The Importance of Financial Transparency
Swallowing a Bitter (But Necessary) Pill

E-mail Story
Print Story
JUNE 2007 - In 2004, the Government Accounting Standards Board (GASB), an independent national body that sets the accounting and reporting standards for government entities, issued a new standard with enormous potential implications for state and local governments. Statement 45 established new rules for the way government entities record and measure the projected costs of future retiree healthcare and other post-employment benefits (OPEB). (GASB 43, a similar standard issued in 2004, applies to trusts that are established to pre-fund OPEB benefits and to trusts that are used as conduits to pay OPEB benefits.)

Under GASB 45, state and local government entities are required to calculate and report a present-value dollar figure for the total cost of the OPEB obligations promised to employees in the future. They are not, however, required to set aside money to fund those benefits. In essence, GASB 45 would change a government entity’s method of accounting for OPEB from “pay-as-you-go”—in which OPEB obligations are not recognized until actually paid to government employees once they retire—to an accrual method in which expenses are measured and recognized when they are promised.

This would be a significant change. Credit Suisse estimates that state and local governments across the nation owe approximately $1.5 trillion in unfunded OPEB liabilities. In other words, the old pay-as-you-go approach may have been enabling governments across the nation to promise much more than they can actually deliver.

Unless GASB 45 is challenged by the New York State Legislature, it will apply to every government entity in the state that issues statements in accordance with GAAP. That means GASB 45 would affect approximately 430 (or one-quarter) of our local governments and all 700 school districts.

The preliminary estimate of New York State’s accrued OPEB liability is almost $47 billion. But hiding this fact will not make it go away. On the contrary, if future cost projections are made public, government entities would be more likely to make prudent financial decisions in the present, and less likely to promise benefits they cannot deliver in the future.

Implications of Noncompliance

Politicians in New York State should avoid the path taken by their counterparts in Texas, where proposed legislation would block the implementation of GASB 45, possibly allowing future cost obligations to continue to go unrecorded on state and local government balance sheets. If the proposed legislation passes, the new GASB standard may be blocked by other state legislatures as well, potentially denying citizens throughout the nation a more transparent look at their government’s financial position.

Supporters of Texas’ proposed legislation cite three main reasons for their opposition to GASB 45. First, they point out that promised future benefits are not guaranteed under contract and can therefore be changed or eliminated at any time. If there is no legal obligation to cover the costs, they argue, why must they be disclosed? Second, some claim there is no way to accurately record the present value of future retirement benefit costs, so projections are bound to be misleading or inaccurate. Finally, many worry the new standards would cause state and local governments to cut promised future benefits to retirees.

Frankly, these are weak arguments that are easily addressed. It’s true that future benefits are not guaranteed under contract and can be changed at any time. But reneging on future benefits that have been promised and disclosed would almost certainly carry a heavy political cost, and government leaders would be loathe to court that kind of controversy. Furthermore, even if a government’s legal obligation to pay is dismissed, what about its ethical obligation? If a government entity makes a promise, it should deliver. For a government to say, in essence, “Well, we could always break our promise, so we don’t have to record the liability” is just plain bad governance. Little else could so undermine the public’s faith in government.

AICPA or state CPA society members doing governmental auditing or accounting work in any state that blocks GASB 45 may also face serious ethical dilemmas. In New York, for example—where the AICPA’s and the NYSSCPA’s Codes of Professional Conduct require compliance with GAAP promulgated by GASB—CPAs may be forced to issue a modified or prescribed format opinion and to justify why compliance with GAAP would result in misleading financial statements. In addition, under the rules of the New York State Board of Regents, “independent” CPAs may be at risk of unprofessional conduct if they are associated with statements that are not presented in conformity with GAAP.

The argument about flawed projections is itself flawed. Financial statements frequently estimate future costs, including allowances for bad debts, depreciation costs, and pension costs—that’s a big part of what financial statements are supposed to do. The estimated cost of promised future benefits is certainly not zero, which is how they are currently being recorded. Of course, no projection can be 100% accurate, but that does not mean that governments shouldn’t recognize that a future liability exits.

Last, if GASB 45 disclosure causes governments to scale back on the amount of benefits they are promising, so be it. The unfunded liabilities facing state and local governments are a clear indication that we have been promising too much for too long, and future generations may have to pay the price.

A Bitter Pill

Make no mistake: Implementing GASB 45 will be a bitter pill to swallow. But it’s a necessary dose of medicine. The new standard does not create an obligation to provide benefits that did not exist before and it does not make an obligation higher or lower than it actually is. The obligation always existed. GASB 45 just measures and records the obligation as accurately as possible, and allows government leaders, policymakers, lenders, investors, and taxpayers to see the real costs of retiree benefits.

The reasons to support the new GASB standard far outweigh the reasons to oppose it. Our elected representatives in Texas and New York owe it to government employees, taxpayers, and the nation to reject any legislation attempting to block implementation of GASB 45.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA





















The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices