The past few years have not been easy for state and local government finance staffs.
In an effort to increase transparency and accountability, GASB has issued new standards at a rapid pace. First came an overhaul to pension standards with GASB Statements 67, 68, and 73. Now governments are working through new standards for other postemployment benefit (OPEB) plans with GASB Statements 74 and 75.
New disclosures for tax abatements with GASB Statement 77 are now being implemented, and an overhaul to lease accounting standards with GASB Statement 87 was released in June. GASB Statement 84, meanwhile, was issued in January 2017 with an objective of improving guidance regarding the identification and reporting of fiduciary activities for accounting and financial reporting purposes.
The technical complexity and rapid pace have strained many smaller governments.
“When that many [new standards] are implemented all at once, it’s pretty time-consuming, especially when you have a small staff,” said Melinda Hitz, CPA, CGMA, finance director for the city of Garden City, Kan.
In many communities, overseeing the preparation of the financial statements is “just a small part of our jobs,” said Bob Scott, CPA, the CFO and assistant city manager for Carrollton, Texas. He oversees a staff of five, including a controller who is also a CPA, and who, like Scott, was a former auditor. “None of us have the luxury of having a primary focus on financial reporting.”
Hitz noted that the main impediments to getting the work done centered on “doing more with less. We were already struggling against the calendar to meet timely completion of our financial statements.” The new standards added complexity to the financial statement preparation process, which required a focused team effort.
The sweeping changes to pension reporting forced government finance officials and their auditors to step up their game. Implementing the additional new standards will require a similar effort. Here are some ideas for making the process smoother.
Communication and teamwork are key
“You couldn’t do all this by yourself. It’s just too much,” said Hitz. “If you have a good team working for you outside your organization, everything will be OK.” Communication between all parties is crucial for getting the information needed on a timely basis. Getting through the next round of new standards means closer interactions with auditors.
Allow for a steep learning curve
Given the complexity of some of the new standards, understanding all the impacts, nuances, and effects could take a while, and it may require outside help from consultants.
Implementing the pension standards was especially challenging for the governments with cost-sharing arrangements, which had to get information from the state retirement system to determine their share of the statewide liability, according to Lynda Dennis, CPA, Ph.D., a lecturer at the University of Central Florida. “I think that was one of their biggest challenges, just getting the data, and then learning how to understand it,” she said.
Additionally, those charged with governance of governmental entities (e.g., city or county councils) have also been challenged to keep up with the new rules, especially as they relate to pension liabilities. Finance professionals need to be prepared to answer their questions and help explain the nuances of the accounting.
Scott also cited the challenges for government officials in trying to understand the pension liability. “The calculation of the numbers is very complex, so for many governments, it was very difficult for them to spend the time to understand how it was generated,” he said.
Early planning is key
A big hurdle in the first year of employers’ implementation of the pension standards was obtaining appropriate evidence for their pension amounts. The only feasible method was for the plans to prepare additional information and engage their auditors to provide assurance.
As the OPEB accounting follows the pension models, the same hurdles exist, but with solutions already in place that can be modified for OPEB purposes.
To keep deadlines top of mind, Hitz created a spreadsheet with the standards, their implementation dates, and the information that would be needed by the auditors. Keeping that information in front of her every day has been helpful as she collects the data needed for her audit.
Get a handle on what your OPEB benefits are
Scott noted that an advantage in implementing the pension standards was that many states have statewide pension programs to cover all state employees. These large statewide pension plans generally have staff who can help the smaller governments. In addition, the pension benefits tend to be well-documented and change infrequently.
However, the OPEB plans are a mixed bag. For some retirees, OPEB obligations may just be subsidies for health insurance, the amounts of which change every year. Others may receive a small monthly stipend or additional life insurance, among other benefits. These benefits may be subject to annual informal changes. Some plans are administered through a statewide plan, while others have no dedicated staff to administer them.
“The first thing you have to do is make sure that your plan is well-documented and that the documentation is actually what’s happening in practice,” Scott said. This means it’s crucial for finance and human resources teams to talk to each other.
The city of Garden City performs an annual review of its policies and documents, and amends those as needed. “That’s a very important point — to make sure you keep your policies and procedures updated,” Hitz said.
The actuary depends upon documentation of OPEB benefits and provisions to base assumptions. If that documentation is out-of-date, incomplete, or inaccurate, the calculations won’t be correct.
For OPEB plans that don’t have dedicated assets in a trust, most of GASB Statement 74 won’t apply, but GASB Statement 75, which applies to OPEB accounting for governmental employers, will. For OPEB plans that don’t have dedicated assets in a trust, there is no correlating plan financial statement; rather any assets accumulated for OPEB purposes should continue to be reported as assets of the employer. There is a risk that employers may fail to report assets held for OPEB and/or the OPEB liability due to the lack of a formal trust. It is critical auditors ask questions to identify whether OPEB is offered (with or without a trust).
The variety of OPEB plans will be a challenge to auditors as well, and as a result, an entire chapter has been added to the 2017 AICPA Audit and Accounting Guide, State and Local Governments, addressing the different kinds of OPEB plans and how to audit them from the perspectives of both the plan and the participating employers.
Finding a good actuary is essential
The OPEB standards, like the pension standards, rely heavily on actuarial estimates for the liabilities and expenses to be included. Scott said that finding a good actuary who can help the government walk through the process is a must since most of the numbers the government will book are actuarially generated.
Get the assumptions aligned
Dennis recommended providing the actuary for an OPEB plan with the actuarial report from the pension plan as some of the assumptions will be consistent. She also noted the importance of ensuring that the actuary’s assumptions for the OPEB plans mirror reality. For example, if 200 retirees are eligible for the subsidized health insurance, but only 10 retirees take advantage of that benefit, the actuary’s assumptions need to reflect that.
Educate the stakeholders
It’s challenging enough for the auditors and financial professionals to understand what the new liabilities for pensions and OPEB plans mean. Elected officials, residents, and rating agencies will also need explanations. Dennis noted that some of the liabilities may be especially difficult for stakeholders to understand. For example, a liability for discounted retiree health insurance won’t require a future cash outlay for the government, but is instead a future cost to be absorbed by higher premiums for all purchasers of health insurance, which needs to be quantified (as an implicit rate subsidy).
Beware of unintended consequences
With the new standards for pensions, OPEB plans, and soon, leases, balance sheets will look different. For many governments, overall financial position will decline, significantly in some cases.
“Governments need to get a handle on how bad their equity is going to look,” Dennis said.
It may be a good idea for governments to give bond rating agencies and credit analysts a heads-up about the changes that are coming to the balance sheet. Some debt covenants also may need to be renegotiated to prevent a mandatory bond call if the additional liabilities are significant.
Learn all you can and keep learning
The complexity of the new standards means that finance officials in government will need to devote time and resources to professional education. Many governments may want to check out the resources at the AICPA-sponsored Governmental Audit Quality Center as well as the AICPA Audit and Accounting Guide, State and Local Governments, and Scott suggested seeking out the annual codification from GASB, as that includes all standards updates as well.
— Liz Farr is a freelance writer based in Los Lunas, N.M. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, a JofA editorial director, at Kenneth.Tysiac@aicpa-cima.com.