Local Option in Texas: The Great GASB

Any time a legislative body as large as that of the Texas House of Representatives passes a bill of greater import than the designation of a state flower (e.g., Yellow Rose) or nut (e.g., Pecan) by a unanimous vote (i.e., 140-0), you sense that something odd may be afoot.  As your blogger drafted, the New York Times last Friday (5/18) cast light on the recent passage of a bill in the Texas House that would reject GASB's rules governing disclosure of the cost of promised healthcare benefits for retired employees of the state and its political subdivisions.  (Mary Williams Walsh, "Auditing Rule Is Put at Risk by Texas Bill," NYT, 5/18/07, C1.)

Reportedly, the Texas Senate is expected to vote before Memorial Day on a "softened" version of the House bill which would permit the affected governmental units to adopt and apply the GASB rules but not require them to do so.

The Government Finance Officers Association (GFOA), which includes folks who manage and report on general-account public funds as well as benefit plans and other trust funds, have stirred up outright opposition to the adoption of the GASB rules on grounds which on their face seem Byzantine: the GFOA would rather have the public-sector entities adhere to the more stringent FASB rules which apply to the private sector but which, unlike the GASB rules, do not require "performance audits."

Whether the unanimity in the Texas House would have been breached in a compromise for a permissive-only approach to GASB, we cannot know.  One would think that at least a few votes, if not a majority, could be mustered against "local option," as in prohibiting or allowing the sale of alcohol.  However, if GFOA had its way, the FASB standards would be Texas's. Local finance officials would then have no choice but to bite the bullet on calculating and disclosing an actuarial cost estimate of their reporting units' accrued obligations to pay post-retirement healthcare benefits.

GASB or FASB, either would nevertheless greatly displease many local officials, such as the Travis County auditor, who oppose any rule which requires some calculation of the government's accrued obligations for "other [non-pension] post-employment benefits" (OPEBs).

To maintain, as the Travis County official has been quoted to say, that those obligations are "not measurable" because different actuaries at two different valuation dates previously furnished healthcare cost estimates as wide apart as $89 million and $320 million (although they later closely converged on numbers of similar magnitudes) is ostrich-like: it is not to deny that the significant millions involved are that much greater than zero.

In a practical world, there ought to be a way for that county government and others like it to be able to avoid or lessen the risk of having their current credit ratings promptly downgraded in the wake of disclosing astronomical numbers (in the context of their finances generally) with no funding plans in place. Public officials ought to be able to find midway courses between, on the one hand, drastic cuts in public services and employee payrolls and, on the other, huge hikes in any of those relatively few tax and other revenue sources that political subdivision units have control over.

In the immediate aftermath of the Enron era scandals, when most public pension funds had taken large hits to their funded status, the legislative tack taken in a number of states entailed the adoption of credible plans, instituting step-rate increases in employer contributions -- in some cases, accompanied by temporary, defeasible employee contribution increases.  These were calibrated to make funding progress while the equity markets regained public confidence and staged an expected comeback -- sooner or later. Those efforts are by now proving themselves effective.

Granted, trying to remedy a pension plan funding deficit is not as politically daunting a task as deciding to begin funding long-term benefit payouts from scratch.

Cities and counties which have not already begun that task could be -- and some are -- banking on a pipe dream: that someday very soon, through overarching Federal action, America will enjoy universal healthcare coverage.

But before new legislation can possibly be enacted and set on a path to implementation, which could occupy the entire term of the next adminstration, realistically Congress will have had to attack the long-term funding shortfalls under both Social Security and Medicare. The truly "universal" health coverage that many now yearn for will also need to address issues of co-existence with Medicare (including the Part D program instituted just last year) and, in time, the "universal" plan's transitioning into or possibly swallowing up at least the benefits side of present-day Medicare for Medicare eligibles.

Until then, state and local governments with retiree healthcare plans will be forced to fend for themselves in quandaries of their own making.  The present values of future benefit obligations created by plan sponsors have a reality of their own, an existence independent of rule-makers.

Abbott A. Leban

Comments

[Don Levit]

Abbott:
Thanks for providing your comments.
It is interesting to contrast the GFOA opinion of the FASB with that of the National Asssociation of State Retirement Administrators (NASRA).
"NASRA strongly believes that this debate must retain the premise that public sector accounting is fundamentally different than accounting outside the public sector.
Unlike the private sector, government's long-term nature and its ability to generate a reliable revenue stream virtually eliminate the possibility of involuntary asset liquidation."
It soumds like NASRA and the Texas House have a lot in common.
Don Levit