of service requirements for eligibility, Hampton wrote.

This being MuniLand, of course, the range of other post employment benefits varies insanely. Which leads to the scariest part of this story: putting a number on the size of the problem. Nobody seems to know.

``The unfunded liability related to OPEB, when calculated, will be sizable,'' said S&P's Young, ``and, in many cases, greater than the current unfunded liability for pension benefits, reaching billions of dollars for larger state plans.''

For now, it's impossible to know the extent of what may be a sizable problem. After all, it's not as though health-care costs have declined. The actuaries are crunching the numbers, but it's going to be a while.

As Moody's Hampton observes, for states, the first financial reporting periods subject to Statement No. 45 will be those ending during calendar year 2008. So a complete picture is ``not likely until early 2009, when published comprehensive annual financial reports covering fiscal 2008 become available,'' he said.

The more responsible states and localities are going to start assessing and fixing the problem sooner rather than later.

To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net.

Last Updated: July 29, 2005 00:07 EDT