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BACKGROUND The reason that this benefit has gained attention recently is that it has become a significant cost item for public agencies and has the potential for this cost to mushroom over time. It is for this reason that the public agency accounting rule making authority, the Governmental Accounting Standards Board (GASB) has issued two new accounting standards that shine a light on the true long term costs of providing this benefit to public employees. GASB Statement No. 45, Accounting and Financial Reporting by Employers for Post Employment Benefits Other Than Pensions, requires that the employers total liability be disclosed in their financial statements and that an annual set aside be made (Annual Required Contribution, or ARC) to fund that liability over a 20 to 30 year time horizon. It is important to note that GASB #45 does not, at this time, require full funding of the liability. It does require a that a liability be reflected on the balance sheet to the extent the annual set aside, or ARC, is not funded. And, in order for this annual set aside to count against reducing the liability, it must be put into an irrevocable trust. This new standard will apply to all public agencies including states, counties, cities, school districts, and public universities and hospitals. The effective date for the City of Pleasanton and LPFD when this new rule would take effect is June, 30 2009. The GASB has also issued a companion rule, GASB No. 43, Financial Reporting for Post Employment Benefit Plans Other Than Pension Plans, which will govern the establishment and reporting of an irrevocable trust, should an agency decide to pre-fund a portion or all of this liability in a trust rather than using the pay-as-you-go approach. DISCUSSION The City of Pleasanton on behalf of LPFD has conducted regular actuarial studies in anticipation of this new accounting rule and, in addition, has set aside annual contributions in an internal reserve fund. A decision will need to be made in advance of the June 30, 2009 implementation date as to whether to pre-fund in an irrevocable trust. As of June 30, 2007 the LPFD Retiree's Medical Reserve Fund had a fund balance of $10.8 million from annual contributions of $1.4 million being split 50/50 with the City of Livermore. The most recent actuarial study estimated the unfunded accrued actuarial liability for LPFD to be $26 million if reserves were put into an irrevocable trust and $42 million if the current pay-as-you-go approach is continued. The annual set aside, or ARC would be between $1.7 to $2.0 million if existing reserves were invested in an irrevocable trust and $3.2 to $3.7 million if the current pay-as-you-go approach is continued. Most, if not all, public agencies have historically funded this benefit on apay-as-you-go basis. That is, to just record an expenditure for the out of pocket expense for the annual health premium cost for retired employees and their beneficiaries. The establishment of an irrevocable trust to pre-fund this benefit similar to the way pension costs are funded is a relatively new phenomenon. Pre-funding requires that an annual amount be set aside during an employees working years so the benefit is funded upon his or her retirement. Establishment of an irrevocable trust and contracting for related services can involve an actuary, legal consultant, investment advisor, investment manager or staffing a treasury function. Just recently, a market has been developing around the Page 2 of 3