GASB 45 - A real test of accounting integrity

In the last few months there have been some wails from the public sector about GASB 45. The Government Accounting Standards Board (GASB) is the group that sets the standards fro governmental accounting. GASB 45 (Accounting and Financial Reporting by Employers) requires governments to include actuarial estimates of the future costs of benefits promised to employees. Although the standard was promulgated in 2004, it began to take effect in December. For smaller units there are delays of one or two years.

GASB 45 parallels FASB (the same standards setting except for private sector employers) 158. In both cases the assumption is that the reporting entity (either governmental in GASB or private in FASB) should in their accounting statements realistically estimate what the future value of pension and health obligations will have on their expenditures. For a long time, many government agencies have blithely assumed that they can hand out future benefits without worrying about who will pay for them. Many government employers, for example, offer lifetime health coverage for retired annuitants that might be worth $10,000 or more a year, per employee.

GASB 45 hit big in California when a couple of cities admitted that they had no way to fund all the goodies that they had offered to their employees. Most private employers have made two changes in their retirement policies over the last thirty years. First, they have scaled back or eliminated generous health plans for retirees. At the same time they have switched from defined benefit to defined contribution retirement plans. Many government agencies still have defined benefit plans - which are those that calculate a retirement benefit based on years of service and highest pay. Defined contribution plans have several benefits both to employers and employees. First, they give the employee an asset that does not die when they do - but at the same time they require employees to begin to think more carefully about retirement options and financial issues. Among the societal benefits, if individuals begin to consider the financial consequences of their own actions, they might well be more cognizant of the financial consequences of governmental actions. Second, for employers the actuarial soundness of the plan is based on two relatively simple issues - has the current contribution been made to fund the current year obligation and has the employer done a reasonable level of due diligence to assure that the savings are accumulating in a responsible manner?

Without GASB 45, governmental entities would be forced to arbitrarily curtail some of these benefits or to go to the taxpayers for a boatload of more tax revenues to fund the outrageous policies. But some public employee unions are already whining. This will make it a lot harder for governmental agencies to fudge their numbers hoping that someone (the taxpayer) in the future will bail them out - let's hope the political class is up to working with honest numbers.