Written by ι Stock Market Media Group — September 5, 2013
Seven weeks ago today, Detroit became the largest U.S. city to file for bankruptcy, and in the process, became the 8th city, town or county to join the growing ranks of bankrupt government entities since 2010. This list will likely continue to grow given the underfunded liabilities cities, towns and county governments face in their futures. INSCOR, Inc. (OTC PINK: IOGA) executives knew this storm was brewing when it specifically tailored one of its insurance products to address what is now an epidemic in the U.S. – broken promises to employees.
Government entities (cities, towns, counties) hired employees years ago by winning them over in the recruitment process with promises of employee retiree benefits like pension plans, healthcare, dental, prescription plans, life insurance and other post employment benefits. But, for years they made these promises without actually putting money aside to pay for them, and accounting rules allowed them to get away with. However, as cities are finding out now, they didn’t really get away with it.
In addition to the obvious problems of having the piper come-a-calling, accounting rules were changed (GASB45) by the Governmental Accounting Standards Board, and now budgets nationwide are bursting at the seams.
Needless to say as these entities now have to pay for and account for these future costs, a panic has set in because up until now these were costs that were accounted for on a pay-as-you-go basis. That panic is justified because municipalities are increasingly confronted with how to pay for these massive promises. The Pew Center for the States, in Washington, estimated states’ public pension plans across the U.S. were underfunded by a whopping $1.4 trillion in 2010, and as one can only imagine that number is likely very conservative today.
INSCOR designed what it calls a Financed Insurance Trust (FIT) plan for Other Post-Employment Benefits (OPEB) – meaning the employee benefits covered in the plan are all those promised benefits after retirement other than pension plans. The company has been educating its potential client list and marketing its plan as the solution to this growing unfunded liability problem.
It is these benefits, especially healthcare, that cash-strapped governments are now scrambling to find funding solutions for nationwide. The typical options available are to cut benefits, cut programs and projects, and/or issue bonds or raise taxes. INSCOR’s FIT OPEB plan provides governments and corporations with a low-cost, highly-efficient option for the management and funding of their Other Post-Employment Benefits (OPEB) costs.
FIT OPEB plans are a customizable retirement benefits solution developed by INSCOR in collaboration with attorneys, actuaries and financial institutions. The plan involves purchasing specifically designed life insurance on active employees using funds borrowed from the financial sector or bond issuance and secured by the insurance policies themselves. The program functions by utilizing the arbitrage between the borrowing rate and the rate of return on the policy.
The plan is modeled to provide an income stream from policy proceeds based on predictable employee mortality and yearly withdrawals from policy cash values. As a result, a FIT OPEB plan can provide a cash stream to support each year’s OPEB obligations, plus fund future OPEB liabilities with reduced spending or taxes than may be required with other funding solutions.