America’s state and local governments are sitting on a hidden fiscal crisis. Under today’s official accounting rules, hundreds of billions of dollars in underfunded pension promises are not reflected as liabilities in the budgetary fund statements used for budgeting decisions. The result? Distorted budgets, squeezed funding for schools, roads, and public safety, and a massive transfer of costs to future generations.
At the center of this problem stands the Governmental Accounting Standards Board (GASB), the private-sector body that sets generally accepted accounting principles (GAAP) for state and local governments. Keep in mind, this is different from the GAAP used by corporations and companies. Under the GASB’s GAAP, the governmental fund statements, which include the general fund used for budgeting, are required to use a convoluted set of accounting rules that GASB itself has admitted has no "conceptual foundation.” This “collection of accounting conventions” is, in essence, cash-basis accounting, which does not report accumulated debt, including underfunded pension liabilities, or pension costs as they are incurred.
GASB is theoretically an “independent” board; its current pension standards allow governments to use what some believe are optimistic discount rates and other actuarial assumptions that dramatically understate the true economic cost of these obligations. The board could fix these rules tomorrow to require more comprehensive and more transparent reporting of these earned and incurred costs.
This is not merely a technical accounting debate. It is a governance failure with real-world consequences. When pension shortfalls and other long-term liabilities are not fully reflected in the financial information used for budgeting, lawmakers make spending decisions based on incomplete information. Bond investors price risk without seeing the full picture. And taxpayers remain in the dark about the bills coming due.
Congress has both the authority and the responsibility to intervene.
In 2010, Section 978 of the Dodd-Frank Wall Street Reform and Consumer Protection Act created a stable funding stream for the GASB. Under this provision, “accounting support fees” (taxes) are collected by the Financial Industry Regulatory Authority from broker-dealers that participate in the municipal securities market. These fees are assessed based on the par value of municipal securities transactions reported to the Municipal Securities Rulemaking Board.
This structure links GASB’s funding directly to activity in the national municipal bond market. And because that market crosses state lines, it is considered interstate commerce it is under the authority of Congress. Therefore, Congress should take an active role in shaping the framework for producing and relying on municipal financial information.
The chart below shows revenue from accounting support fees (taxes) over the years:
Source: Financial Accounting Foundation
That market connection matters. Governments have issued pension obligation bonds or similar instruments to pump short-term cash into underfunded retirement systems. These bonds provide temporary budget relief but do nothing to close the underlying actuarial gaps.
Under current GASB rules, some costs incurred today are not fully reflected in the budgetary fund statements that guide day-to-day fiscal decisions, but will instead be reflected in future periods, when they must ultimately be financed by future taxpayers. This accounting makes it difficult to determine whether governments are truly balancing their budgets or deferring current costs and ultimately passing them on to future taxpayers.
The scale of the problem is staggering. Recent analyses, including Truth in Accounting’s Financial State of the States reports, document $832 billion in unfunded pension liabilities. These shortfalls place pressure on state budgets, crowd out funding for essential services, and shift substantial costs into the future, where they will be borne by taxpayers who were not involved in making the original commitments.
Congress should act now.
Lawmakers can and should initiate a thorough oversight review of the GASB, its standard-setting process, and its impact on the fiscal health of state and local governments. The funding mechanism Congress created in 2010 gives it leverage. The interstate nature of the municipal bond market gives it a clear constitutional basis under the Commerce Clause. The public interest in transparent and reliable government accounting provides a strong public policy imperative.
The pension crisis will not fix itself. Optimistic assumptions and opaque reporting have already delayed accountability for too long. It is time for Congress to exercise its oversight role and demand the transparent financial reporting that Americans deserve. The fiscal health of our states and cities, and the trust of the taxpayers who fund them, depend on it.