Change in accounting rule forces governments to disclose liabilities

moneyState and local governments will no longer be allowed to hide the true costs of the long-term benefits provided to government workers.

A recent change by the Governmental Accounting Standards Board, known simply by the acronym GASB, forces government bodies to be more transparent in reporting pension liabilities and long-term commitments for retiree heath care. Among the changes: the liabilities must be reported on the first page of financial reports instead of being buried in a footnote.

“Applying accounting standards can sometimes be complex, but identifying the right standards to apply should be straightforward,” GASB Chairman David A. Vaudt said of a slew of accounting changes.

While changes in accounting rules may not garner time on the evening news, accounting rules have been the primary method for forcing governments to address the rising cost of unfunded pension and health care liabilities. In 2007, the board began implementation of GASB 45, a change in accounting rules that, for the first time, forced government bodies to disclose their pension liabilities. That change was enough to put the issue of pension liabilities on the mainstream public radar.

California’s next major liability: Other Post-Employment Benefits

Although governments have been slow to address the problem of unfunded pension liabilities, the government accounting board nonetheless raised the profile of the issue. With its most recent changes, GASB is likely to drive a conversation about “other post-employment benefits.” Health care benefits are the biggest and most common post-employment perk, which can also include life insurance, disability coverage, legal assistance and other services.

From an accounting perspective, it’s easier to budget for pension liabilities than other post-employment benefits. Due to court rulings, governments have little authority to reduce or change promised pensions. That makes it a liability with a present-day obligation.

In contrast, other post-employment benefits do not have the same legal protections as pensions. As Bloomberg noted earlier this year, “The Supreme Court unanimously decided that retiree health benefits are not necessarily guaranteed.” That case involved private sector workers. In theory, the Court’s ruling could also extend to the public sector.

“Consequently, some governments may be able to change the benefits or employees’ eligibility to receive benefits, or even stop providing benefits altogether, whenever they wish,” GASB explains in a newly published fact sheet. “These facts raise questions about whether OPEB is a liability that should be reported in the financial statements.”

Although the new accounting standards force governments to disclose the liabilities, it does not require governments to set aside funds or budget for the future. “How a government actually pays for OPEB is a policy decision made by government officials,” the board explains.

“These newly published OPEB standards will give financial statement users a much more complete picture of how much state and local governments have promised in retiree benefits—and how much those promises actually cost,” Vaudt, who serves as chairman of the government accounting standards board, said in a press release. “Together with the Board’s recent pension standards, these standards will provide consistent and comprehensive guidance for the full suite of postemployment benefits that governments provide to their employees.”

Rising cost of unfunded health care liabilities

Ed Mendel, who covers the state’s pension issues at CalPensions.com, points out that the rising unfunded liabilities arising from promised retiree health care benefits is skyrocketing. Since 2007, the retiree health care liability for state workers has increased by $24.2 billion. Retiree health care benefits provided to state workers now exceeds $72 billion – more than the state’s unfunded pension liability.

“State worker retiree health care has been one of the fastest-growing state expenses: $1.9 billion next fiscal year, up fourfold from $458 million in 2001,” notes Mendel, one of the state’s top journalists covering pensions. “It’s also one of the most generous benefits, requiring no contribution from most state workers.”

Attorney General  Jerry Brown speaks news conference disclose new developments in his prope of excessive salaries in the City of Bell, in Los Angeles  Monday, July 19,     2010. (AP Photo/Nick Ut)

Governor Jerry Brown

This year, Governor Jerry Brown raised the issue of retiree health care benefits with his January budget proposal. As Mendel notes, the governor is looking to move the state away from “pay-as-you-go” funding in favor of pre-funding future health care benefits. By paying in advance, governments are able to reap the benefits of investing the funds and earning more money through appreciation and interest.

“If we don’t rein things in, then down the road there will be drastic cuts, just like there were over the last 10 years,” Brown said earlier this year. “It’s either stop and start or steady as you go.”

The governor’s proposal could be a double-edged sword for the state’s long-term budget picture. By negotiating changes to retiree health care benefits, some analysts believe it increases the chances that courts will protect the benefit as an irrevocable contractual obligation.

21 comments

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  1. Ronald Stein
    Ronald Stein 12 July, 2015, 08:41

    The international business world is intelligent enough to know that defined benefits are financial disasters to any business, thus all businesses focus on the known, i.e., defined CONTRIBUTIONS alone. When public sector contracts are negotiated by public sector employees that hammer out a contract with defined benefits that forces under duress a third party, the taxpayers, to cough up the necessary dough, then it’s truly a case of the inmates running the Asylum as well-connected public sector unions overpower the poorly represented taxpayers. Any challenges to that “racket” would be heard before judges who have pension and benefit package they want to protect. Again, seems like a racketeering cover-up right before our public eyes.

    Legally, we may be obligated to pay those DEFINED benefit pension plans, but their unsustainability is killing the budget and discouraging new job creation as the entrepreneurs’’ taxes and fees are contributing to paying for those defined entitlements that are not available in the private sector.

    Stealing from the young who silently shoulder the costs and bear the burden of unfunded promises of these programs to enrich the old seems to describe the Governments expansion of entitlement benefits and other government services, along with the taxes young people will have to pay to support them, mostly to subsidize older Americans.

    The unfunded differences are taxed to younger and future generations – to be paid in the future, by unknown subsets of them, through higher outright taxes, reduced benefits, debt defaults, or inflation. The situation is intractable because most of those being burdened are not voters (most are not even alive) and cannot be part of a constituency for reform.

