David A. Vaudt, the new chairman of the Governmental Accounting Standards Board, plans to closely monitor the impact of GASB’s new pension accounting standards on the finances of state and local governments.
“Pensions are still at the top of the agenda for the GASB board,” he said in an interview with Accounting Today on Friday.
GASB issued its long-awaited standards for improving pension accounting and financial reporting last year with the goal of more faithfully representing the full impact of pension liabilities and expenses of state and local governments (see GASB Approves New Pension Accounting and Reporting Standards). But the problems with underfunded government pension obligations were highlighted recently by Detroit’s bankruptcy filing and mounting concerns about similar problems in other cities and states (see GASB Standards under Scrutiny amid Detroit Bankruptcy Filing).
Asked about what role the pension accounting standards changes may have played in Detroit’s bankruptcy, Vaudt responded, “I think it’s hard to comment specifically on Detroit, but I think when you look at any particular government out there, there are a lot of factors that go into what their situation looks like, and obviously a lot of different issues that can impact them. But on the pension side, the really positive side of the pension standards is it has elevated the discussion about the promises that have been made to employees and how we make sure that we’re funding those promises. I think that discussion is very, very important because it’s really getting governments to think longer term rather than just looking one year at a time. It’s required them to say, ‘How are we going to make sure that we have sufficient assets set aside to cover those promises going forward?’ I think it will definitely elevate the discussions on longer-term planning. I’ve seen it happen in the state of Iowa, where I came from. Rather than just looking at a one-year budget, they’re looking at two-year budgets and also looking at five-year financial plans to project out where they see they’re going and how they’re going to sustain those levels of services. So I think that’s the real positive that’s come out of the pension standards.”
The other area that GASB is focusing on is “other post-employment benefits,” also known as OPEB, such as retiree health care benefits, Vaudt noted. “Definitely, for some governments, that net liability is probably going to be larger than their pension liability because in most cases, they’ve set no assets aside to fund those particular promises, so that’s going to be another area that is going to get increased focus over the next couple of years.”
For a large city that declares bankruptcy, the issue of what happens when it tries to get out of paying for unfunded pension liabilities, and how they should be treated under the accounting standards, is unclear. “I think it’s too early to say how it’s all going to play out,” said Vaudt. “What happens in some of the more recent cases is probably going to drive a lot of what happens in the future. There are differences in state constitutions and so forth. The federal laws are going to come into play too. Until we see how some of that plays out with some of the current situations, we’re not going to really know what impact it’s going to have. We have seen in some of those governments where they have gone through this process, sometimes there have been concessions made well before they’ve gotten to answer any of the really difficult questions of how are those promises going to be met and can they be adjusted, so I think the jury is still out on what’s going to happen in that area.”
Reaching out to Stakeholders
GASB relies on its advisory council to help address these types of questions, as well as other problems that municipal and state governments are having with their finances.
“We reach out to our advisory council to see which issues they see as the most pressing that they’re trying to deal with, so we can follow up on those issues,” said Vaudt. “The other thing we want to do is to work strategically with maybe some of the players that haven’t given us as much input in the past to say, ‘What’s coming down the pike and how can we keep in front of it?’ Rather than saying, ‘Now that this has happened, how do we account for it?’ we’re trying to be in there helping governments deal with it. If they’re going to adapt and make changes to the way they operate, what are going to be some of the financial impacts to those? Our real role is to make sure that the financial information that’s provided to the users and elected officials, and so forth, provides them with decision-useful information that’s relevant to the type of policy decisions that they’re making. That’s our real role: to make sure that they have adequate information to make those policy decisions.”
Asked about whether that might include meetings with municipal employee unions, Vaudt responded, “I think every group can provide input. The key thing is to bring different perspectives to the table at the same time because it helps get each of the different groups to understand there is another way to look at things. When you do that, I think you come up with better conclusions and better comments.”
