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A far-reaching change to accounting rules for public employers has attorneys across the country braced for a surge of legal work. The new rules, which will be phased in starting in December, require government entities � from cities to universities to school districts � to calculate and report how much they owe for health care costs and other post-employment benefits for their present and future retirees. Prompted in part by the recent demise of employee pensions among several companies in the private sector, the new rules call for public employers to disclose the amount they have promised to retirees for health care coverage, life insurance, dental coverage and more. Importantly, public employers also will need to show how they will pay for those benefits. The upshot for attorneys, particularly those in the public-finance area, is an expected avalanche of work from municipal governments, hospitals and any other public employers scrambling to comply. “I’ve been in municipal finance for 31 years, and I’ve never seen anything like this,” said Edsell “Chip” Eady, a partner in the San Francisco office of Nixon Peabody. As at other law firms, Nixon Peabody has assembled a team of lawyers to tackle what it calls the “OPEB problem.” OPEB is the acronym for “other post-employment benefits,” an obligation for public employers that by some estimates equals between $700 billion and $1 trillion nationwide. Throughout the year, Nixon Peabody has conducted seminars and attended conferences in which its attorneys have addressed the issue generally. But now it is holding what it calls “OPEB labs” around the country with public employers. The sessions are “off-the-clock, off-the-record” meetings for senior municipal managers to get together as peers and compare their situations, Eady said. “They wind up being a support group for each other,” he said, adding that high numbers of retiring baby boomers and skyrocketing health care costs are particularly troubling for these employers trying to meet the new requirements. Nixon Peabody is “building a substantial practice around OPEB,” he said, and has enhanced its practice with two partners and four associates working full-time on OPEB matters. The reporting changes stem from new requirements under the Government Accounting Standards Board, which now call for government entities to report two types of information. First, they must identify the annual cost of their OPEB obligations. Second, they must report the net OPEB obligations, meaning the difference between what they owe and what they have contributed to cover those costs. Riding on the reported figures will be the entities’ credit rating and, ultimately, their ability to borrow money. The rules, which will affect thousands of municipalities and other public employers, will be phased in based on the size of the entity. Larger governments with annual revenue that exceeds $100 million must start disclosing their unfunded liabilities on all financial reports starting on Dec. 15. The new rules apply to governments with revenue between $10 million and $100 million starting on Dec. 15, 2007, with the smallest government entities reporting one year later. Observers attribute the rule change to the increased scrutiny of underfunded retiree benefits in the private sector. Thousands of retirees at several U.S. corporations, including US Airways Group Inc., United Airlines parent UAL Corp., Polaroid Corp. and Cone Denim, saw their pensions compromised after those companies hit hard times. ‘MASSIVE’ IMPACT The challenge for public employers is not only the initial chore of determining the exact obligations covered by the rule, but also the more daunting task of figuring out how they are going to fund those benefits. “The impact of this is just massive,” said Ron Kirk, a public-finance partner in the Dallas office of Vinson & Elkins and former mayor of that city. Vinson & Elkins, which has its largest office in Houston, has established its own task force of 10 attorneys to address the reporting revisions. Kirk said that public employers historically have used attractive benefit packages for current and retired employees to lure workers to take jobs that often pay less than those with private employers. But those enticements have created enormous future commitments for government entities, which are often unable to revise those obligations to more manageable levels because they were reached through collective bargaining. LEGAL SKILLS Solving the OPEB problem likely will draw upon a variety of legal skills, Kirk said. Compensation and benefit lawyers, labor lawyers, tax attorneys, public-finance lawyers, trusts experts and litigators all will play a role in compliance. One public employer that has needed OPEB assistance is Travis County in Texas, which includes Austin. Susan Spataro, chief financial officer for Travis County, which employs 4,400 people, said that she called upon Vinson & Elkins to help her determine the amount of the county’s future health benefit obligations, also termed “liabilities.” Spataro, who claims that compliance with the new changes will make virtually every state in the country appear insolvent, said that she needed an objective analysis of liability. She has written a letter to the GASB stating that compliance with the new rules amounts to a material misrepresentation of the county’s obligations. “Nothing real has changed,” she said. “We just have a new accounting rule.” Detroit’s Miller, Canfield, Paddock and Stone has created its own seven-member OPEB task force with a combination of labor lawyers and public-finance attorneys, said partner Michael McGee. It may add attorneys, but right now the 355-attorney firm has “redeployed” existing lawyers to focus on the work. The basic tension for clients is to meet their true obligations while simultaneously protecting taxpayers’ interests, McGee said. The solution, he said, has three prongs: reduce or eliminate benefits, contain the costs of benefits and fund the obligations. Each of those facets requires legal help, he said, whether it is to establish trusts to support the obligation, to develop state legislation to facilitate financing vehicles, or to help consolidate benefits programs among individual entities to reduce costs. Also staffed to offer OPEB services is Orrick, Herrington & Sutcliffe. Roger Davis, head of the firm’s public-finance group, said he has wrapped up the “mind-numbing” slew of OPEB conferences in which Orrick’s task force has participated during the last two years. About 10 Orrick attorneys are handling compliance matters, mainly in New York, California and Oregon, he said. “We’ve written the materials and done the seminars to death,” he said. His team now is spending much of its time devising legislation for various states to create funding mechanisms. “It’s a big job,” he said. “A lot bigger than we anticipated.” Leigh Jones is a reporter with The National Law Journal, a Recorder affiliate based in New York City.

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