Tuesday, June 22, 2004
Exciting news from the world of accounting
New accounting standards will require state and local governments to acknowledge the full cost of health benefits promised to retirees, putting immense pressure on public employers to reduce their liabilities by scaling back benefits or shifting more o the cost to retirees, government officials and accountants say.| link |
One thing that should be said is that it's obviously good practice to account for expected future liabilities. In fact, it's kind of mind boggling to learn that most governmental entities don't track the future cost of benefits that have been promised (It turns out, by the way, that tracking these sorts of liabilities didn't become standard practice in the private sector until about 1990). Absent information about future liabilities, there's no way to engage in effective long range planning or budgeting, so it's pretty clear that the change in standards is a good thing.
Overshadowing this, however, is the suggestion that the way for governments to handle these liabilities is by cutting benefits to retirees. That's just outrageous. The retirees are people who took a government job probably paying less than they could have made in the private sector on the understanding that if they put in their time then they would continue to receive benefits once they had retired. Now they are told that because their former employers didn't account for the cost of holding up their end of the bargain those benefits will be taken away. This is government rewarding personal responsibility with a slap in the face.
It would be bad enough if the employer were a business. For one thing, a business doesn't act on behalf of citizens, and so its behavior doesn't reflect on all of us or embody our operative ethical standards. Moreover, a business that takes on liabilities that it can't meet will, in theory, fail. In that case you can at least say that some of the consequences of irresponsible promising fall on the organization that made the promise. But the government isn't going to go out of business. It can run a deficit or bring in revenues to meet the cost of rising liabilities. The choice to cut retirees off is a political decision to the effect that it is more important to control the cost of government than to fulfill the obligations that it has undertaken. It is a choice to break a promise because breaking the promise is more politically expedient than keeping it.
Some might say that this indictment is too severe. Government has competing duties in such a case, the objection goes. As asserted, government has a duty to the retirees such that they be given the benefits they were promised. In addition, though, government has a duty to spend taxpayer dollars responsibly. This doesn't mean that promised benefits should be entirely eliminated but, the objection concludes, they may need to be constrained in accordance with this duty of fiscal responsibility.
The plausibility of this line of thought depends on the sorts of cuts that are made in benefits. If, for example, a government institutes a modest co-pay for doctor visits or prescriptions or something like that it may be that this is justified by appeal to the duty of fiscal responsibility but doesn't amount to a violation of the obligation the government has to the retirees.
Problems arise at the point where the duty of fiscal responsibility is thought to be capable of overriding the duty of keeping promises. That is, when cuts in benefits are so severe that the cuts amount to the breaking of a promise. In such cases, I claim, it's a mistake to think that the duty of fiscal responsibility can legitimately trump prior obligations.
The crucial fact to notice is that the violation of the duty of fiscal responsibility occurs when a government takes on liabilities that it can't meet, not when those liabilities come due. Just imagine telling your creditors that the reason you won't be paying your bills is that it would be fiscally irresponsible for you to do so. You don't get to start fresh every day, and neither does government.
That's about all I have to say about that, but I would be remiss not to mention the disappointing response of organized labor to this issue. From the Times article:
Unions contend that the standards will force public employers to overstate their liabilities for retiree health benefits, because the standards ignore the fact that employers can reduce or eliminate health benefits in the face of fiscal pressures.
As the Minneapolis Transit Strike illustrated, governmental agencies will leverage cuts in benefits promised to retired workers against the wages of present employees, and unions face an uphill battle in fighting those cuts. Insofar as unions adopt the policy ascribed to them in the Times, they're just giving up the ghost. They're saying 'promise us the moon, but don't worry about delivering.' That may make for impressive looking contracts, but in the long run it doesn't help workers.