Is the Governmental Accounting Standards Board in trouble? "Trouble" may be too strong a word, but it's been a bumpy couple of months for the state and local government standard-setter.In December, the Government Financial Officers Association voted to "re-assess GASB's role as the authoritative accounting standard-setting body for state and local governments."
Then, early this spring, Texas passed legislation allowing municipalities to avoid following GASB standards when reporting certain post-employment benefits.
Shortly thereafter, the Connecticut state legislature passed a bill that would have allowed the state comptroller to set accounting standards for the state, a bill later vetoed by Governor Jodi Rell.
And now, Christopher Cox, chairman of the Securities and Exchange Commission, sensing a shaky situation, has made a public call for better funding for GASB and a legislative mandate that would require state and municipal governments to comply with GASB standards.
In a recent speech before officials in Los Angeles, Cox recommended federal legislation that would "mandate municipal issuer use of generally accepted accounting standards" - i.e., GASB standards - and that to keep GASB sturdy and independent, legislation "could provide an independent funding mechanism for GASB."
He also called for legislation that would permit the SEC to oversee GASB, just as the Sarbanes-Oxley Act permits the commission to oversee GASB's sister board, the Financial Accounting Standards Board.
GASB declined to comment on Cox's speech, except to issue a statement expressing appreciation of Cox's support and "recognition of the need for a stable, long-term funding source."
GASB's funding has always been somewhat precarious, as it is derived from sales of publications, contributions from state and local governments and the financial community, and a nominal voluntary fee assessment on municipal bonds that are issued.
FASB's funding was similarly voluntary until Sarbanes-Oxley mandated that public companies contribute a fee to support the board, thus ensuring its independence.
Kinney Poynter, executive director of the National Association of State Auditors, Comptrollers and Treasurers, said that his association agreed with some of Cox's points, while disagreeing with others.
"We agree that GASB should be the standard-setting body for state and local governments," Poynter said. "We also agree that it may be time to explore options for mandatory funding. Right now it's all voluntary, and it's just not working. GASB's budget continues to go up, and that's becoming of concern to some who have to pay the bills."
Poynter said that the NASACT also supported Cox's call for more timely financial disclosure. However, it did not see a need for SEC oversight of GASB. The exceptionally rare instances of defaults on state and local bonds, Poynter said, was evidence that the system is "not broken to the degree that the chairman keeps talking about."
"The trick is to find a mandatory process for funding without the direct oversight by the SEC," Poynter said. "That's tricky, because to have mandatory funding, you're going to have to have legislation. But legislation on funding for GASB at 50 capitals around the country is a non-starter. So that leaves us at the federal level and some kind of legislation on Capitol Hill, and the fear is that the SEC will want to have some kind of influence. It's a tough dilemma."
THE MUNI MARKET
The state and municipal bond market in the U.S. is huge, and surprisingly active. The value of bonds outstanding - $2.5 trillion - exceeds the gross domestic product of China. The value of bonds issued last year - $430 billion - roughly equals the U.S. defense budget. Over $6 trillion in bonds exchanged hands last year, with 87 percent of that in trades under $100,000.
According to Moody's Investor Services, the 10-year default rate on municipal bonds since 1970 has been .06 percent, compared to 2.23 percent for comparable corporate bonds.
Cox pointed out that the municipal bond market touches every individual and company in the country, if not through investments, then through the municipal facilities financed by bonds or taxpayer contributions that pay off bonds.
Cox found it very worrisome that, despite the sums issued and exchanged, there are no mandatory accounting standards established by federal legislation, and no federal regulator has the authority to insist on full disclosure of information when these securities are first issued.
"We need to take immediate steps to improve governmental accounting, and to ensure that issuers make financial information available more quickly," Cox said.
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