    “Defined benefit” programs are lucrative to the recipients, but unsustainable as they are funded by investments that do not get defined rates of returns. Currently there are more than 12,000 people receiving pensions over $100,000 from CALPERS. When the CALPERS investments perform poorly, the consumer picks up the tab for those defined guaranteed pensions.

    Reply this comment
  2. Queeg
    Queeg 12 July, 2015, 08:50

    Comrades,

    It will snow in Bellflower before a board certified balance sheet for plutocrats is forthcoming!

    Reply this comment
  3. Rex the Wonder Dog!
    Rex the Wonder Dog! 12 July, 2015, 14:41

    Guys what the heck is going on, my profile pic is NOT showing up anymore, what did YOU DO?????????????????

    Reply this comment
  4. Bill Gore
    Bill Gore 12 July, 2015, 15:38

    SO-a glimmer of sanity at GASB-which may inflict collateral damage on the great california government gravy train. Those 20-year public safety retirees are sure going to be pissed…Look for a MAJOR push in the union-owned legislature to somehow force GASB to reclassify such liabilities as ASSETS, or apply some kind of accelerated depreciation schedule, or even strip GASB of any authority. If the banks could get away with it with ‘mark to market’ reporting for their liabilities (which turned mortgage liabilities into assets) then anything is possible. Accounting has been corralled by the lawyers and special interests. It boils down to ‘take the money and run’.

    Reply this comment
    • Bill Gore
      Bill Gore 13 July, 2015, 07:35

      CORRECTION to my previous post: It was “mark to model” NOT “mark to market”. Banks were required by FASB to present mortgages and mortgage-backed securities at MARKET VALUE, i.e., what they were really worth in the real world. Long story short: they pulled some really big strings and had this requirement changed to something more to their liking-presenting these ‘assets’ at notional, or ‘model’ value. Presto: banking crisis solved!

      Reply this comment
  5. desmond
    desmond 12 July, 2015, 17:48

    I agree with Bill. This will be altered so as to be meaningless. My generation(believe it or not) will fix this. We are pragmatic. We have sympathy for alternative lifestyles, embrace new technology, don t have much religion. Killing the over compensated generation will be like taking a dump, something messy, but it has to get done.

    Reply this comment
    • Ulyssess Uhaul
      Ulyssess Uhaul 12 July, 2015, 21:00

      Did business in a narrow minded small town in Northern Californis. Local merchants cheered when a fellow merchant went BK. Ah. The remaining merchants felt they would gain customers through the continual BK attrition…..

      Well Desi….the town stills sucks and is in worse shape after 25 years of steady decline. If you think dumb butt Millenials will be sucessful your delusional….by attrition or even hard work. You’re all doomed….lazy, fungus toed, greasy hair, dope addicts, communication majors from low end public universities….

      Why aren’t Millenials working? Cause guys like me have no interest in training hopelessly spoiled snots with no skills and no guts!

      Reply this comment
      • Bill Gore
        Bill Gore 13 July, 2015, 07:40

        Ha ha: like ‘taking a dump’ I love it! OK-I hate to be the buzzkill (OK i love it…) but I predict your ‘generation’ will sell out as completely and thoroughly as the boomers ever did, and it will happen when your increasingly soft fat butts realize just how much they LOVE eating and laying in the comfy recliner in front of the wide screen. Remember: “COMFORT KILLS DREAMS”.

        Reply this comment
  6. bob
    bob 13 July, 2015, 19:20

    Boyz…why all the negativity???

    Don’t you worry your pretty little heads…there’s nothing to see here, folks…just move along now….

    After all, as Doglass will tell us, there is no funding issues with all these pensions and other benefits…but if there is the tax suckers gotta pay…no cuts…and Sawhorse will tell you she’s paid in more than her fair share.

    Reply this comment
  7. Teddy
    Teddy 13 July, 2015, 23:13

    Honestly Doomers—Zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz

    Reply this comment
  8. Donkey
    Donkey 14 July, 2015, 09:42

    The RAGWUS run organizations like “GASBAG” care nothing about the truth. The Feeders of the RAGWUS have accumulated well over a trillion dollars in debt for the younger kids to pay in California. The parrots and Ahauls of the state believe their theft is unassailable, the math will settle their fate.
    The taxpayers are leaving the “lead state”(element) for better run government. Like Chicago, Detroit, Baltimore, and a large list of other feeder sites across the nation, our once vibrant state has been eaten hollow from the inside out! 🙂

    Reply this comment
  9. Donkey
    Donkey 14 July, 2015, 09:55

    The dolts that have control of the RAGWUS halls, local city management, school administration, appointed boards, politicians installed with RAGWUS cash are no more than fifth columnists with designs of stealing from the taxpayers, with no regard for those outside their fold. 🙂

    Reply this comment
    • Ulysses Uhaul
      Ulysses Uhaul 14 July, 2015, 11:11

      Donkey

      The Ragwhenetti rule…kiss rings….

      Reply this comment
      • Ted
        Ted 15 July, 2015, 09:02

        WELL said U Haul– The Doomera must pack and ship— it’s over——–

        Reply this comment
        • ulysses Uhaul
          ulysses Uhaul 15 July, 2015, 15:09

          Teddy

          Gavin is warming up to finish off dem doomer goose steppers……lots of Pack and Ship.

          Reply this comment
          • bob
            bob 15 July, 2015, 17:04

            Exactly. People think it’s bad now, well it is but they ain’t seen nothin’. Just wait ’till Pretty Boy is Governator. He will make Brown look like a right winger.

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John Hrabe

John Hrabe

John Hrabe spends his time traveling the world as a freelance journalist. When he isn’t on an international flight, John writes about California politics for CalWatchdog.com and CalNewsroom.com.

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