The buck stopped here
During legislative hearings last spring, national accounting regulators were adamant in telling Texas legislators they absolutely must comply with a new rule to report the cost of post-retirement health care benefits. But, State Senator Leticia Van de Putte was not buying it. “They were pretty heavy-handed,” recalls the chair of the Senate State Affairs Committee, which held the hearings on the rule. “They are a board that’s not elected, trying to change state policy. But, you don’t threaten us; it just has the opposite effect. We’re not afraid of the guys in suits. They don’t know Texas.”
Around the nation, public finance officials are getting to know Texas but are not sure what to make of the state’s financial reporting policies. While states and localities are keeping one eye on their own balance sheets, they are keeping another on Texas’ financial statement, as they all struggle to account for the post-retirement health benefits they have promised their employees.
Texas seeks independence
Three years ago, the Norwalk, Conn.-based Government Accounting Standards Board (GASB) issued a requirement for state and local governments to begin calculating and reporting the cost of the promised benefits of their retirement health plans on their balance sheets. The rule (GASB Statement 45) becomes effective in fiscal 2007-2008 financial reports for the largest state employers.
Governments have been reporting pension liabilities on their balance sheets for a long time, but the cost of the post-retirement health care benefits has come as quite a shock for many officials. Reporting them on their balance sheets forces governments to come up with an annual contribution to pay for the benefits, which may incur the ire of employees if governments are forced to trim plan features or the wrath of voters if they have to raise taxes. Failing to pay the annual contribution could quickly damage a government’s credit rating.
Nationally, the total cost of retiree health benefits for state and local government employees has been estimated at as much as $2 trillion. For Texas governments, the benefits have been estimated to cost $50 billion.
In May, the Texas legislature decided to go another route. State lawmakers overrode the provisions of GASB 45 and gave governmental units the option of reporting the cost of their benefits in their statement footnotes, rather than as a liability on their balance sheets. Reporting the liability would require the state to begin funding the cost over time.
Gov. Rick Perry signed the measure in June, and now local governments in the state are considering the benefits and consequences of following the state’s lead. Some, like Houston, have opted to follow GASB 45, while Travis County, where the rebellion began, is likely to opt out of the GASB requirement. Meanwhile, a war of words has broken out between the state and the government financial accounting establishment.
Other states, which face huge costs to fund the liabilities, are watching to see what happens, says Van de Putte, immediate past president of the Washington-based National Conference of State Legislatures. “They are in a bind as well and understand our mutiny,” she says.
Not so, declares Dean Mead, GASB’s manager of research. “This doesn’t portend a national change,” he says. “Texas is the only government that decided not to comply with Statement 45.”
An independent observer on the scene says that the situation remains unsettled, but that governments have to be careful about bucking GASB 45. “There will be a penalty to pay,” says Michael Granof, a professor of accounting at University of Texas at Austin and a public finance expert. “It will have an impact on bond ratings and their interest costs. It’s not clear today how many governments are going to do it.”
Texas representatives insist that they are not trying to hide their potential costs, but that various laws and accounting considerations make it impossible for the state to comply with the GASB rule. The state legislation, as originally proposed, would have prohibited any community from complying with the GASB provision, but it was amended when a number of local governments said they wanted to implement the accounting change to preserve their bond ratings. So, now it is optional at the local level.
Officials at GASB, as well as the Chicago-based Government Finance Officers Association, who do not necessarily agree on everything (see sidebar on p. 40), are in lockstep when it comes to their interpretation of how Texas is handling the issue: They do not like it. “I hardly find their arguments persuasive,” says Stephen Gauthier, GFOA’s director of technical services. “Every state cannot set its own standards. There is a national consensus on this [GASB 45].”
Defending the constitution
The issue of post-retirement health care benefits is politically charged across the nation. A Wall Street Journal opinion column published on May 29, 2007, said the Texas action “only serves the interests of disclosure-averse elected officials and public-sector union bosses from coast to coast.” And, unions, such as the Washington-based International Association of Fire Fighters (IAFF), have crafted strategies to counter any government proposals to reduce employee benefits as a result of complying with GASB 45. Texas legislators insist that employee pressure has nothing to do with their legislation, and they point out that Texas is a “right-to-work” state, without public unions, as evidence that their situation is different enough to justify their actions.
Suzy Whittenton, director of fiscal management in the Texas Comptroller’s Office, states that complying with GASB would be contrary to the state constitution, which does not allow one two-year session of the legislature to bind the actions of another. In other words, the state cannot commit for more than two years at a time, she says. The GASB rule basically assumes a 30-year commitment. “It’s not a benefit that’s been promised,” Whittenton says. “It’s not a contract. It’s unreasonable to consider it a liability.”
