Importance of Financial Transparency
- 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.)
Swallowing a Bitter (But Necessary) Pill
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
Publisher, The CPA Journal
Executive Director, NYSSCPA