The Accounting Rule that Exposed the Public Sector Pension Crisis

By: June 22, 2011

Conservatives and tea party movement activists understand that the problem of large unfunded pension and benefits liabilities for public sector retirees did not spring to life overnight. We know this problem is not going to be solved quickly or easily. What many of us don’t know, however, is why this problem remained hidden for so long.

It wasn’t until 2010, when almost all state and local governments finally complied with an  arcane public sector accounting rule called GASB 45, that the full extent of the fiscal crisis caused by these massive unfunded public liabilities was unveiled. The standard was adopted in 2004, but state and local governments were given six years to come into compliance.

GASB is the Governmental Accounting Standards Board, the public counterpart to FASB, the Financial Accounting Standards Board. GASB nor FASB are professional accounting related standards organization, not governmental entities.  The accounting statements of publicly traded private sector companies are prepared based on FASB standards. State and local governments prepare their accounting statements based on the GASB standards. Failure to do so risks negative annual audit reports and poor bond ratings.

What fiscal truth did compliance with GASB 45 reveal?  

GASB 45 required that  all state and local governments  abandon a long established practice of budgeting for pension and “other post-employment benefits” ( OPEB ) on a cash “pay as you go” basis. Under “pay as you go” each fiscal year’s adopted budget simply had to contain an appropriation for what the total pensions and OPEB expenses needed to be for that given year for existing retirees. Under GASB 45,  “pay as you go” was out as an accounting practice. In its place, state and local government units had to instead record new liability accounts on their balance sheets for the entire future OPEB costs. If the new liability accounts were not recorded, then all of the government units would risk credit rating downgrades by bond rating agencies looking for compliance with all GASB related standards.

The new multi-year OPEB liability accounting requirement meant that all state and local governments had to  build into their budgets a multi-year plan that would show not only how they would to fund the current year’s OPEB costs for existing retirees, but also how they would fund the total future OPEB costs for both existing and future retirees. For most state and local governments, this was like trying to turn around an aircraft carrier ship on a dime. Couple the timing of this new budget and accounting requirement of compliance by 2010 with the 2008 economic crash and related tanking of tax revenues, and you have a perfect fiscal storm .

Unfortunately, the so-called mainstream media never really understood what an “OPEB”  was or how GASB 45 brought to light this  major budget crisis that had been brewing for decades in state and local governments across the country. The general public only knows that–as if out of the blue–in the past year or two most state and local governments have developed a budget crisis related to “unfunded pension liabilities.”

It’s important for conservatives to gain a better understanding of how this crisis developed over the past several decades. State and local government units across the country bargained in good faith with public sector labor unions. During that time, it was common to grant pension improvements and future retirement related healthcare benefits in exchange for holding down wage increases. Those decisions were viewed as a means of spreading the ultimate labor costs over time.

Conservatives and tea party activists should take note of what appears to be a constructive agreement that Governor Chris Christie has recently struck with the New Jersey Democratic State Legislative Leaders. The deal is multi-faceted and includes the following highlights to attack the state’s unfunded pension related liability for state workers: (1) raising the retirement age for new workers, (2) increasing the pension contribution percentages for the state workers, and (3) increasing percentage participations by state employees in their health insurance costs.

Several other leading conservative governors have negotiated and implemented innovative measures to address this budget crisis.  I think it would be great if Voices of the Tea Party could publish an e-book that summarizes the tough conservative policies that have been implemented at the state and local level to resolve this problem in a responsible manner.

Quincy Williams is a tea party supporter who works for local government in a Blue State.

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