| August 2, 2010

It's Time to Get Oklahoma's Pension Accounting Right

The 1980 fall elections had just concluded and the state auditors gathered in a cramped room in the nation’s capital to discuss who should set accounting standards for government, and the direction in which those standards should evolve. There was considerable anxiety about the future, and several state auditors voiced opposition to the AICPA (American Institute of Certified Public Accountants) gaining more influence over setting accounting principles for state and local governments.

Your writer was the still relatively new Auditor and Inspector from Oklahoma, having been elected in 1978. I had not done any accounting work in government prior to my election (a fact my campaign materials conveniently omitted) and had to get up to speed quickly on the vagaries of The Blue Book and fund accounting. Quite frankly, a lot of it seemed confusing, and the explanations from patient, more-experienced practitioners as to why accounting in government was so different sounded like a lot of mumbo jumbo. They still do.

During the meeting, Bob Scott, Colorado’s State Auditor, rose to say in very clear language that the reason so many in the room didn’t like the AICPA was that they didn’t want to disclose the full extent of their liabilities which accrual accounting, urged by the AICPA, might force them to do. As if that wasn’t enough, he pointed to a GAO official sitting against the wall and said the feds were the worst of all because they didn’t want people to know how much we were really in hock for Social Security and Medicare!

The courageous Mr. Scott could not have created more pandemonium if he had lit the fuse on a stick of dynamite and tossed it on the floor. The anger was palpable as the room erupted. I wouldn’t have been surprised if someone had thrown a punch. Fortunately, no punches were thrown and order was restored, but a very deep division was exposed.

A few months later, we gathered again at an Arizona resort. Several of the older hands expressed concern that if we went too far too fast, legislators would revolt at the thought of putting all those liabilities on the balance sheet at once. Point well taken. When the Governmental Accounting Standards Board (GASB) was first established, it needed to take care that its pronouncements were in fact generally accepted.

Today, however, governments at all levels face serious fiscal crises. Some might say these crises have arisen, at least in part, because the accounting profession has failed in its accounting and reporting duties. Some governments face the prospect of defaulting on pension obligations, short of enacting very onerous new taxes or excruciating service reductions to get the money to make those obligations good.

Are we actually going to continue to account for government without putting the pension liabilities on the balance sheet or running all the cost of new benefits through the activity statement? Oklahoma’s Teacher Retirement System (TRS) is one of the six worst-funded state pension systems in the country, but you wouldn’t learn that from the state’s balance sheet, which shows $13.8 billion in net assets for the primary government and another $6.0 billion for component units. You have to look in a note on page 115 to find that TRS is an estimated $9.5 billion under water and that current contributions are “insufficient to cover the interest on the current unfunded liability and the normal cost.”

And, yes, the note also tells readers that there is a separately issued audit report for TRS which can be obtained by writing to the appropriate agency at an address provided. The single largest number that should be on the balance sheet and someone has to write off for a separate report? Are we nuts?!

We will be called worse than that when citizens find out they have to endure ruinous tax increases and/or calamitous service curtailments for something that has been known for years but not clearly and prominently displayed by the accountants.

Fortunately, Oklahoma’s current state auditor chose to emphasize this matter in his recent opinion. But he did so on the basis of his professional judgment. What about those who reside in a state where the auditor is perhaps lazy, incompetent, or timorous? We need fundamental change and the GASB should proceed quickly to bring it about.

Tom Daxon is a former Oklahoma state auditor and inspector and a former secretary of finance and revenue for Gov. Frank Keating. A Certified Public Accountant who holds both an undergraduate and a master’s degree from Oklahoma State University, Daxon is the author of two recent OCPA studies on financial reporting in government and one on comprehensive health care reform.

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