Government Fiscal Woes
As the federal government cuts back on its aid to states and local governments, they will be faced with more fiscal challenges and spending reductions. “I think part of that is more on the budgeting side of things,” said Vaudt. “What they need to do from a budgeting perspective is to be thinking longer term. That’s the real key. As I found from my work in Iowa with our elected officials, you need to look farther out from a budgetary basis and you can start to see what the impacts are and whether they can sustain the expenses.”
Vaudt is a former elected official himself. His previous job was Iowa Auditor of State and he is still in the process of moving from Iowa to GASB’s Connecticut headquarters. He took over from his predecessor, Robert Attmore, who retired on June 30 after leading GASB for a decade. Vaudt was named to succeed Attmore in April and he said he had received valuable advice and guidance from his predecessor during the transition (see Iowa Auditor of State David Vaudt to Chair GASB).
Vaudt will be bringing his perspective as an elected state auditor to the job at GASB. “My office there was responsible for over 200 local government audits each and every year,” he pointed out. “I not only bring that state perspective, but also that of large community governments to very small community governments, so I’ve been able to see the differences, capabilities and resources that they have.”
Working with FASB
Vaudt visited the Accounting Today offices Friday with the Financial Accounting Standards Board’s new chairman, Russell Golden, who also began his chairmanship on July 1, succeeding Leslie Seidman, after serving as a board member on FASB (see New FASB Chairman Makes Plans for Future Accounting Standards). Vaudt compared FASB’s involvement in standard-setting for smaller private companies with GASB’s involvement with standards for local government.
“I think we can definitely learn a lot from what’s taking place on the FASB side with the Private Company Council,” said Vaudt. “You obviously have totally different resources available at very small governments versus large governments, and we have to see what we can learn from the process that they’re going through and how we can leverage that on the governmental side.”
GASB has been closely following what its sister organization, FASB, is doing with converging lease accounting standards with the International Accounting Standards Board for companies in the private sector so it can align its standards for the public sector.
“We want to stay up to speed with what they’re doing so that we can track and follow and do updates as we need to on the governmental side, following their guidance and where they end up in the final statement,” said Vaudt.
He said GASB is always trying to get broad participation from a variety of stakeholders. “Working through our advisory council brings 30 different players to the table to help provide some of that input,” said Vaudt. “But I also want to continue to do more direct outreach to all those organizations and establish strong relationships and communication channels with each of the organizations and stakeholder groups out there, and then also just work together to make sure that we’re reaching out to some that probably haven’t provided us input in the past, like elected officials. What kind of information can we better provide them so that they can make some of the difficult decisions that governments are facing today?”
To help with the new pension standards, GASB has been issuing guidance for government officials to aid them with making the transition. “We’ve issued the standards, of course, but this demonstrates that once we’ve issued the standards, our work is not done,” said Vaudt. “So we just recently issued an implementation guide on the plan side for the pension accounting and reporting and now we’re working on the employer side for an implementation guide. Obviously pensions are going to be a very important topic over the next few years, and we want to make sure for the stakeholders we’re providing them with adequate resources so that they can understand and implement the new standards. We’re also spending a lot of time going out and meeting with constituent groups so that they have a good understanding of the statements and how to implement those. We’re making good progress there.”
Vaudt noted that GASB recently issued an exposure draft on the concepts for measuring the assets and liabilities of state and local governments, and a document outlining its preliminary views on the measurement of fair value and the application of fair value, including note disclosures. The board is planning to expand on that work.
“We’ll be looking at the feedback that comes from our stakeholder groups, along with preliminary views on fair value,” he said. “There we followed a lot of what FASB has done, so we’ll be looking for feedback on both of those due process documents coming up. Looking a little bit longer term, we’re going to be definitely looking at the recognition side on the concepts statement. When we first started on the measurement side, it was going to be measurement and recognition, but when we got into the project, we decided to split those two apart. The recognition side, I think, will be much more difficult to deal with, especially as we look at governmental funds and the basis there. My own personal view is I think it will also bring us into discussing the financial reporting framework. The two are so tied together, it’s going to be impossible to separate the two.”
He also plans to leverage the work that FASB is doing on developing a converged lease accounting standard with the IASB, as state and local governments will need to account for their leases in a similar way.
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