|
Executive Director's
Report - Volume 51, Number 6 - 2007
GASB Statements 43 and 45 ill-advised.
When I was attending Troy State University (now Troy University) in the late ‘60s, students in the School of Business were required to take a minimum of two courses in accounting. Both were designed to provide a “business major” with a basic understanding of the subject. It was not my best subject, and I was glad to complete the courses and move on to others.
Even though I am not an expert in the field of accounting, I have great appreciation for its purposes. Financial activities from as simple as reconciling personal bank account statements to managing the federal budget involve accounting practices and principals. The conduct of even the simplest economic activity without some involvement of the practice of accounting is impossible.
County governments in Alabama expend annually more than $2 billion. The state and municipal governments combined expend many billions more. It is very important that money (generally referred to as “funds”) received and expended by governments in the state be accounted for accurately. The accounting for governmental expenditures involves much more than just adding columns of numbers. It also involves a determination that governmental funds are expended according to the requirements of the law. Just as important, governmental officials cannot make funding decisions unless they know the extent and condition of their entity’s fiscal resources.
To that end, the Alabama Legislature several decades ago created by statute the Department of Examiners of Public Accounts (Examiners). The law charges the Examiners with the responsibility of examining the “…books, records, vouchers and accounts of every state and county office, officer, bureau, board, commission, corporation, institution, department, and agency… at least once in every period of two years…”.
Stated simply, the Examiners is the auditing entity for the state and county governments in Alabama. Municipal governments have the audit functions performed by private accounting firms. The law establishes the position of “Chief Examiner” and authorizes him or her to prescribe systems, procedures, and forms to be used by the entities the Examiners audit. This provision authorizes him or her to prescribe recording and reporting procedures that are uniform with regard to similar governmental entities. The Examiners have done exactly that through the years. County governments in the state generally follow the same accounting practices, policies and procedures.
The relationship that has existed through the years between the Examiners and county employees and officials has been outstanding. Problems that have arisen usually result from the failure of local officials to follow prescribed practices, policies and procedures, or failure to comply with the law. The relationship between the Examiners and county employees and officials can be best described with adjectives such as cooperative, understanding, conciliatory and professional.
While the Chief Examiner has authority to prescribe his or her own uniform accounting practices, policies and procedures, he or she must also pay attention to the accounting standards adopted by the national Governmental Accounting Standards Board (GASB).
The GASB is an independent, private-sector, not-for-profit organization that establishes standards of financial accounting and reporting for federal, state and local governments. The GASB does not have authority to enforce its promulgated standards. The GASB standards are, however, enforced through the audit process. The Examiners generally, but not always, recognize and enforce the GASB standards. The municipal bond industry prefers that governments comply with GASB standards and failure to do so can have an impact on the bond rating ascribed to governmental entities as they enter the bond market.
I said all the above to get to a position where I can offer some comments about recent activities of the GASB. In April 2004, the GASB issued Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and in June 2004, Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. Both of these statements address the reporting of and possibly funding of what is referred to as Other Postemployment Benefits (OPEB).
OPEBs are post-employment benefits like healthcare, life and long-term care insurance. They generally do not include pension benefits. More specifically, OPEBs are benefits governmental employers pay on behalf of individuals who no longer work for the government or are retired therefrom. Currently, most governments account for and fund OPEBs on a “pay-as-you-go” basis. The costs of OPEBs are simply included in the annual budget of the entity and paid when they are due.
Stated simply, and probably over simplified, GASB Statements 43 and 45 require governments to actuarially determine the costs of OPEBs over a long-future period, say 30 years, and record the costs as long-term liabilities. GASB Statement 45 provides direction as to how the liabilities are to be computed. It is clear that there is an assumption that some governments would want to begin a process of “pre-funding” the liabilities. In order to pre-fund the liabilities, a governmental entity would have to somehow obtain the necessary revenue and place it into an account or trust out of which the costs of OPEBs would be paid in the future.
