AGA Today
Texas Lawmakers Opt
to Ignore Government Accounting Standard
By JOANNE WOJCIK , Business
Insurance
June 04, 2007
AUSTIN, Texas-Legislation allowing Texas and
public entities within the state to disregard an accounting standard
that governments publish their retiree health liabilities on their
financial statements is drawing a mixture of criticism and praise.
The Norwalk, Conn.-based Governmental
Accounting Standards Board-the private organization that promulgated
Statement 45-as well as accounting organizations and other public entity
benefit managers predicted that Texas will suffer financially if it does
not follow the accounting practice.
However, lawmakers and representatives of
retired employees disagree, and Texas Gov. Rick Perry is expected to
sign the legislation.
Faced with a projected $50 billion in future
retiree health liabilities, Texas lawmakers last month passed H.B. 2365
by nearly unanimous votes. The legislation would give Texas and any of
its public entities permission to ignore GASB Statement 45, an
accounting standard requiring state and local governments to disclose
their liability for "other post-employment benefits," which include
retiree health, dental and vision benefits and some forms of life
insurance (see box, page 21).
GASB 45 was issued in 2004 and takes effect
this December for large public entities. It recommends that these
liabilities be funded in much the same manner as pensions, using an
actuarial approach, rather than a pay-as-you go basis as they
traditionally have been.
The first iteration of H.B. 2365 forbade any
Texas public entity from following GASB 45. However, the measure was
changed to give public entities the option of using either GASB 45 or
the so-called Texas Standard after several public entities stated their
preference for the GASB standard in testimony before the Texas
Legislature.
The legislation defines the Texas Standard as a
"statutory modified accrual basis for governmentwide and fund-level
internal and external financial statement reporting."
State Rep. Vicki Truitt, R-Fort Worth, said she
wrote the bill after representatives from Terrant and Travis counties
told her that applying GASB 45 would make many public entities appear
insolvent when they were not.
"We want to disclose (retiree health
liabilities), but we do not believe it to be a hard liability that
should be listed as such on the financial statements," Rep. Truitt said.
She added that the state's constitution
prohibits lawmakers from making appropriations more than two years in
advance, and GASB 45 requires that retiree health liabilities be
projected 30 years into the future.
Moreover, retiree health obligations in Texas
are not guaranteed because collective bargaining agreements are barred
by statute for most public entity employees, with the exception of
police and firefighters, she said.
"These are things granted on a
session-by-session basis," said Andy Homer, director of government
regulations for the Texas Public Employee Assn., a nonunion organization
that represents some 15,000 active and retired state workers. TPEA
testified in favor of the bill.
For example, in 2003 when the state was facing
a $10 billion budget shortfall, the Legislature voted to increase the
eligibility requirements for retiree health benefits, thereby reducing
those obligations, Mr. Homer said.
While lawmakers and public entity retiree
representatives support the measure, the GASB, other accounting
organizations and some public entity benefit managers, expressed
concerns that Texas' decision to essentially flout GASB 45 could
backfire by making the state appear to be a greater credit risk.
Potential audit troubles
"The Big Four accounting firms have said this
could result in not getting a clean audit opinion. The bond rating
agencies have said this will be a factor in their credit ratings," said
a spokesman for GASB in Norwalk, Conn.
"It may or may not be a factor in bond rating,"
said Douglas Benton, vp and senior credit officer in Moody's Investors
Service's Dallas office. "As a rating agency, we don't create or require
governments to adhere to any specific accounting principles because
we're not a regulatory body behind GASB. We're not like the (Securities
and Exchange Commission) where we demand compliance with accounting
standards," Mr. Benton said. "However, GASB has become the standard in a
lot of states."
Although Standard & Poor's Corp. doesn't
specifically require that entities use generally accepted accounting
principles, "if you do not follow GAAP accounting, it's a negative
credit factor and could adversely affect ratings," said Parry Young, a
director in the public finance department at S&P in New York.
"As a rating agency, we want certain pieces of
information, and one thing we would like to know is how well the entity
is managing their OPEB liability," added Sherman Myers, a director at
S&P in New York.
Indeed, the objective of GASB 45 is to create a
uniform way for public entities to report their long-term retiree health
liabilities, according to GASB.
"In Texas, they don't want to see these
liabilities on their watch. They said that in their own testimony. To
us, that will result in flawed information to the public and the public
will not get the truth," the GASB spokesman said.
The American Institute of Certified Public
Accountants in New York said any public entity that forgoes GASB 45 will
receive an adverse opinion stating that their financial statements are
not in accordance with GAAP.
"The AICPA's position is that we support GAAP
reporting by state and local government entities," said a spokesman for
the organization. "We support the GASB, and we always have."
However, "if you begin to pick and choose which
accounting principles you like and don't like, then you don't have
generally accepted accounting principles," said Relmond Van Daniker,
executive director of the Alexandria, Va.-based Assn. of Government
Accountants, which also has come out against the Texas legislation.
Several public entity benefit managers also
criticized the Texas action.
"Everybody keeps saying GASB 45 is not binding.
On the other hand, I can assure you that the bond rating agencies are
going to want to look at retiree health liabilities," said Darrell
Wells, director of risk management for Odessa, Texas, who also is in
charge of the city's health benefit program for active and retired
employees.
"They know this is going to be a huge number.
They know there will be back scatter from the media and citizens" and
financial markets if the liabilities are reported, and they are
significant, Mr. Wells said. "The Legislature would be asked to put in
large amounts of money to fund retiree health," he said. "But there's
not enough money to go around."
Paul Hackleman, benefits manager for San Mateo
County, Calif., said Texas public entities that opt out of GASB 45 "are
going to find themselves at some financial disadvantage in terms of
either money that they're borrowing or bonds that they're trying to
float or anything where they're trying to get money from creditors."
Will other states follow suit?
But Rep. Truitt doesn't expect such
repercussions.
"We don't believe it will affect the state's
bond rating," she said. "The issue is creditworthiness and the key is
making all the information necessary available to those who need it to
determine creditworthiness, and the legislation we passed does that.
It's not that we're not offering full disclosure. We will offer full
disclosure. We just won't do it as a liability."
As far as the Texas rebellion against GASB,
Rep. Truitt said she expects other states to join Texas and she is
preparing a presentation for the this year's annual meeting of the
National Conference of State Legislatures.
"Other states are interested in finding out
what Texas did," said Arturo Perez, fiscal analyst for the Denver-based
NCSL. "It's possible they may take actions."