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.”

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.

I groused about it in this U-T San Diego editorial:

“Imagine a family in which both parents work and make $100,000 a year between them but have $300,000 in steadily growing credit-card debt. If the parents got raises and their income increased to $110,000 a year, would you say the family is suddenly in good shape financially? Of course not.

“But that sort of happy talk is just what we’re hearing from state leaders after an upbeat report from the Legislative Analyst’s Office predicted a coming era of budget surpluses because of revenue from tax hikes and a surge in capital-gains tax receipts, thanks to Wall Street’s latest boom.

“The 62-page report mentions the state’s massive unfunded liabilities for the California Public Employees’ Retirement System and the California State Teachers’ Retirement System only briefly.”

Reporters don’t connect budget happy talk with pension gloom

What’s amazing is that the same Sacramento reporters who have covered Gov. Jerry Brown’s efforts to win pension reform don’t connect the dots. If Brown says pension benefits are a toxic, long-term, unaffordable fiscal nightmare, how can that be squared with Mac Taylor’s fiscal happy talk? It can’t be.

Here’s Mac:

“We now find that California’s state budget situation is even more promising than we projected one year ago. The state’s budgetary condition is stronger than at any point in the past decade.”

Here’s me:

“As of September, CalPERS had about $260 billion in assets and about $340 billion in liabilities. Those numbers are based on CalPERS’ assumption that decades of investment returns will average 7.5 percent annual growth.

“But a comprehensive 2011 study overseen by Joe Nation, a professor at the Stanford Institute for Economic Policy Research and a former Democratic state lawmaker, concluded assumptions of 5 percent to 6 percent are more historically appropriate. In September, Nation said a more realistic assessment of CalPERS’ current unfunded liability is $170 billion — not $80 billion. …

“The Legislative Analyst’s Office’s report simply doesn’t contemplate what state budgets would look like in coming years if they addressed and paid down the state’s share of CalPERS’ unfunded liability. Instead, it only predicts a slow growth in annual contributions to $2.8 billion by 2019-20 — meaning the total unfunded liability will continue to grow by billions each year.”

In even worse shape than CalPERS: CalSTRS

“CalSTRS is in even worse shape than CalPERS. The state teachers’ pension system reports assets of $172 billion and an unfunded liability of $70 billion. But it too uses the 7.5 percent projection for investment returns. Even with that questionable assumption, CalSTRS is on track to run out of funds in 2043. If Nation’s more prudent model were followed, CalSTRS’ unfunded liability would double, and it would run out of funds long before 2043.

“Once again, the LAO report doesn’t contemplate what state budgets would look like in coming years if they addressed and paid down CalSTRS’ unfunded liability. Even if the optimistic 7.5 percent earnings estimate is used, it’s been estimated that CalSTRS needs $4.5 billion a year for 30 years to dig out of its financial hole. Yet the LAO only predicts a slow increase of state funding to $1.8 billion in 2019-2020.”

I have whined an awful lot about the state media in recent months. They keep giving me fresh fodder.

How can reporters covering Sacramento not realize that they can’t simultaneously believe that the state government is in good shape fiscally and that it faces an enormous long-term crisis in paying for unfunded retirement benefits?

It’s truly bizarre, because this isn’t a case like fracking or AB 32 where there’s a green agenda driving coverage. Instead, it’s just the laziest pack journalism imaginable.