December 26, 2005
From the desk of Winterspeak:Ask and you shall receive
Firstly, Merry Christmas.
Secondly, I recently wrote that "I would like the government in general to shift from cash accounting to GAAP accounting. While GAAP accounting has lots of room for fudging, the mismatch between long-term liabilities and short-term cash plays havoc with discussions around pensions in general and social security in particular"
It seems my wish has been granted. This NYTimes article states that
When the numbers are added up under new accounting rules scheduled to go into effect at the end of 2006, New York City's annual expense for retiree health care is expected to at least quintuple, experts say, approaching and maybe surpassing $5 billion, for exactly the same benefits the retirees get today. The number will grow because the city must start including the value of all the benefits earned in a given year, even those that will not be paid until future years.I would love to know how they got this rule change pushed through. I'd also love to see it happen for social security, medicare, and other long-term government obligations. Posted by Winterspeak at December 26, 2005 12:01 AM | TrackBack | Technorati inbound linksThe pay-as-you-go accounting method that New York now uses greatly understates the full obligation taxpayers have incurred because it does not include any benefits to be paid in the future. Most other state and local governments that offer significant health benefits to retirees use the same method and will also have to bring newer, larger numbers onto their books in the next two or three years.
If you take a look at http://www.gasb.org/, you can see that these accounting changes took years to begin to implement. GASB-34, for instance, has been known about since at least 2000, but many transportation agencies are only now beginning to put those new standards in place.
/f
...yup, these new financial-accounting rules are an obscure, but great holiday gift to average taxpayers.
The true cost of decades of gross mismanagement by state & local politcians will become painfully obvious.
Mass bankruptcies by American municipalities are very likely... as severe & quite necessary corrective surgery.
Many of those highly overpaid municipal-union employees & government bureaucrats will join their GM and FORD brethren .... in discovering their retirement gravy-train will quickly be derailed.
As the MSM constantly bemoans the low-savings-rate & household-debt of private Americans..... the MSM never seems to notice the much worse financial condition of state & local government bureaucracies.
{...perhaps they'll soon start to notice, as 'true' financial statements are legally required ?}
...Fritz, all these new accounting rules will be in force 'everywhere' within five years ... and all 50 state-governments & hundreds of large cities & counties must comply within 2 years -- that's very quick by the glacial standards of government bureaucrats.
How about the Federal government? Shouldn't we hold them to the same fine standards of responsible accounting?
One difficulty with accounting on this basis for pension and medical expenses but not other expenses is that it assumes a peculiar priority system: namely, that a medical care obligation that falls 20 years in the future will be paid, but that fire and police salaries 20 years in the future (or even next year) may or may not be paid. The bankruptcy court is unlikely to enforce that particular prioritization. If the purpose of the accounting change is to warn current employees that they are unlikely to realize those particular future benefits, it certainly will do that.
The more people that lose their employment-based health care, the greater the likelihood that there will be a federally-mandated universal coverage system put in place (the general populace in the US has rejected, and I believe will continue to reject, broad libertarian economic policies). If that occurs, will cities be able to dump their obligations onto that program? Or would they continue to administer their programs but receive previously unanticipated federal dollars to help pay for it? The new accounting rules will provide a different view of the long-term financial health of city governments, but not necessarily one that is more accurate than the current view.
Wasn't it a similar change 15ish years ago that caused most pension plans to be changed from defined benefit to defined contribution type? (Something like FASB?)
Oh yes, please.
The WHOLE government, top to bottom particularly including the Federal...I remember reading somewhere that the Pentagon uses 15 recognizable accounting systems alone, one can only imagine what is being hidden.
Audits too.
It'll be interesting to see how they deal with the asset side of the balance sheet, too. With a $12 trillion GDP, I'd guess it as roughly $120 trillion in assets. makes a measly little $6 trilling in SS debt look pretty reasonable.
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