STUMP » Articles » Governmental Accounting Standards Board: Meep Writes a Letter » 24 January 2019, 17:52

For the more accounting-oriented folks here, I want to point you to an email-writing campaign from Truth in Accounting. If you are on their mailing list, you may have already received the following request:

Hi Mary Pat,

Thank you for offering to help me make governments more transparent in the financial reporting of their general funds. As you might recall from our discussion, Truth in Accounting has started a new letter-writing initiative that needs your support.

As I mentioned, we are trying to end state and local governments’ use of Enron-like accounting, which allows them leave their pension debt off of their general fund balance sheets. This type of accounting makes governments’ general fund balances look good, but it is confusing and misleading. I also believe this accounting has assisted in the accumulation of billions of dollars in pension debt.

That is why we are spearheading efforts to encourage the Governmental Accounting Standards Board (GASB) to require governments to use full accrual calculations and techniques, or FACT-based accounting, when reporting their pension debt and expenses.

Would you help us improve accounting standards by sending an email to GASB?

Please click here to send your email

The button will take you to a webpage that has more information and email templates. Just click on one of the templates, fill in the blanks and hit send. This is just suggested wording, so feel free to change it. I also would be willing to help you to customize an email.

The deadline to submit an email is Feb. 15, 2019, but I am asking for your support today. This will only take a few minutes of your time and would mean so much to me.

Thank you for your support,
Sheila
Founder & CEO

If you Go to the link, you will see two different email forms. I don’t run a think tank (I mean, I could call STUMP a think tank, given how many such orgs are just one person and a website… and are self-funded), so I used the citizen form…. and heavily edited.

THE LETTER I SENT

Here it is. I won’t blockquote it, as I wrote it… duh.

Dear Director Bean,

I want to start off by thanking the Governmental Accounting Standards Board for the steps it has taken to improve the financial transparency of government finances at the state and local levels. I’m further encouraged to know the Board is in the process of hearing comments on Project No. 3-25.

I am Mary Pat Campbell, a resident of New York who works in Connecticut, and I have been long interested in public finance (and particularly public pensions). I have written about these topics in several venues, and I’ve done my own analysis of CAFRs and similar financial reports. My own background is as an actuary in life insurance and annuities, with an extensive understanding of their valuation and accounting. In the insurance field, regulators have been development advancements in making sure liabilities are properly accounted for, and that the matching of revenues and expenses are appropriate in patterns. Similar to pensions, these are very long-term commitments, and recently the FASB announced an Accounting Standards Update that has modernized some of the approaches in accounting for these long-term promises. Similarly, the main insurance regulatory group, the NAIC, has been updating its approaches to reserving and capital measures.

Of course, the aims of FASB are to provide appropriate information to shareholders, to try to reduce the principal-agent problem. The NAIC’s focus is on protecting policyholders and the promises made to them. GASB somewhat balances these two — one needs to make sure the commitments made by governmental entities are measured such that people like pensioners are protected. At the same time, GASB focuses on information appropriate for taxpayers (and politicians) to make a proper evaluation of how the financial state of the government stands. Given what I see in the states in which I live and work, and the other states and municipalities I’ve studied, I believe it is imperative that GASB take the lead and shine a light on the long-term costs that are often obscured from public view. Both taxpayers and retirees may find themselves in danger.

While I believe one of the proposals in the preliminary views document, the “Statement of Short-Term Financial Resources Flows,” is valuable and a step in the right direction, it will be incomplete and misleading without a full-accrual approach. As it stands, this proposal would not paint a complete picture of a state’s general fund finances because it does not include the largest expenses: the compensation costs associated with pension and other post-employment benefits. Without knowing the full scope of these costs and accruing long-term liabilities, it’s impossible to determine whether a state’s general fund is balanced without pushing current costs onto future taxpayers. As we saw with Detroit, sometimes the future taxpayers do not show up, in which case pensioners can find themselves getting less than they originally expected.