A county administrator in one of the financially smaller counties made a rough calculation as to how much revenue the county would have to come up with in order to prefund OPEBs. The estimate totaled about $500,000 when extended out about 30 years. This particular county’s annual budget is less than $6 million. There is no practical way this county could totally prefund its OPEB liabilities. The amount of money required for a county the size of Jefferson County to fund its OPEB liabilities would be in the hundreds of millions.
The obvious question at this point is, “How are counties that provide OPEBs supposed to approach the funding of these liabilities?” A secondary question is, “Well, if we do not fund our OPEB liabilities will the failure to do so really have an impact on our bond rating?”
The truth is, most governmental entities in the country will never fully fund OPEB liabilities. The amount of revenue required would cause many essential services to go unfunded. Many governments, state and local, will simply establish accounts or trusts into which they will make deposits in an effort to at least partially fund OPEB liabilities. It is anticipated that some will ignore Statements 43 and 45. It is expected that bond rating institutions will look favorably upon those governmental entities that at least make a substantial effort toward funding such liabilities.
There is currently no statutory authority in Alabama law for counties to establish trusts into which funds would be deposited for the purpose of funding OPEB liabilities. Based on discussions with appropriate officials with the Examiners, it is our view that they would not take exception to the establishment of such trusts. There is currently legislation pending in the Alabama Legislature that would authorize counties to establish OPEB-Funding trusts, individually or jointly. In addition to authorizing such trusts, the legislation would provide direction as to how such trusts are to be established and maintained. The legislation is being supported by ACCA as part of its legislative program.
I will be scoffed at and criticized by some for making the following statement, but I am going to make it anyway. I think GASB Statements 43 and 45 are ill-advised. Below are my reasons for making this statement.
First, the whole concept of GASB Statements 43 and 45 does not need to apply to governments. Except for the very smallest, when measured by revenue and expenditures, governments do not go away. They do not dissolve or cease to exist. The purposes for which GASB Statements 43 and 45 were envisioned apply more appropriately to the private sector where businesses come and go. During my 35-plus year tenure with ACCA, no county in Alabama has ever been abolished, and only one has ever filed for bankruptcy. And even in that instance, citizens continued to pay taxes and the government eventually corrected its financial problems. If GASB Statements 43 and 45 should apply to any governmental entities, it should only be to the very smallest.
Second, the members of the GASB, including its staff and other advisors, failed to properly analyze the practical effects of the implementation of the two statements. For example, statements adopted by the GASB are only recommendations, but they are generally recognized and adopted as requirements by organizations like the Examiners of Public Accounts. It is my understanding that the Examiners of Public Accounts will require counties to recognize OPEB liabilities, but will not require that they be funded. The liabilities, whether funded or not, will show up on future financial statements. Such liabilities will be noted by bond rating and underwriting institutions and the status thereof will likely affect the ratings of and other matters relating to bonds issued.
As stated above, it is my view that most governmental entities will never fully fund their OPEB liabilities. The State of Alabama recently estimated its OPEB liabilities to be in the billions of dollars. The legislature will never fully fund the state’s liabilities simply because it cannot afford to do so. The legislature and some state agencies have set aside several hundred million dollars for this purpose and will likely set aside more money for this purpose in the future. The revenue put into this trust account will virtually sit there forever. The state has set aside hundreds of millions it cannot spend for liabilities it cannot meet. The money would be better spent funding governmental services and OPEBs on a pay-as-you-go basis. The situation with regard to state government applies similarly to county governments. The county mentioned above that estimated its OPEB liabilities to be about $500,000 will most likely never be able to carve out enough revenue to fund the full liability. The county should do what it has always done, budget for the current costs of OPEBs as it does for salaries, utility expenses, and other recurring expenditures.
There is another big problem raising its head because of GASB Statements 43 and 45. I have heard from many county officials that rather than meet the requirements of the statements, they will just stop OPEBs altogether. This action could be devastating for many retired people. Everyone knows that unless you are a multi-millionaire you cannot be without health insurance.
The members of the GASB and others who advise them did not adequately consider the far reaching consequences of adopting Statements 43 and 45. Organizations of all types have to justify their existence. They have to come up with things to do. In my opinion, in this instance, an organization came up with the wrong thing.
|
