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House Bill 2365 Protects Texans From Far-Reaching Consequences of Government Accounting Rule
Texas Comptroller Susan Combs
State Senator Robert Duncan
State Representative Vicki Truitt

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). We are concerned that an arbitrary accounting rule, handed down by a board with no checks or balances, will adversely impact health care benefits for our state retirees.

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 such legal obligation. On the surface this appears to be a fairly innocuous and ministerial requirement. However, because the rule requires these costs to be measured and reported for a period up to 50 years in the future, the requirement has a far-reaching and potentially damaging affect.

Consider your own individual health care costs and those of your family for this year alone. Now try to predict how your health may change during the next 50 years and project the associated cost. It’s an impossible figure to determine or to guess. Despite this fact, now contemplate opening a trust account and depositing that total amount today. For most people, attempting to do this would be financially impossible or would at least cause serious fiscal hardship. GASB 45 has put state and local governments around the country in this untenable position.

Retirement health benefits for the state of Texas and most Texas governmental entities are not constitutionally mandated or contracted programs. Instead, the programs are reviewed and renewed during the regular budgeting process.

Accounting experts tell us GASB 45 — this nationally developed, voluntary accounting standard — conflicts with Texas law. We explored this issue fully during the recently concluded legislative session. There was healthy debate in both the House and the Senate.

We learned the American Academy of Actuaries believes the rule 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.

The rule didn’t pass the GASB board unanimously. One dissenter, Paul Riley Wood, indicated it would mean governments should pre-fund or book items that do not require pre-funding or booking. This is precisely the concern we have in Texas.

We appreciated the appearance of Carl Johnson, a main author of the GASB 45 statement, during our legislative discussions. We asked how this principle was developed and requested an explanation of the rule’s underlying theory.

His response was that it’s what the board concluded based on “all of the facts and communications.”

Ipse dixit, the Latin phrase for “because I say so.”

Contrary to the GASB board’s out-of-state hearing process, our facts and communications are laid out in full view. Texas retiree health benefits are budget - not contract - based, and that process is clearly visible every budget cycle, when the Legislature and other local governmental entities draft their budgets.

Texas budgets within available revenue; however, what we can afford as a state changes each biennium. For example, in 2003 the Legislature faced a $10 billion shortfall. Consequently, benefits were reduced.

Texas is a pay-as-you-go state, and there is no way to accurately report that changing figure on a balance sheet. Susan Spataro, an accounting expert and Travis County, Texas, auditor for the past 18 years, investigated 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 the requirement of projecting the cost of the program. One firm suggested a price tag of $89 million; the other projection was $320 million. This disparate range illustrates the flaw in GASB 45's measurement of the cost of the benefits.

It’s true. GASB doesn’t specifically say these amounts must be paid immediately. Instead, they require calculation and reporting of an “Annual Required Contribution.”

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, the proceeds of which 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.

The county would be in the same unenviable position as the state — register a huge, so-called liability and take the ensuing lumps, or cut retiree health benefits.

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.

Those who want Texas to comply with this mandate also ignore the human and social cost of complying with the rule. 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 also be adversely affected. This is a problem.

Consider what happened when the private sector equivalent of GASB, the Financial Accounting Standards Board (FASB), imposed a similar rule on private companies. No fewer than 70 percent of Fortune 500 companies cut or eliminated retiree health insurance benefits.

Texas is not alone in questioning GASB 45. State Sen. Leticia Van de Putte of San Antonio, the president of the National Conference of State Legislatures, points out that other states are consulting their attorneys and accountants and working through the math. Still others are even looking at ways to eliminate the GASB board altogether.

Texas has decided instead to be a leader of reason in the effort to counteract the potential for adverse consequences to our retirees.

Texas’ Attorney General has clarified there is no legal obligation. House Bill 2365 simply creates an “other comprehensive basis of accounting (OCBOA)” that 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. In addition, the bill 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 fair and balanced approach.

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. As elected officials, we have an obligation to uphold the Constitution and take into account the implications of implementing GASB 45 for those who have devoted their professional lives to the state of Texas.

And that is exactly what we are doing.


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.
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