More On Government Accounting!

What good is it to require truth only in documents that hardly anyone reads?

Further to our recent opinion piece about state and local government accounting, a reader asked for an illustration of a state budget ignoring costs. California’s treatment of insurance subsidies provided to retired state employees (known as “Other Post-Employment Benefits,” or “OPEB”) provides one such illustration.

California’s State Controller reports that the State of California incurred OPEB Expense of $5.658 billion in the 2017–18 fiscal year:

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But only $2.267 billion of OPEB expense showed up in the state budget (see the last three columns below):

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The difference — $3.391 billion — was ignored by the budget. That amount quietly became an IOU, which is how more than $85 billion of state OPEB debt has quietly been created.

Citizens and journalists pay attention to budgets, not to OPEB reports issued by State Controllers. By law California’s governors are required to issue budgets in January, state legislatures are required to pass budgets by June 15, and budgets must be enacted by June 30. State and local governments are all about budgets. Hence, because only the Controller reported the truth, few know that California’s budget ignored more than $3 billion of expense in 2017–18.

The Governmental Accounting Standards Board (GASB) could help. California’s Controller issues its OPEB report to comply with a GASB rule. GASB should require any published financial documents, including budgets, to include the full OPEB Expense and to disclose how much of that expense was paid by IOU. The absence of such a rule is currently enabling governments to ignore an expense in their budgets without concern they are violating a rule.

GASB can’t influence what politicians do when they craft budgets but it can influence the integrity of financial information published by governments. Just as financial documents published by private sector enterprises must comply with Financial Accounting Standards Board (FASB) rules, financial documents published by governments should comply with GASB rules.

What good is it for GASB to require truth only in documents that hardly anyone reads? Budgets are the most-read documents in state and local governments. Right now California’s published budgets are not disclosing financial truths. GASB should demand truth in all published financial documents, including budgets.

Written by

Lecturer at Stanford University and president of Govern For California

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