As proof, State Sen. Robert Duncan, the bill’s author, points to 2003 when the state faced a $10 billion shortfall and trimmed benefits and increased co-pays to help reduce costs. He calls the GASB rule “policy engineering” rather than accounting standards.
Van de Putte goes even further and says that the differing actuarial assessments of the state’s potential liabilities would force the state to include inaccurate information on its financial statements. “We can’t disclose what is not accurate and can’t be verified,” she says.
Gauthier says the state is resorting to legalities to defend its defiance of the accounting standards, rather than facing the economic realities. While the state may make some changes to its benefits from time to time, it is extremely unlikely that it will cancel post-retirement health care benefits altogether, he says. That is similar to other commitments like long-term leases that are commonly reported on balance sheets. “It’s being applied selectively,” he says.
Counting on powerful bonds
As support for their position, Texas officials point to positive indications they say they received in August from the bond rating agencies when the state was ready to issue $4.9 billion in short-term notes in anticipation of tax receipts. The agencies continued to give the state their highest ratings.
But, the big question is how the agencies will rate the state once the financial statements do not report the health costs according to GASB 45. It is likely that auditors will note the discrepancy and the state may not receive a clean audit — the mark that the state meets generally accepted accounting principles and the usual standard of financial health. “We’re concerned about the bond rating,” Whittenton says. “We will continue to communicate with the agencies.”
The agencies have issued cautious but not definitive statements on the Texas situation. Shortly after the legislative session ended, New York-based Fitch Ratings said that it considered noncompliance with GASB 45 “a management weakness” that would be incorporated into its overall analysis of the state’s credit rating. New York-based Standard & Poor’s said the state’s action would not have “an immediate impact on ratings in the state,” but that failure to supply sufficient information on the state’s post-retirement health benefits “could have negative credit implications.”
Locals that follow Texas’ lead may run into similar accounting issues but without the clout of the state’s financial power. GFOA has warned Texas communities that it will not give its Certificate of Achievement for Excellence in Financial Reporting to communities that do not follow the requirements of GASB 45. And, the state’s certified public accountants have said they will issue qualified opinions on statements that do not follow the GASB rule.
Granof says the issue goes to the core of fiscal responsibility. “This is great for the politicians,” he says. “Once they acknowledge their obligations, they’ll have to figure out how to pay for them. If they ignore them, they will not have to address the issue, and their successors will have to worry about it. That’s why it’s so pernicious.”
Robert Barkin is a Bethesda, Md.-based freelance writer.
GFOA and GASB: Divided they stand
“GASB’s time has come and gone,” says a statement from the GFOA Executive Board.
“Preposterous,” says Gerard Carney, GASB spokesman. “We’re dealing with the needs of the public, and these people just don’t want to provide the information that’s needed.”
In the staid world of government accounting, that is as close as it gets to a good fight.
On one side is GASB, the designated arbiter of accounting rules for the public sector. On the other is GFOA, which supported GASB’s creation in 1984 when it thought its predecessor organization, the National Council on Government Accounting, had run its course. Since then, GASB’s relations with GFOA have been cooperative. Even as governments currently struggle with GASB’s new financial reporting rules for retirement health benefits, GASB and GFOA have been shoulder to shoulder in the need for transparent accounting.
But, GFOA has a problem with a new set of “Service Efforts and Accomplishments Reporting” (SEA) standards that GASB staff is ready to propose to its board. Governments that use the standards would set service delivery objectives and then would be measured on performance. GASB says that the standards are the only way to gauge the efficiency and effectiveness of local and state government operations.
GFOA argues that with the SEAs, GASB is moving beyond its original charter. Instead, GFOA says, the board should be closed and folded into its sister group, the Financial Accounting Standards Board (FASB), which serves private and public corporations. “They are going beyond their areas of expertise,” says Stephen Gauthier, GFOA’s director of technical services. “Their responsibility is accounting, not accountability.”
GASB argues that setting such standards has been part of its charter since it was created and that government officials just do not want to be held accountable on how well they perform their jobs. “Few budgets present information about government performance,” says Dean Mead, GASB’s research manager. He points out that the standards will not be part of financial statements and are not mandatory.
GFOA’s position is that GASB’s mission to provide uniform standards in government accounting has been largely accomplished, and, as an agency, its tendency in the future will be to create new regulations where they are not needed. Better rely on FASB, with minimal exceptions, where needed, Gauthier says.
Just a ruse, retorts Carney. “This is a veiled argument against improving transparency to the public,” he says. “If we don’t have independent standard setting, look out for the public interest.”
— Robert Barkin