Chicago’s recently-released annual financial report was notable for several alarming developments. One of them resides in an arcane area worthy of scrutiny.
Back in 2010, the Governmental Accounting Standards Board (GASB) developed two new accounts for the statement of net position (the balance sheet) for state and local governments -- “deferred outflows of resources” and “deferred inflows of resources.”
What does a “deferred outflow of resources” sound like to you – an asset or a liability?
Well, longer story short, the GASB includes deferred outflows among the assets, and deferred inflows in the liabilities. In computing the net position (assets less liabilities, or equity, in the private sector), the new GASB treatment adds assets and deferred outflows, and then subtracts liabilities plus deferred inflows.
A significant increase in deferred outflows, depending on the reasons why, can shield or cushion an otherwise adverse impact on net position. We saw this back in 2010, when many state and local governments began recognizing new liabilities on swaps (derivative positions). Instead of recognizing a loss that impacted the net position, the GASB treatment allowed them to debit (add to) deferred outflows, thereby cushioning the impact on net position.
Well, in a report released (late) on Friday afternoon last week, the City of Chicago reported a massive decline in net position from what it previously reported in 2014, coupled with a huge increase in the (negative) change in net position during the year – despite a massive downward restatement in the beginning-of-year net position.
Things could have been even worse, however, but for another curious element of the report. A massive increase in “deferred outflows,” from $600 million in 2014 to $8.9 billion in 2015. Relating to pension accounting.
This one deserves a closer look.