The Governmental Accounting Standards Board: Fraud Hidden in Plain Sight

This year has been wrought with financial turmoil for nearly all Americans. From low-wage workers to small business owners, millions of Americans have experienced financial stress courtesy of the coronavirus-induced downturn.

As all state legislatures convene in the upcoming year and develop their budgets, these financial stresses should be taken into consideration. Lawmakers will be looking to help their constituents while also looking for ways to recoup revenue lost in the midst of these trying times.

All 50 states are experiencing revenue shortfalls due to declines in sales taxes, gas taxes, and licensing fees, not to mention the myriad other ways the government gleans revenue on a daily basis.

For many states, actual revenue will fall short of revenue projections, which were made before the pandemic. In fact, 22 states will end the current year with deficits exceeding 10 percent of total revenue. However, despite these alarming figures, many states are claiming they will end the year with a budget surplus.

A budget surplus in a year when almost every American not named Jeff Bezos or Elon Musk has had to tighten their belts more than a starving artist. How is this possible?

The answer is in plain sight but clouded by a dense fog of fuzzy math. It is called the Governmental Accounting Standards Board (GASB) and is the single worst display of accounting practices since the Enron debacle.

GASB legally permits state and local governments to conduct their accounting using "modified accrual accounting," which is simply "cash basis accounting" under another name. This means that governments can hide substantial portions of their debt while claiming loans and other sources as assets, allowing all levels of government to paint a false narrative of their financial condition.

In other words, GASB makes Bernie Madoff look ethical.

GASB is one of the two accounting standards practiced in our nation. All public companies in the United States operate under the Financial Accounting Standards Board (FASB) guidelines. Yet, another set of standards were employed for governmental entities in 1984, with a myriad of loopholes. Thus was born the GASB.

If, like me, you are wondering why corporations and governmental entities do not have to adhere to the same standards, you would not be alone. Understanding the differences between the two is at the fulcrum of understanding how governments can, and have, become so deeply entrenched in debt. For if any company were to spend and behave the way governments do with their finances, they would have gone out of business long ago.

As aforementioned, GASB uses "modified accrual accounting" while FASB uses "full accrual accounting." This means that per the FASB standard, businesses can only account for income on their balance sheets that have already come in or is already accrued. Per accounting nomenclature, this is called current cash flow.

However, in the modified accrual accounting that is allowed by GASB, the government can integrate the money it has on-hand with expected future cash flows, as well as loans and other forms of capital, even though this money is far from in-hand. Imagine a family anticipating winning the lottery and using this nonexistent revenue when developing the annual family budget.

Manipulating anticipated income as an asset has been the way in which cities such as Chicago have accrued such staggering amounts of debt. Based on 2018 audited financial statements, Truth in Accounting found that the "true" debt of Chicago, based on full accrual accounting methods, is $34.4 billion. This roughly comes to $37,100 per taxpayer in the Windy City.

However, because of unreliable and faulty GASB standards, Chicago's leaders continue to claim that the city remains on firm financial footing. In fact, Chicago purported to have a year-end budgetary surplus for the Chicago Public School (CPS) system in January 2019. Never mind that the city is wildly in debt or that CPS is so cash-strapped that it has resorted to closing schools. Apparently, the accounting lined up, somehow.

Coincidentally, this happened to occur right before negotiations were scheduled to begin for the Chicago Teachers Union's (CTU) new contract. This was the perfect time for the collective bargaining initiative to point to the clear surplus as a means to cover the ever-expansive list of demands of the Chicago Teachers Union. The result? A $1.5 billion contract for CTU.

This blatant disregard for common-sense, practical accounting is yet another example of how the government and those elected to it are not held to the same standard as we the people.

It is clear that as its first function, GASB accounting relies on assets that have not yet been realized while not including all liabilities of government entities. The second function of these methods is posturing a government's finances to look able enough to make political actions, such as signing new contracts for teachers unions, tenable.

Allowing governments to use sham accounting practices that no business or family would ever fathom using, is misleading, corrupt, and counterproductive if we ever want to get a hold of the public debt crisis.

GASB standards should be reformed ASAP. The American people have been in the dark for far too long. If full accrual accounting is what you must adhere to for your businesses and personal finances, then it is more than sufficient that the government be held to the same standard.

Samantha Fillmore (sfillmore@heartland.org) is a government relations manager at The Heartland Institute

Image: GASB