In 2004, the Governmental Accounting Standards Board (GASB) issued Statement No. 45 (GASB 45), creating accounting standards for governmental entities’ "other post employment benefits" (OPEB). GASB 45 requires Texas state and local governments to recognize and record retiree health insurance benefit costs as a financial obligation, even if there is no legal obligation to pay promised benefits.
In fact, Texas funds OPEB obligations for two-year periods because the state Constitution generally prohibits the Legislature from creating a debt or obligation beyond two years. Texas budgets within available revenue; however, what we can afford as a state changes each biennium. In 2003, the Legislature faced a $10 billion shortfall. Consequently, benefits were reduced.
GASB 45 also requires projecting OPEB costs for up to 50 years in the future, giving this seemingly innocuous rule a far-reaching and potentially damaging affect on future health care benefits for state retirees.
Consider your family’s health care costs for this year alone. Now try to predict how those costs might change during the next 50 years. It’s impossible. Nevertheless, now contemplate opening a trust account and depositing 50 years worth of future health care expenses today. For most people, this would be financially impossible or would at least cause serious hardship. GASB 45 has put state and local governments in this same untenable position.
During extensive, healthy debate in the recent legislative session, Susan Spataro, an accounting expert and Travis County, Texas, auditor for the past 18 years, described what GASB 45 would mean for her county.
She obtained two opinions from professional accounting firms on the cost of pre-funding retirees’ health insurance benefits based on projected health care costs. One firm suggested a price tag of $89 million; the other projection was $320 million. This disparate range illustrates the flaw in GASB 45.
Travis County would be required to front an annual required contribution of $46 million. To obtain those extra millions, property taxes would have to increase 16 percent, and the proceeds would be devoted exclusively to the GASB contribution. If that price went unpaid, it would compound, eventually showing these fictional liabilities as exceeding assets. The county would be insolvent on paper.
Ms. Spataro concluded GASB 45 does not meet the two-prong test necessary for an accounting transaction to be booked: it does not meet the accounting definition of an obligation, nor is it measurable.
Some suggest that the county or the state could simply book this as a liability without pre-funding. But accounting rules should not require a governmental entity to measure its solvency by liabilities it does not legally bear. Texas’ financial statements must be fair and accurate.
House Bill 2365 simply allows government retiree health plans to continue to be accounted for as they have been for years—on an annual, pay-as-you-go basis. HB 2365 calls for long-term retiree health cost data to be made available for informational purposes, as part of the supplemental information submitted with a financial statement. This is a true representation of obligations.
The American Academy of Actuaries believes GASB 45 would damage the credibility of a balance sheet and add unwarranted volatility. Many actuaries recommend predicting liabilities for no more than five to ten years into the future.
Those who want Texas to comply with this mandate also ignore the human and social costs. To pre-pay retiree benefits as though we had no control over them would cost the state of Texas billions of dollars or unnecessarily force significant adjustments to retiree benefits. Even worse, other important areas of appropriation such as public education, transportation, criminal justice and Medicaid could be adversely affected.
Consider what happened when the private sector equivalent of GASB, the Financial Accounting Standards Board (FASB), imposed a similar rule on private companies. Significant numbers of Fortune 500 companies cut or eliminated retiree health insurance.
As elected officials of a pay-as-you-go state, we have an obligation to uphold the Texas Constitution and take into account the implications of implementing GASB 45 for those who have devoted their professional lives to the state of Texas.
Susan Combs is Texas Comptroller of Public Accounts. Texas State Senator Robert Duncan of Lubbock represents Senate District 28. Texas State Representative Vicki Truitt of Keller represents House District 98.