NPPC, I recommend you think through what will actually inform and protect your members. The TIA folks are not distorting the message, except to the extent that state and local governments are undervaluing their pension and OPEB promises.
Complaining about TIA will not make the pensions better-funded. Complaining about TIA will not prevent the worst-funded pensions from running out of assets, which will not be supportable as pay-as-you-go, as the asset death spiral before that will show that the cash flows were unaffordable for the local tax base.
And don’t look to the federal government to save your hash. So far bailout amounts have been puny compared to the size of the promises.
Spending plans that “fully fund” pension obligations by making statutorily required contributions — amounts required by legislators, by law — do not necessarily fully fund pensions. In fact, Illinois has a sad history of passing laws with funding that falls far short of actuarial requirements — the amounts necessary to keep pension (and related retirement health care) debt from rising over time.
For an example, take a peek at the Illinois Teachers’ Retirement System (TRS). Their annual report for 2020 is available here. The table on pdf page 2 shows that the system has accumulated more than $50 billion in invested assets, but this massive amount actually falls far short of the nearly $140 billion in present value obligation for future pension payments, leading to a nearly $90 billion unfunded liability.
The practice of distributing unfunded promises to pay money in the future has been a key of the tool chest that politicians have employed in misleading the citizenry that Illinois has lived up to constitutional balanced budget requirements, when in truth it has done anything but.
Transparency is not just a good thing for the public. A study of the 2012 Recovery Act (ARRA) showed that the biggest users of publicly available data were government officials, who used the information to track spending. Cities that do not already issue comprehensive annual financial reports (CAFRs) should adopt them for the benefit of policymakers and the public. Meet or exceed Generally Accepted Accounting Principles (GAAP) and Government Accounting Services Board (GASB) statements in your reporting. Clearly account for liabilities such as pensions, retiree health benefits and infrastructure maintenance and replacement. Have that accounting independently verified.
According to a January 2021 report from Truth in Accounting, the top 75 US cities have a combined unfunded public pension obligation of more than $180 billion. Cities often underfund these obligations to cover budget shortcomings elsewhere, an irresponsible game of whack-a-mole.
Treasury guidance forbids using ARPA money in pension funds to cover unfunded liabilities from before the COVID emergency. It does allow spending on current payments for either defined benefit or defined contribution plans. Cities could use ARPA funds to provide additional payments to those plans to encourage employees to switch from their traditional pension to a defined contribution plan—which is a much more financially sound position for cities to be in.
Truth in Accounting has released a new analysis of the 10 most populous U.S. cities that includes their largest underlying government units. With the exception of New York City, most municipalities do not include in their annual financial reports the finances of large, underlying government units for which city taxpayers are also responsible, such as school districts, and transit and housing authorities.
This report takes into account these underlying government entities and provides residents and taxpayers in these cities with a more accurate and holistic view of their respective city’s finances. We only include underlying entities that city governments claim responsibility for in their annual financial reports. These underlying governments are essentially subsidiaries of the city and the majority of their debt falls on all city taxpayers. When the unfunded debt of these underlying government units is combined with the county, municipal, and state debt, city taxpayers are on the hook for much more than they think.
As routine as the changing of the seasons, every year, Truth in Accounting (TIA) produces a new report which declares that taxpayers across the country will somehow have to foot a huge tax bill immediately to pay for their state’s unfunded pension liabilities. However, a recent working paper from the Brookings Institution shows this is not a truthful depiction of how public pension funding works.
TIA often argues that taxpayers are responsible for paying their city and/or state’s unfunded liabilities in a few ways. First, if a pension isn’t at 100% funded status in the course of a given year, they state that the pension is somehow in grave jeopardy and that its unfunded liabilities need to be paid immediately to ensure the pension is “debt-free.” They then calculate a supposed “taxpayer burden,” or an amount each taxpayer will have to pay to meet their state or local pension’s unfunded liabilities.
These tactics, which are often amplified by news outlets critical of public pensions such as the Center Square, are designed to elicit fear that taxpayers will have to fork over a large bill at some point in the future for their area’s pensions.
