Important steps to bring a modicum of honesty to communicating what governments really owe.
Fiscal hawks hope to see reforms in accounting standards for state and local governments that would increase the transparency of their debt.
The Governmental Accounting Standards Board (GASB) is now considering changes to its reporting recommendations, accepting comments until Feb. 15, 2019, on its plan called “Preliminary View on Financial Reporting Model Improvements.” That proposal would guide governments to add some costs and liabilities to their general fund financial statements, but wouldn’t require them to list some of the biggies such as pension and retiree health-care costs that are largely underfunded.
GASB is a private, nonprofit organization formed in 1984 that creates generally accepted accounting procedures (what is known as GAAP standards) followed by most governments.
“What the board ultimately is trying to do…is provide better information to financial statement users,” GASB Chairman David Vaudt said in a news release. “These proposals are designed to enhance both the value and clarity of the information reported in financial statements.”
Sheila Weinberg, founder and CEO of Chicago-based Truth in Accounting, said lawmakers should demand reform of the standards that now allow bureaucrats to distort their finances. Governments can now prepare two separate financial statements that they report on their annual Comprehensive Annual Financial Reports (CAFR). One statement uses a modified accrual basis to report a basic presentation of revenue and expenditures. This allows governments to recognize expenditures at the time in which they incur the actual liability. So this allows governments to leave pension and retiree health-care payments off the sheet until they actually spend the money on them.
The second and more accurate “government-wide” statement presents a more realistic representation of the debt racked up by governments. This full accrual basis of accounting is used by most businesses, Panmore Institute notes.
“The ways governments have reported their general and other governmental funds enable governments to keep millions — even billions — of dollars in deferred compensation and other costs off of the operating statement and balance sheet,” Weinberg said.
Weinberg points out that California’s general fund balance sheet shows a positive fund balance of $5.8 billion, but anyone who follows the news knows it’s hardly all sunshine and rainbows in the Golden State. In fact, California’s government-wide statement reports a negative net position of $21.3 billion. That’s quite a gap between the two statements.
“The general fund’s income statement includes only the amount of money elected officials chose to pay into their government’s pension plan. It doesn’t show all of the pension benefits earned and the respective liability that has been incurred,” Weinberg writes. “This shortsighted method used to budget and report governmental funds makes it possible for officials to claim the budget is balanced while continuing to rack up enormous unfunded obligations and deficit spending.”
Truth in Accounting’s annual report on the financial state of states published in September found that while 49 states have balanced-budget requirements, 40 of them have actually incurred massive debts, $1.5 trillion in total, made up largely of pension and retires health-care promises. The accounting trickery allows this to take place.
Calls for change have come from the inside in the past. Former GASB leaders Robert Attmore and Martin Ives published an article in the spring 2015 edition of the Journal of Government Finanical Management calling the governmental fund reporting model seriously flawed, and saying there is no conceptual rationale for using the modified accrual basis focus.
“Although the financial statements purport to present fairly the governmental funds’ financial position and changes in financial position, GASB’s current financial reporting model results in incomplete and misleading information regarding those funds,” they wrote.
Governments should stop playing hide-and-seek with their debt, and reform of GASB accounting standards would be a good step in this direction. But that board should go farther than its current plan and require long-term transactions such as pension debt to be listed on all government financial reporting.