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Will GASB remain on its wayward path?

July 15, 2021

Truth in Accounting has been opposing two exposure drafts from the Governmental Accounting Standards Board (GASB) that could lead to the adoption of a fundamental concept statement and accounting standard. (See, for example, TIA founder and CEO Sheila Weinberg’s comment letter here.)

TIA isn’t alone. The GASB received hundreds of comment letters from elected officials, policy experts, and everyday citizens, most of them opposing these proposals.

Consider a letter from Martin Ives, former board member and vice-chair of GASB, that included:

“In my opinion, stating that the Board’s proposal regarding fund reporting results in the ‘accrual basis of accounting’ is grossly misleading and must be dropped. … In my opinion, the Board has attempted to rationalize a model that cannot be rationalized.”

In early July, GASB held a board meeting and discussed the proposals and feedback. Staff and board members indicated that they intend to nonetheless proceed with what they currently call a “short-term financial resources measurement focus and accrual basis of accounting” for governmental funds statements. These statements are widely used for budgeting by state and local governments and have long provided an unsound if not deceptive foundation for budgeting and related governmental communication. GASB’s proposals would effectively sanction these longstanding practices, and even attempt to provide what GASB would call a “conceptual foundation” for them. 

As I reflect on GASB’s proposals, the feedback provided to GASB on them, and the GASB board members’ reflections in an early-July GASB board meeting, I still find myself shaking my head and wondering how, and why, GASB proposed them at all. 

Consider, for example, the comment letter by Nick Murray of the Maine Policy Institute, which included:

“… Your proposals will allow state legislators and local government officials to validate budgets that include loan proceeds as revenue and exclude costs that weren’t paid in the respective year. … By contrast, accrual accounting calls for the recognition of debt as it is incurred, not only when ‘payments are due.’ Please reject this proposed concept statement. I urge you to help solidify the public trust by bringing honesty and transparency to government financial reporting.”

Andrew Abramczyk of the Commonwealth Foundation offered stinging and cogent observations, like these:

"The proposed changes disfavor policy-oriented users of government accounting information in favor of liquidity-oriented users like internal planners and lenders. Worse, they cause financial statements to misrepresent a government’s financial position by ignoring noncash costs. The changes even elide the difference between regular revenue and borrowing proceeds, allowing a government that has borrowed to fund operations to claim it is in fiscal balance. The changes will thus compound and worsen the state of U.S. public finance … We are puzzled by GASB’s deliberate departure from the principles of accrual accounting."

If you thought "elide" was a typo, you weren't alone. But here's what it means, from Merriam-Webster: "to suppress or alter by elision." And "elision?" Again, from the dictionary: "the act or an instance of omitting something."

GASB’s proposals may not seem rational or, at least, logically well-grounded. But they may be very rational, in light of how the public choice school of economics views the driving forces for government officials and regulators. In economics, people are assumed to be rational -- not that they can add 2+2 and get to 4 all the time, but in the sense that they are self-interested. People want to make themselves better off and that’s what drives their decisions. In turn, the public choice school of economics encourages us to consider that government officials and regulators may not be working, first and foremost, for the general welfare – they may be rational and self-interested, like the rest of us. In turn, the prediction is that well-organized special interest groups dominate policy (including governmental accounting policy) at the expense of citizens, taxpayers, and the common good.

I have to speculate, if not assume, that GASB has been catering to a coalition of focused interest groups that can include politicians and financial services providers to governments (like bond underwriters and credit rating agencies), but at the expense of the general welfare as well as notions of “interperiod equity” and “fiscal accountability” that GASB has been asserting as grounds for its proposals.

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