Should legislators establish accounting standards?

HB 2365 by Rep. Vicki Truitt (R-Keller) puts the legislature in the accounting standards business by establishing Regulatory Accounting Principles (RAP) for all Texas governments and then requiring those governments to follow RAP rather than GAAP in all reporting.

GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, generally requires that state and local government employers account for and report the annual cost of other post-employment benefits (OPEB) and the outstanding obligations and commitments related to OPEB in a manner similar to accounting for pensions, except that the unfunded liability must be booked. The biggest OPEB are health care benefits.

Some Texas county auditors don’t like GASB 45, expressing concern that the actuarial numbers to quantify the purported liability vary so much that any number selected would actually be misleading to the public. If the numbers at the top of the range are used there is concern that governments would unnecessarily curtail their post-employment benefits, and if the lowest number is used auditors might object on the basis of conservatism (evidently even the low number is pretty big).

To further complicate the issue, it is believed that the Texas constitution prohibits governments from making commitments beyond two years. Therefore, although a county might plan to pay health benefits for retired employees forever, they can only be obligated to do so for two years. Evidently GASB 45 says that doesn’t matter: if it is customary for the government to pay the benefits throughout retirement, a liability must be recorded, even if it isn’t enforceable. It’s these two issues - measurement and accruing a pseudo-liability - that have county and state officials and some legislators upset.

To be more specific, their position is that there is no contractual or other legal liability for OPEB, so no liability should be recorded, and there is no readily available means of ascertaining the cost of such benefits for as much as 30 years in the future, especially since the nature of and entitlement to those benefits can and are changed every two years.

HB 2365 and its Senate companion, SB 1102, would establish Regulatory Accounting Principals (RAP) for state and county governments as an Other Comprehensive Basis of Accounting (OCBOA) for Texas, and auditors would be asked/required to give an OCBOA report. The only difference in RAP and Generally Accepted Accounting Principals (GAAP) would be GASB 45.

Another tough issue with the government folks: they say only the state legislature or the county commissioners have the right to obligate their respective government entities. By requiring the governments to book the liability for OPEB, GASB is dictating what obligations the government takes on, and they don’t have any authority to do so. The idea is the law determines what is a liability, not GASB.

While this is certainly a sticky wicket, generally speaking we CPAs have been opposed to government getting into the accounting standards business. What few of us realize is that in Texas, the State Comptroller already has substantial authority to establish accounting standards, policies and procedures for state and local governments. Nevertheless, the state legislature deciding to legislate away an accounting standard formulated by one of the accepted accounting authorities in the country is bad public policy and a bad precedent.

If you’d like to know more about the significance of GASB 45, including the estimate that country wide OPEB liability might total $1 trillion, check this out.

Thursday's Austin American-Statesman had a good analysis of the issue as well - read it here.