Lawmakers should demand reform of government accounting standards (Weinberg)

Lawmakers at every level of government currently have a unique opportunity to end the confusion and distortion surrounding the ways governments calculate their finances and report them on their financial statements, as the Governmental Accounting Standards Board (GASB) considers changes to its reporting recommendations.

Double Standards

GASB, a private, nongovernmental organization responsible for creating generally accepted public accounting procedures, currently requires state and local governments to prepare two sets of financial statements using different measurements for assets, liabilities, revenues, and expenditures.

One set of statements justifies the convoluted way in which governments calculate their balanced budgets while racking up millions and billions of dollars in debt, and the other set more accurately reports their financial conditions and the results of their financial activities.

Both sets of statements are reported in state and local governments’ Comprehensive Annual Financial Reports (CAFR). The more accurate financial statements are called government-wide statements and are prepared using an economic resources measurement focus similar to the full accrual basis of accounting used by most businesses.

Government CAFRs are voluminous because both sets of financial statements are included. These governmental funds statements include balance sheets and statements of revenues and expenditures, with columns for each of the major governmental funds, including the general fund. These statements are prepared using a modified accrual basis, which is closer to the cash basis than accrual basis.

‘No Conceptual Rationale’

Past GASB leaders have also argued for changes to how governments report their finances. In the Spring 2015 edition of the Journal of Government Financial Management, former GASB Chair Robert Attmore and former GASB Vice Chair and Research Director Martin Ives Martin published an article titled GASB’s Governmental Fund Reporting Model Is Seriously Flawed.

There is no conceptual rationale for using a current financial resources measurement focus and modified accrual basis focus for reporting governmental funds by state and local governments, Attmore and Martin wrote. [A]lthough 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.

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.

Most people look only at the general fund’s finances, because that shows the funds which they have voted to put in the budget. For example, California’s general fund balance sheet reports a positive fund balance of $5.8 billion, yet the government-wide statement of net position, or balance sheet, reports a negative net position of $21.3 billion. This is, effectively, a net pension liability of $86 billion and a net retiree health care liability of $29 billion.

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. 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.

Hiding Fiscal Holes

Truth in Accounting’s (TIA) latest Financial State of the States report, published in September, found 40 states have created a fiscal hole totaling more than $1.5 trillion, even though 49 states have balanced-budget requirements in place.

The checkbook-like accounting methods used in the past are incomplete and deceptive, because all costs and liabilities incurred during the budget year, especially those related to pensions and retiree health care benefits, were not included.

As a result, many governments are now struggling with how they can honor these obligations and maintain necessary government services and benefits without increasing taxes to the point where taxpayers leave their jurisdictions.

On September 28, GASB issued a recommendation, titled the Preliminary View on Financial Reporting Model Improvements. GASB suggested including a few more costs and related liabilities on the general fund financial statement, but significant items such as underfinanced pension and retiree health care liabilities would continue to be ignored.

Long-Term View Needed

GASB is asking for comments on this recommendation, but if the past is a prediction of the future, the vast majority of comments will come from government officials who will agree with such a half-measure, because they want to maintain the status quo.

Neither the current model nor the proposed model provides complete, accurate, truthful financial reporting. For our part, TIA is starting a new fact-based accounting initiative, recommending that general-fund statements be prepared using a long-term, full accrual-based focus, including unfunded pension and retiree health care costs and liabilities.

Just as one man cannot move the world, one organization cannot change decades of accounting policy. Other stakeholders in the public accounting sphere, including lawmakers at all levels of government, should write to GASB in support of standards reporting a long-term, full accrual-based accounting focus for general and other public funds.

Source: Sheila Weinberg, Heartland.org