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Old Mendocino County Courthouse Around 1915

California County Pension Debt

 

The End of Government Pension Financial Reporting "Fraud"



Bill Gates Says It Was Fraud.
Is He Right?



End of Pension Accounting "Fraud"


Choices -

Major Reform - GASB 68

Bill Gates-"It's Fraud!" Was He Right?

When Pension Expense Happens

GASB's Basic Principle Retirement Benefits

Fatal Flaw GASB's Old Rules

Major Changes Government Financial Statements

Three Ongoing Impacts Balance Sheets

Pension Expenses

Footnotes - Required Supplemental Information

GASB68 Prior Year Adjustment Important!

 

During a discussion about education in America at the 2010 Aspen Ideas Festival Bill Gates was asked 'Do we have a huge unaccounted for pension overhang problem that's going to hurt our (government) budgets?

Part of Bill's answer:

Absolutely, it's pretty mind-blowing.

Bill Gates

The way that State (and local government) budgets are presented is so fraudulent - there's a thing called the Government Accounting Standards Board that allows you (state and local governments) not to take (report) full pension cost, not to take (report) retiree health care benefits.

Whenever something's free it gets overused, and so improving the pensions of people who are already retired - never shows up on the budget. Letting people retire early, have more overtime factored into their retirement - all these things come from the fact that the person who says "yes" to those things - the government person - doesn't feel any pain at all because there's no number that ever shows up.

Pension payments to government employees, lots of that, looks free and we've messed up long enough that we have a huge overhang here.

It looks really free to continue ... state (and local) deficit spending which nominally is a balanced budget but ...

... only accounting fraud allows you to pretend it's balanced.

Read what Bill Gates said in the box to the right - and watch the video. Bill Gates is right. It was financial reporting fraud. But it was an "officially-sanctioned" fraud.

Hundreds of billions of unreported pension expenses and debt were hidden by a "Fatal Flaw" in GASB's old accounting rules. But the new rules are driving them out of their hiding places in state and local governments.

A Tsunami of Red Ink

The People are being told - finally - just how bad things really are. We need to prevent those who want the People to be so confused that they won't see that simple truth. (Note 1)

Wimpy's Offer

Remember Wimpy's offer I will gladly pay you next Tuesday for a hamburger today. to Brutus? "I will gladly pay you Tuesday for a hamburger today!" Wimpy won't incur the burger's expense when he pays for it next Tuesday - he will be paying a debt he incurred when he "bought" and ate the burger today. The expense happens today - the payment is only paying off the debt.

I will gladly pay you a pension when you retire if you work for our County now.

Government officials say to prospective employees"work for us for the next several years and we'll pay you a salary, provide a bunch of benefits while you're working like health insurance, and when you retire we'll pay you a pension". It's more complicated than Wimpy's offer - but the part about the pensions is pretty much the same. "Give me what's yours now - thousands of hours of your life - and decades in the future when you retire we'll pay you a pension".

Of course the amount of money involved in these two situations is hugely different. Today a burger costs a couple of bucks - maybe more depending on how fancy you get. But we're talking hundreds of billions of dollars of pension obligations - trillions in fact. The financial complexity of pensions is far - far more than that of hamburgers.

But - even so - one fundamental financial truth applies to both ...

Payments and Expenses are Two Different Things

This is absolutely essential to understand.

Major Point!

Don't confuse an expense with when you pay for it. They are two different things. In simple terms ...

An EXPENSE is when you consume or lose something of value.

You can pay for an expense:
  • before it happens
  • when it happens
  • or after it happens
If you incur an expense but don't pay for it at that time - you create a debt. The payment of that debt in the future is NOT when you incur the expense. It is ONLY when you pay your debt!

I could make this a lot more complicated - but this captures the fundamental accounting flaw in the old government pension financial reporting rules. When you pay an expense is not necessarily when you incur the expense And it's crucial for you to know the difference.

So - when Bill Gates says ...


"Whenever something's free it gets overused, and so improving the pensions of people who are already retired - never shows up on the budget. Letting people retire early, have more overtime factored into their retirement - all these things come from the fact that the person who says "yes" to those things - the government person - doesn't feel any pain at all because there's no number that ever shows up."

... how does that relate to Wimpy's offer to potential employees ... what was "fraudulent" about that in the past ... and how do the new rules "fix it"?



 

 

Note 1: Many pension reformers believe GASB's new rules themselves are "fatally flawed". They believe the rules don't come close to forcing governments to report that the situation is much more dire than even the new rules disclose. I understand and sympathize with many of their concerns - and I'll lay some out later in this section.

But I believe we can't let the "perfect" be the "enemy of the good". These new rulea are way - way - way better than in the past about reporting the "financial truth" about this disastrous debt. I'll explain why I feel this way as we go on.

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