Author(s): Tristan Fitzpatrick
Publication Date: 2 June 2021
Publication Site: National Public Pension Coalition
Unlike FASB, the SEC has no control over GASB. But the Commission is obligated “to protect investors in the municipal markets from fraud, including misleading disclosures [emphasis added].” Taken together, the SEC’s own statements make a strong case that it is obligated to prevent fraud in state and local governments’ financial reports, which are confusing and obfuscate the truth.
The state and local governments’ annual financial reports are based on shoddy accounting practices. If confusing and misleading disclosures are considered fraud, then annual reports produce fraudulent disclosures.
It is confusing and misleading that the GASB requires state and local governments to keep two sets of books. Annual financial reports include governmental fund statements that are prepared using an accounting basis called the “modified accrual basis,” which in essence uses short-sighted cash accounting, while the consolidated financial statements are prepared using accrual accounting standards similar to those used by corporations.
Watch a recording of Truth in Accounting’s virtual event with special guest Steve Malanga, senior editor at City Journal. In this episode, we discussed the financial troubles of America’s largest cities and the effects of Biden’s infrastructure plan.
Author(s): Bill Bergman, Sheila Weinberg, Steve Malanga
This video contains 15 testimonies before the Governmental Accounting Standards Board (GASB) in March and April of 2021 by citizens, elected officials, think tank leaders, and more. All of whom argued against GASB’s proposals to continue cash-basis-like accounting for governmental funds statements. Cash-basis accounting supports bad government budgeting practices like counting borrowing proceeds as revenue, and underfunding pension funding requirements, in order to “balance budgets.” On the other hand, full accrual accounting shows expenses as they are incurred, especially when a government makes a promise to pay in the future.
Publication Date: 6 May 2021
Publication Site: Truth in Accounting channel at YouTube
The question of whether pensions and other retirement benefits should be more prominently reported by state and local governments is a burning controversy for the Governmental Accounting Standards Board.
What?s at stake is whether the public is being misled by when a governmental general fund is listed in financial statements as balanced while omitting those long-term debts.
GASB requires long-term obligations to be reported in governmentwide reports, but critics say lawmakers too often look only at cash flow funds.
?I implore GASB to stop this confusion and bewilderment,? wrote Sheila Weinberg, founder & CEO of Truth in Accounting in a comment letter. ?Our representative form of government is being harmed.?
Illinois is among the states that critics say have downplayed their tens of billions of dollars of unfunded long-term debts and should be forced by new GASB rules to become more transparent.
GASB officials, on the other hand, say that state and local governments have been required to disclose their long-term debts since the publication of GASB 34 about 20 years ago.
Several months ago, the Governmental Accounting Standards Board (GASB) issued two new Exposure Drafts for proposals that would lead to a new government accounting concept statement and related standard. GASB invited comment on those proposals, a process in which Truth in Accounting participated directly and also encouraged others to participate.
… The following information is on the State of Illinois, the city of Chicago and the Chicago Public School (“CPS”) system … The severe financial decline in those three entities have not been at all adequately communicated to the various users of the information. The accounting standards and reporting have not required it. Those governmental units are financially unsustainable and their services to their citizens have not been sustained. The financial accounting standards have been fundamentally flawed for decades and border on gross negligence.
… The GASB must have a higher level of accounting standards. There are no independent third parties overseeing their government accountings standards like there is with FASB and nongovernmental entities. The financial and service sustainability of State and local entities are in question. The services they provide are of the utmost importance to the public and their citizenry. … Requiring fund balance accounting using total financial resources focus measurement and accrual basis of accounting is the tool necessary for the political system and the public to successfully address these issues.
Illinois and Connecticut state governments don’t pay taxes to the federal government. In Illinois’ latest financial report, a report prepared by the department led by Mendoza (note that the latest report available is for fiscal 2019, for a fiscal year that ended more than 600 days ago), Illinois reported roughly $25 billion in grant “revenue,” most of it from the federal government. This doesn’t add up to Illinois contributing more in federal taxes than it receives from the federal government.
So how does their math work?
To claim that Illinois and Connecticut act as donor states, Mendoza and Lembo are “counting” on the money sent by their state’s taxpayers to the federal government, a very large amount.
But when they call for federal “relief,” they aren’t calling for federal money for state taxpayers. They are calling for federal “relief” to be sent to state governments.