By William Bergman
Double-entry, accrual-based accounting systems can help secure accountability and financial stability in private and public organizations. Accrual accounting is an important bedrock, but may cease to be so without defenders.
The Governmental Accounting Standards Board (GASB) has embarked on a fundamental reexamination of its financial reporting model, and it had appeared that it was about to reinforce existing unreliable and misleading cash-basis-like principles for governmental funds statements. In recent months, however, GASB has pulled back from claims that its proposals are grounded in accrual-based accounting principles.
The financial stability of local and state governments, including school districts and public pension plans, is vital. Flimsy, misleading accounting standards for governmental funds accounts have long enabled many local and state governments to advertise balanced budgets, even as they accumulated massive on- and off-balance-sheet debt, undermining their financial sustainability.
Here is one example: in October 2014, Rahm Emanuel, the mayor of the City of Chicago, made an extraordinary claim. A city press release, titled “Mayor Emanuel Presents Balanced 2015 Budget to the City Council,” included the following:
“To balance our budget for the past three years without any increase in property, sales, or gas taxes was only possible by changing the way Chicago does its business,” Mayor Emanuel said. “We have reduced our structural deficit by making city government smaller, smarter, and simpler.”
There are words, and there are deeds. For state and local governments, there are budget reports, and there are accrual-accounting-based results in the governmentwide Statement of Net Position and Statement of Activities. In each of the four years ended in 2014, covering Emanuel’s “balanced budgets” claim, Chicago’s accrual-based revenue fell short of expenses by more than a billion dollars a year. The city’s unrestricted net position (akin to shareholders’ equity in corporate statements) fell from a negative $7.2 billion in 2011 to a negative $11.7 billion in 2014.
At a 2015, at a public meeting, I went up to a member of the Chicago City Council finance committee and asked how the city could claim to balance its budget according to state law when its revenues fell short of expenses by a billion dollars a year, every year. He was almost proud in his response: “We borrow the money! We have access to the markets!”
Anticipated borrowing proceeds – basically planning to run up the credit card – isn’t the only way to deceptively “balance” government budgets. Deliberately underfunding pension and other retirement obligations can also reduce short-term cash outflow, but this has long-term consequences.
In June 2020, GASB issued an optimistically titled exposure draft, Financial Reporting Model Improvements. A few days earlier, they had issued another exposure draft, Recognition of Elements of Financial Statements. The former could lead to a new standard and the latter to a new fundamental concept statement.
Together, the two exposure drafts would have reinforced the past practices that lead to unreliable funds statements while trying to claim the “improved” practices constitute accrual accounting, not the “modified accrual” practices from the past.
The GASB is now in “redeliberations” regarding these projects, including a review of comment letters received on its exposure drafts. The comment letters included one from Martin Ives, a former GASB member:
“I strongly disagree with the Board’s proposed concepts statement, primarily because it continues to exclude – in fund financial reporting – significant long-term liabilities arising from pension and OPEB [other postemployment benefits] transactions and events.
The proposal refers to the MFBA [measurement focus and basis of accounting] as “short-term measurement focus and accrual basis of accounting.” As discussed in Comment 1, accrual-basis accounting requires reporting of long-term liabilities arising from operating transactions such as pension benefits and OPEB. … Hence, what is accruable for governmentwide reporting is not accrued for fund reporting. 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.”
Ives wasn’t alone, and the commenters appear to have made an impact. Reporting on developments from its latest meeting (November 2021) on the “Conceptual Framework: Recognition” project, GASB stated the following:
The Board continued redeliberations of the Conceptual Framework—Recognition and the Financial Reporting Model projects by discussing the name of the measurement focus and basis of accounting for governmental fund financial statements.
The Board discussed whether any modifications should be made to the name short-term financial resources measurement focus as proposed in the Exposure Drafts, Recognition of Elements of Financial Statements (Concepts ED), and Financial Reporting Model Improvements (Financial Reporting ED), and tentatively decided that the name of the measurement focus should be retained.
The Board then discussed whether any changes should be made to the use of accrual to describe the basis of accounting proposed in the Eds, and tentatively decided that the basis of accounting for governmental fund financial statements should be identified as the modified accrual basis of accounting.
At least they aren’t trying to stretch the meaning of accrual accounting anymore. School districts, citizens, and taxpayers should more generally remain watchful over government budget-balancing.
William Bergman is an adjunct instructor at Loyola University Chicago and will present "Accounting for School Money – GASB Update" at PICPA’s School District Conference Webcast on May 25.
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