The proposal also allows legislators to validate a budget that includes loan proceeds as revenue and excludes costs that weren’t paid in the respective year. With incomplete and misleading information, policymakers will continue to make ill-advised financial decisions that have major repercussions for those who ultimately will be responsible for the bill when it comes due: the taxpayers, including future generations of taxpayers. It may also make municipal bankruptcies more likely, in which case, pensioners can be damaged.

I strongly believe that in addition to the “Statement of Short-Term Financial Resources Flows”, a general fund balance sheet and income statement prepared on a full accrual basis are essential.

Thank you.

Sincerely,

Mary Pat Campbell
North Salem, New York
marypat.campbell@gmail.com

PLEASE SEND A LETTER IF SO INCLINED

I have written to GASB and other regulatory/accounting bodies before. Obviously, a lot of the details in the letter are specific to me… but many are not.

I am giving anybody permission to re-use any of the ideas in my letter, but it may be better that you put it in your own words, so that it doesn’t look too form-lettery. Truth in Accounting’s focus is on taxpayers, but I want to make sure GASB understands that low-balling the pension promises also affects the people they should also be protecting: pension participants.

Note I did not reference municipal bondholders, who obviously get damaged in municipal bankruptcies. However, with respect to securities holder protections, that’s more of an interest of the SEC than GASB.

In the public company world, we have seen bad accounting practices drive destructive behavior (let me not start on the credit crisis stuff). Similarly, bad pension accounting practices have led to behavior that makes disaster more likely.

Fixing the accounting obviously won’t fix the problem by itself, but it can help signal problems well in advance of a crash.

OLD POSTS WITH RELATED MATERIAL

Another related post: Public Pensions: On Accounting For Assets and Liabilities and REALLY BAD IDEAS

Public entities should stay the hell away from financial engineering — it’s dangerous enough when private entities do it… getting governments involved is a horrible idea.

BECAUSE EXPERIENCE

Oh, and I see they’re talking about cost accounting. Yes, cost accounting tends to be horrible, but you can’t mess around with the figures so much.

That’s really important when it comes to government and finance.

BECAUSE EXPERIENCE

Look, how trustworthy are politicians with respect to public finance? We know if they don’t have oversight they get up to all sorts of shenanigans.

If the public finance standards are tightened, it can rein in some of the crazier ways politicians can make governments more likely to fail financially.

Then there’s the problem of when the accounting deviates from reality. Numbers on paper don’t make it so.

In an earlier post on public pension valuation:

TO BE RATHER THAN TO SEEM

Someone responded to one of my recent posts on the discount rate drop in Illinois:

On the recent Illinois TRS decision to lower their discount rate to 7% I have to laugh at the headlines about the decision increasing costs 400M. I don’t understand why you don’t point out the decision doesn’t increase costs.

Yes, I didn’t mention that. Changing the valuation technique or assumptions changes how expensive the pensions look. The cash flows are whatever they’ll be… and the government will put in whatever contributions they put in.

But these balance sheet values… they’re only approximations. Changing how you make those approximations doesn’t actually change how much the pensions ultimately cost.

And making the pensions look cheaper doesn’t actually make them cheaper.

Making them look cheaper, making the current year costs look lower, doesn’t mean they will ultimately be cheap.

So again, please consider sending your own email. There are versions just for any old citizen/taxpayer, and it’s less involved than what I sent. Also, don’t worry about this sentence in the form letter:

As a concerned citizen and a taxpayer in YOUR STATE, a state with mounting financial issues…

Guys, you can slot any state in there. Some are much worse than others, but I’m telling you all of them have mounting financial issues.

FUN VIDEO

And… this next video has nothing at all to do with this prior stuff, but it’s really cool.

But here’s my tortured attempt: the video is capturing a very short period of time, and then the video is slowed down and you can see the cause-effect chain much better.

…just like financial statements, where you’re trying to capture a lot of movements (in a year) within one document……

Okay, it doesn’t quite work, but it’s a really cool video.