Like its college football, Texas is turning the shell game into a spectator sport. Following in the Lone Star State's footsteps, Connecticut, the state that is home to the independent accounting standards board that is leading the way to government transparency, also wants to hide the pea.
Both states have figured out logical-sounding arguments to support their contention that they should not have to worry about GASB 45. That's the accounting rule issued in 2004 that told governments to figure out the cost of health care benefits that they have promised to state workers in retirement–and then reflect those costs as a liability on the books today.
Texas has passed a law that says its state and local governments have the option of ignoring the standard.
Connecticut legislators were less frontal in their assault, simply giving a state official the authority to pick and choose which accounting standards to follow (although the governor recently vetoed the legislation when it reached her desk).
These two states are trying to stir up a government rebellion against GASB 45. Why? Because it is not very convenient for politicians, who are used to voting for benefits today and putting off paying for them until tomorrow, to be faced with the kinds of obligations that retiree health care costs add up to.
Just a few examples of the public tab over the next 30 years: the state of Pennsylvania, $14 billion; New York City, $50 billion; the state of California, $48 billion; Utah State University, $93 million; and the Los Angeles Community College District, $625 million. In fact, testimony by an expert to New York legislators recently put the total cost of all unfunded public sector liability for health care costs at $600 billion to $1.3 trillion. To put that in context, consider that the outstanding value of all state and local government municipal bonds is roughly $2.3 trillion.
So forget the posturing that Texas and Connecticut are engaged in as they try to keep future liabilities from clouding their present spending plans. Instead, look at the reality. Government workers across the nation are typically sold on staying in the public sector because of the value of benefits, both during their careers and in their retirement. In a world where the private sector is rapidly moving to "defined contributions" rather than "defined benefits" in both pensions and health care, government is the last place where employees can still bank on cradle-to-grave security.
The cost of that security blanket for public employees, however, is rising rapidly. And just as private companies found they could not remain competitive in a global economy with pension and health care costs adding a heavy burden to their bottom line, government entities are finding it tough to balance the promises they have made to retirees with the double demand from the public for high services and low taxes. So far they have managed it because the future cost of their commitments is usually safely hidden away in a footnote–or not even calculated at all.
GASB 45 has changed that dynamic, requiring governments to bring the hidden costs out into the sunlight. Nothing in the rule requires governments to actually fund their liability once it is on the books. But since rating agencies take liabilities seriously, public agencies know their ability to issue bonds and raise funds could be severely impacted if they ignore GASB 45.
