CPC Study Estimates Shows New GASB Rules Will Wipe Billions in Net Assets Off Government Balance Sheets

CPC Study Estimates Shows New GASB Rules Will Wipe Billions in Net Assets Off Government Balance Sheets


Sacramento, California, March 19, 2013

Contact:  press@calpolicycenter.org

In a new study published by the California Policy Center financial analyst John Dickerson examined Bill Gates’ assertion that only pension “accounting fraud allows governments to pretend their budgets are balanced”. Although Dickerson uses the term “fatally flawed accounting” he concludes Gates is essentially correct.

New pension finance reporting rules imposed by the Governmental Accounting Standards Board will be phased in over the next couple of years. Dickerson analyzed the 2011 audited financial statements of seven California counties (Alameda, Contra Costa, Marin, Mendocino, Orange, San Mateo, and Sonoma) and showed how different they would have been under the new rules. These counties would have disclosed $9 billion of real past pension expenses they have never reported to the people. This would have cut their combined net worth from a reported $10 billion to less than $1.0 billion.

“The fatal flaw in today’s rules”, states Dickerson, “is that governments report the pension expenses that created today’s huge unfunded pension debt over as many as 40 years in the future as they pay the debt. That’s absurd. The payments of a debt eliminate the debt – they don’t create it.”

Dickerson shows how this “fatal flaw” allowed hundreds of billions of unfunded government pension debt to develop without the public knowing about it.

GASB’s key reforms are first – governments will be forced to report pension expenses that create government debt as they occur – not when the debt is paid, and second – governments will be required to report unfunded pension obligations as liabilities on their balance sheets, eliminating a loophole in current rules.

Dickerson also shows how governments that sold Pension Obligation Bonds in the past offset most of that debt with “Net Pension Assets” that have no value. These counties would have written off $1 billion of these assets as worthless.

“Very few governments have figured out the impact of these new rules” says Dickerson. “Oceans of red ink will be poured on state and local governments.”

The study also estimates the impact of using an assumed rate of future Pension Fund investment profits of 5.5% that Moody’s proposes to use in its government credit rating process. As Dickerson writes: “These seven all together would drop from $10.2 billion of Net Assets down to a negative $8.3 billion hole – $19 billion less. On average, they would have more unfunded pension debt than assets.”

To read the entire study, click on “Unmasking Staggering Pension Debt and Hidden Expense.”

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The California Policy Center is a non-partisan public policy think tank that aspires to provide information that will elevate and enlighten the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at www.CaliforniaPolicyCenter.org.

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