It's Not Just an Accounting Thing

State and Local Governments' Balance Sheets Are About to Explode

December 3, 2015

The public and many elected officials will be shocked when they look at their state and local governments' next balance sheet. 

What they will most likely find is their governments' financial conditions have drastically deteriorated, because millions, if not billions, of dollars of pension liabilities will be reported. In prior years these liabilities have been hidden off-balance sheet, reminding us of Enron's accounting problems that lead to its collapse.

I am fearful that government officials will downplay these liabilities as "an accounting thing." They will claim the government isn't in that bad of shape, the accountants, specifically the Government Accounting Standards Board, is making them report these "Net Pension Liabilities."

These liabilities were incurred when past elected officials chose to "charge" the pension portion compensation costs to the pension "credit card," instead of funding these benefits as they were earned.  

Some officials will say these liabilities aren't that important because it will be paid off over a very long period of time. This is like someone saying their credit card balances should not be considered as debt, because they plan to pay the minimum payments until it is paid off.

While these liabilities are not "current" liabilities, the Net Pension Liabilities are real and present liabilities, which future taxpayers will be responsible for paying, unless promised benefits are adjusted.

The greatest confusion may come from governments that are involved in plans that have multiple employers. These "multi-employer" plans involve several employers (governments) such as the state, city, county and school districts. In this case government officials might dismiss the liabilities saying they are not their liabilities and they are actually the liabilities of the pension plans.

While the pension plans administrate the payment of the pension benefits, the governments are liable for funding them.

This is not just an accounting thing. The Net Pension Liabilities will tell government retirees the amount of pension benefits past elected officials have promised without providing enough many to pay them. These liabilities will highlight the prior compensation costs elected officials have pushed onto future taxpayers, in violation of the intent of balanced budget requirements.  

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