GASB Standards under Scrutiny amid Detroit Bankruptcy Filing

With the recent announcement by Detroit’s state-appointed emergency manager of his intention to file for bankruptcy on behalf of the beleaguered Motor City, government pension accounting rules are being questioned.

The Governmental Accounting Standards Board approved new pension reporting and accounting standards last year with the aim of more faithfully representing the full impact of the pension liabilities and expenses of state and local governments (see GASB Approves New Pension Accounting and Reporting Standards). That put the onus on state and local governments to stop using many of the accounting gimmicks that had been employed in past years to obscure their growing pension obligations.

The financial crisis also meant that state and local governments were forced to revise many of the rosy assumptions they had made about the value of their pension plans’ investment portfolios and their expected payout. Detroit’s pension managers had projected annual growth rates of 7.9 to 8 percent, according to the Detroit Free Press. That rate of return proved to be un-prophetic at best. That was just one of a host of problems afflicting the city, where a shrinking economy and vanishing population and tax base led to a situation where there were more public sector retirees than workers.

“These are unchartered waters, the depth of which we haven’t seen before." said Detroit-area native Leon LaBrecque, CPA, chief strategist of LJPR, LLC, a Troy, Mich.-based wealth management firm. "We are traveling into the unknown. The emergency manager gave Detroit’s creditors the option of dealing with him (the devil they know) or dealing with the bankruptcy court (the devil they don’t know).”

Chances are that GASB’s pension accounting changes made little impact in the end on what was already a deteriorating situation for Detroit. LaBreque pointed out that the bankruptcy filing was a strategic move by the Detroit emergency manager Kevin Orr, who was facing a hearing on Monday in the lawsuit filed against him and Michigan Governor Rick Snyder by Detroit’s two retirement systems in an attempt to block a Chapter 9 filing. “By filing bankruptcy, all lawsuits are stayed,” said LaBrecque.

Eventually, GASB and its parent organization, the Financial Accounting Foundation, will probably need to conduct a post-implementation review of the pension accounting changes and what impact they had on local and state governments like Detroit and Michigan. The FAF has been conducting a series of post-implementation reviews of GASB and FASB standards. Last week, it announced that it would conduct a post-implementation review of the standard for impairment of capital assets and insurance recoveries for state and local governments.

Issued in 2003, GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, establishes measurement guidance for capital asset impairments and requires governments to report the effects of those impairments when they occur, rather than as a part of the ongoing depreciation expense for the capital asset or upon disposal of the capital asset. It also provides uniform reporting guidance for insurance recoveries of state and local governments.

Those who would like to participate in the survey on GASB Statement 42, conducted by an independent survey firm on behalf of the FAF, can register online.

In addition, the FAF announced that the PIR team has recently completed reviews of GASB Statements No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, and No. 30, Risk Financing Omnibus, which establish accounting and financial reporting standards for risk financing and insurance-related activities of state and local governments, including public risk pools. The FAF expects to issue the review report in August.