From the desk of Michael Rapoport – WSJ – June 3/15.
The rising cost of public employee retiree benefits, and underfunded liabilities has plagued state and local governments for years contributing to the bankruptcy of the cities of Detroit Michigan, Stockton, and San Bernardino in California, and Providence, Rhode Island.
Two specific causes are evident. One, accounting standards, promulgated by the Governmental Accounting Standards Board (GASB) dating back to 1996, allowed both cities, and state’s the opportunity to reflect these expenses as nothing more than a footnote on their balance sheets. In doing so, the entity involved obviously looks more solvent than it actually is, and integrity suffers. To complicate matters further, many cities also used unrealistic interest rate earning assumptions that were impossible to achieve. According to Moody’s, state governments alone have $454 billion in underfunded retiree-benefit liabilities as of 2013.
On June the 2nd, the standards board unanimously approved new rules that hopefully will “improve governmental employer accounting and reporting standards closer in line with private sector requirements”. A big however, the new rules will not require governments to commit more money to pay for retiree benefits, nor do they require any changes in the level of benefits provided to retirees.They expect to see (as a result of these changes) ongoing efforts by state and local governments to better control costs.
In my opinion, proper posting of incurred costs will only agitate the witches’ brew of irreconcilable, underfunded liabilities. Although a good start, real change goes well beyond posting numbers on a sheet of paper.