An article published in Bloomberg on May 9th highlighted the troubled financial condition of a hospital in northern Mississippi. As the title, “Not So Great GASB: Accounting Rule Pushes Hospital Near Default,” suggests, the author puts most of the blame on an accounting rule implemented by the Governmental Accounting Standards Board (GASB) that requires public entities to disclose all of their pension liabilities on the balance sheet. The author states that the rule is “creating credit problems for hospitals even though their operations haven’t changed materially” and “they’re making required contributions to state pension plans.”
But saying this accounting standard is the reason for the hospital’s poor financial condition is like blaming your credit card company for your bad credit score while you have a huge outstanding balance on your account. You could argue that you’ve been making your minimum monthly payments, just as the hospital has been making its required annual pension contributions.
Instead of being criticized, GASB should be praised for requiring public hospitals, and state and local governments, to put their pension liabilities on the face of their balance sheets. If anything, I would criticize GASB for taking too long to make this change. The Financial Accounting Standards Board (FASB), which sets accounting standards for corporations, began requiring private hospitals and corporations to report their pension liabilities in 1980.
Four years later, GASB considered requiring the same, but didn’t want state and local governments to have a dramatic increase in their liabilities and a resulting huge decrease in their net positions. As a result, GASB decided to let governmental entities report their pension liabilities slowly over time. You could say that public hospitals have had an unfair advantage in the bond market when they didn’t have to report huge pension debt as liabilities.
In addition to letting governments amortize this balance over 30 years, governments were allowed to delay recognizing benefit enhancements and actuarial adjustments. Each year these increases in the pension liability were amortized and added to the employees’ current service costs and accumulating interest to calculate the government's’ pension expenses. If the government paid the pension expense in full, then no pension liability appeared on its books. The only time a pension liability would appear on the books is if a government didn’t pay the calculated pension expense in full; then the cumulative deficits would appear as its “Net Pension Obligation.”
The result is most governments reported small or no pension liabilities on their balance sheets, while their actual pension liabilities were in the millions, if not tens of billions, of dollars. Truth in Accounting’s study of state governments’ 2014 balance sheets found that only $80 billion of Net Pension Obligations were reported, while in truth more than $632 billion of unfunded pension liabilities existed.
These pension accounting rules were so convoluted that when Detroit went bankrupt, its balance sheet reported a $1.3 billion “Net Pension Asset” despite the city really having $985 million pension liability.
If a governmental entity was part of a multi-employer plan, as most public hospitals are, then it was almost impossible to determine its share of the liability in its employees’ pension plans. Governmental entities and pension plans were not required to calculate, much less disclose, that information.
Every governmental entity, including each public hospital like the Mississippi hospital, knew it had some liability because its employees were participating in a pension plan and the government entities were paying an employer contribution. Employee compensation plans included accruing pension benefits. Each year employees were earning the right to receive these benefits and the hospital was incurring the related compensation costs and liability. Just because GASB didn’t require every hospital to record its share of the pension plan’s unfunded liability, that doesn’t mean the liability didn’t exist.
The various government employers involved in multi-employer plans seemed to think that they need only worry about making their contributions. Unfortunately, history has shown that even if the governments made the contributions the pension plan actuaries told them are required, the unfunded pension liability was increasing, not decreasing. This phenomenon is due to benefits enhancements, inadequate contributions and periodic adjustments to actuarial assumptions, such as the pension plan discount rates and mortality schedules.
If unfunded pension liabilities would have been reported on public hospitals’ and government balance sheets, the elected officials and citizens would have known how much money was being charged to the pension credit card and adjustments could have been made.
Some government officials still tell me that they don’t understand why they have to put their pension liability on their balance sheet because, as the Bloomberg article points out, they have been paying their required contributions. Again, this is like people not understanding why they should look at their credit card balance if they are paying their minimum payments. In fact, it is worse in the case of governments, because elected and employed government officials are not on the hook to pay the balance. Future taxpayers are going to pay the benefits for workers who are retired and not providing any services to those taxpayers.
Now public hospitals and other governmental entities have seen their reported debt go up significantly, which some, like the author, seem to think is unfair. However, reporting the truth is vital to our democracy. Citizens, including taxpayers, deserve accurate information, so they can be informed participants in their governments’ financial decisions.