State, Local Governments Face New Accounting Rule

State and local governments often have difficulties balancing their budgets, and this year it is going be even more difficult. A new accounting rule has been approved that may complicate the way cities and states calculate employee retirement benefits.

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State and local governments often have a tough time balancing their budgets, and this year it's going to get even tougher. The Government Accounting Standards Board regulates the way governments keep their books. It has approved a new accounting rule that will greatly complicate the way cities and states calculate employee retirement benefits. As NPR's Jim Zarroli reports, the new rule could make it harder for governments to raise money in the bond market.

JIM ZARROLI reporting:

One of the enduring truths of politics is that when government officials can kick a problem down the road, they almost always will. The result, says Charles Brecher of the Citizens Budget Commission, is that politicians often end up avoiding problems until it's too late.

Mr. CHARLES BRECHER (Citizens Budget Commission): There's a tendency to self-delusion. You make a promise, and if you don't have to know what it costs, you don't ask, you know, and you carry on your business, and you really should be asking.

ZARROLI: Take, for instance, the way state and local governments calculate retirement benefits. Until now, politicians could promise liberal health-care benefits to retiring employees, knowing that the bill wouldn't come due until long after they've left office.

Mr. BRECHER: So you get the benefits of making the promise now, but somebody has to pay the cost in the future.

ZARROLI: But the free ride is about to end. The Governmental Accounting Standards Board has approved a rule that requires governments to begin including future retirement benefits on their books right now. They don't have to pay for them right away, but they do have to say how much they will owe. The rule only applies to non-pension benefits such as health care, and it is similar to a rule that was approved for corporations in 1990.

Officials of the accounting board says that when governments promise benefits they're legally required to pay down the road, it's just a form of deferred compensation and they should have to account for it when they agree to pay it. Robert Attmore chairs the accounting board.

Mr. ROBERT ATTMORE (Chair, Government Accounting Standards Board): It forces an accountability, yes, and I guess I would argue that the ostrich approach, with your head in the sand, you know, trying to operate as if these obligations didn't exist, is not real-world. It's much better to understand what the potential costs are and have programs that are sustainable.

ZARROLI: The rule change forces state and local governments to confront their huge unfunded liabilities at a time when many are already struggling with rising health-care expenses. Again, Chuck Brecher.

Mr. BRECHER: Most governments now have actuaries working to figure out what the cost is, and we'll know that, but we know it's a big number. It will be billions for most large governments.

ZARROLI: The cost of Michigan's non-pension retiree benefits is said to be about $30 billion. California's is estimated at about $110 billion. Mike Hillerby is chief of staff to Nevada Governor Kenny Guin. He says it was a shock to many people in Nevada to realize how much the state would owe down the road.

Mr. MIKE HILLERBY (Nevada Governor's Chief of Staff): Particularly some policy-makers, I think, had never realized how substantial their unfunded liability was for the cost of caring for current and future retirees. That number is huge. In Nevada, that's as much as $4 1/2 billion, today, that we have unfunded. And that continues to grow as employees come on.

ZARROLI: Like other states, Nevada is looking for ways to cover the liability. Governor Guin has proposed reducing retiree benefits for future employees, but the idea has been strongly opposed by unions and the state Legislature has so far failed to act on it. Hillerby acknowledges that it will be politically difficult for many governments to address the problem, but if they don't, he says, it will hurt their reputation with bond rating firms such as Moody's and Fitch.

Mr. HILLERBY: They're going to want to know what are you going to do about it? I think that's going to be part of how they rate us. That's going to be part of the decision-making for city councils, state legislatures, governors and others, moving forward. How are we going to deal with this growing liability?

ZARROLI: Those who can't answer that question adequately could see their bond ratings lowered, which will make it more expensive for them to borrow money. That means state and local governments that try to cover up the problem will pay a steeper and steeper price as time goes on. Jim Zarroli, NPR News, New York.

MONTAGNE: This is MORNING EDITION from NPR News. I'm Renee Montagne.

STEVE INSKEEP (Host): And I'm Steve Inskeep.

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