California Construction Trucking Association (CCTA)

Local governments now must show pension liabilities on balance sheets

The Governmental Accounting Standards Board (GASB, pronounced Gazz-bee), a federal board that sets accounting standards for local governments is now requiring them to report pension liabilities on their balance sheets for the first time – a move that could add millions and/or billions of dollars in debt to local authorities bottom lines.

The board announced changes in accounting standards that likely will darken the pension picture for most cities, counties, school board and special districts. Previously, pension liability was tucked away in the footnotes of government audits. Now it will be front and center on documents used by the public, bond buyers and lenders to determine an agency’s financial health.
The question of unfunded pension and health liabilities has been a half-trillion dollar issue in California for several years.  Last year the Little Hoover Commission dedicated 106 pages to a report on the topic along with recommendations for potential solutions. Most of the solutions they proposed included freezing current retiree benefits and modifying new employee plans away from the “defined-benefit” system employed by the state and most communities.

How bad is it?

The Democratic Party controlled State Legislature has been quarrelling with democratic Governor Jerry Brown about the solution…but neither of them go as deep as the LHC recommendations.

“The balance sheets will go out of whack, particularly the school districts,” said Marcia Fritz, president of Californians for Fiscal Responsibility, a pension reform group. “All of a sudden they are going to have this big liability.”

Some critics say the new accounting standard will make it harder for local government to obtain credit. But others say rating firms already keep track of the true pension liabilities for each agency, looking past the accounting techniques that kept them hidden.

GASB has been working on the new standards for more than two years.  Private companies (and trade associations) have to comply with requirements from the Financial Accounting Standards Board (FASB), which, since 1973 has been the designated organization in the private sector for establishing standards of financial accounting that govern the preparation of financial reports by nongovernmental entities.

Now governments, at least local governments, are being held to some of the same standards.