The Great GASB
by Jennifer Burnett
One of the acronyms policymakers likely hear most often is “GASB,” which stands for the Governmental Accounting Standards Board.
“People have said to me plenty of times, ‘Who is GASB and why do we have to do what they say?’” said Jan Sylvis, vice chair to the GASB and retired chief of accounts for the state of Tennessee. “In a nutshell, GASB sets accounting and financial reporting standards for state and local governments.”
Created in 1984, GASB is an independent organization that was developed after state and local leaders started talking about the development of reporting principles.
“State government officials at that time believed we needed to have a set of standards that everybody followed to allow for comparability across state governments,” said Sylvis. “There was a concern that if we didn’t have a set of accounting standards then perhaps the federal government would step in.”
“The genesis was at the state level,” she said.
GASB is cousin to FASB, or the Financial Accounting Standards Board, which was created in 1973 and establishes financial accounting and reporting standards for public and private companies and nonprofit organizations that follow Generally Accepted Accounting Principles, or GAAP.
While FASB covered standards for the private sector, no such standards existed for the public sector.
“There was a lot of discussion nationally with several state leaders that a governmental accounting standards board be developed specifically to address the needs of governments. Because just naturally governments are different from private sector entities,” said Sylvis.
GASB is governed by a board of seven individuals that represent backgrounds from across different parts of the government accounting and auditing professions. Board members are appointed generally for five-year terms, but they may serve up to 10 years. While the chair serves full time, the vice chair and the remaining five members serve on a part-time basis.
Before issuing its standards, GASB works to encourage public participation in the process. For example, significant steps in the process are announced publicly and GASB meetings are open to the public.
Another way that GASB takes into account the state and local perspective is through the Governmental Accounting Standards Advisory Council, a 31-member group representing a variety of interests. CSG’s current representative on that board is Alan Conroy, executive director of the Kansas Public Employees Retirement System.
“GASB has a lot of credibility or standing in the financial world in terms of trying to set uniform best practices,” said Conroy. “The ultimate goal is to provide transparency and consistency in terms of financial information.”
While GASB doesn’t have a specific enforcement mechanism, states comply with these rules for a number of practical reasons. For example, states publish a report each year called the Comprehensive Annual Financial Report, or CAFR, which offers a detailed look at a state’s financial health. That report is in turn used by investors to judge a state’s financial risk in areas like the bond market. If a state isn’t using a standardized and accepted way to calculate and produce that report, investors would have a hard time evaluating risk for that state, which could have negative consequences on the state’s ability to borrow funds. “It gets that gold star of approval so everybody knows the report was properly and appropriately prepared and published and calculated,” said Conroy.
When it comes to public pensions in particular, changes in GASB rules can have a big impact.
“There have been some big changes recently in the pension world as it relates to GASB. There have been two big recent pronouncements—(rules) 67 and 68,” said Conroy.
Those new standards, published in 2012, were designed to improve the way state and local governments report their pension liabilities and expenses. More specifically, the new standards require that unfunded pension liabilities be included on governmental balance sheets and create a hard line between accounting and funding.
“There is this split now between funding—how state governments would approach pension plan funding—and accounting. How much money is going to come in and what they are going to contribute, that’s on the funding side. And that’s clearly a legislative responsibility and duty to make that decision,” said Conroy. “On the accounting side, they are trying to improve transparency.”
When they were first released, the new standards had state leaders scrambling to explain seemingly huge jumps in pension liabilities. But it wasn’t the liabilities that changed—it was the way that they were being reported based on the new rules.
“There’s always heightened awareness when a new rule is put out,” said Conroy. “There’s certainly a learning curve. But people are now becoming more comfortable with it.”
“Transparency is bedrock to these changes related to pensions,” Conroy said.