FASAB Debate Over Social Insurance Commitments
By Sheila Weinberg
The Federal Accounting Standards Advisory Board (FASAB or the Board) is in the process of deciding if the long term commitments for Social Insurance programs, including Social Security and Medicare, should be recorded as liabilities on the Federal balance sheet. FASAB’s chair, Tom Allen, stated, “This is the single most important standard that this Board, or any other standard setting body, will deal with.” He commented, "This is our time in history to make a difference."
This Social Insurance project began more than four years ago, when the FASAB sponsors expressed an interest in revisiting whether these commitments should be recorded as liabilities. Statement of Federal Financial Accounting Standard 17 (SFFAS 17), issued December 1999, calls for a social insurance liability in the amount of benefits that are “due and payable.” On October 23, 2006 FASAB issued a preliminary views document on Accounting for Social Insurance (Revised.) This document contains a primary view and alternative view. When the preliminary views document was issued, the six “public” members of FASAB supported the primary view. Three of the four federal members (one member abstained) supported the alternative view. The federal members represent the Congressional Budget Office and, the three FASAB sponsors, the Secretary of Treasury, the Director of the Office of Management and Budget and the Comptroller General, head of the Government Accountability Office.
The Primary View reflected the preliminary conclusion of the majority of Board members that SFFAS 17 is flawed because it fails to recognize the accruing cost of social insurance programs in each reporting period and the accumulated liability for benefits payable at a determinable date under current law. Supporters of the Primary View believe an expense, and a corresponding liability, should be recognized on the statement of net cost when participants become fully insured and thus substantially meet the eligibility conditions for future benefits under the programs. Social Security and Medicare participants would become fully insured when they have worked 40 quarters. The amount to be recorded would be the benefits accrued minus the accumulated taxes paid by each worker.
The Alternative View proposes to maintain the recognition and measurement of expense and liability for Social Security and Medicare program benefits currently required in SFFAS 17. Under that standard the expense recognized for the reporting period is the benefits paid during the period. The Alternative View states: (1) recognition of future social insurance benefits as current expenses and liabilities would disrupt an alignment that allows programs to match costs with results; (2) recognition of future social insurance benefits on the financial statements would diminish significantly the relative size and importance of other expenses and liabilities shown on the financial statements; and (3) given the ability of the Federal Government to change the laws relating to social insurance programs and the unsustainability of current benefit payments with current financing, about which beneficiaries are on notice, amounts of benefit payments are uncertain and not reliably estimable.
The Board received seventy-two comment letters in relation to their preliminary view document. This far exceeded the number of comment letters that the Board has ever received in relation to previous proposed standards. Responders included representatives from budget watchdog groups, employees of governmental agencies, professors, citizens and six current and former members of Congress.
The comment letters may be found at: http://fasab.gov/commentletter.html
Since the beginning of the Social Insurance project four years ago, two of the three FASAB sponsors have been replaced. Former Congressman Jim Nussle is now the director of the Office of Management and Budget and Henry M. Paulson, Jr. is now the Secretary of Treasury. It appears that they agree that only what is due and payable should be reported on the balance sheet. There was discussion on whether the FASAB sponsors even want this project to continue.
Since December 2006, two of FASAB’s public members retired and two new members where appointed by the FASAB sponsors. It is now apparent that there is no longer a clear majority who would support showing a liability on the balance sheet beyond what is due and payable. The majority of members do believe that the federal government should put “sunshine” on the future promises the government has made to beneficiaries. But members’ opinions differ about how these commitments should be presented.
At the September 19, 2006 meeting, Chair Tom Allen steered members away from what he referred to as the “L” word (liability). The focus shifted to what disclosure the Board members believe needs to be highlighted in relation to the Social Insurance commitments. The FASAB staff member assigned to the project was asked to prepare a list of which items could be disclosed. Chairman Allen said then the Board would talk about “geography”, where such disclosure should be reported-on the balance sheet, on a fiscal sustainability report, in footnotes or as required supplemental information. Because a consensus could not be reached on the Social Insurance disclosure the project was placed on a “slow track.”
A related project is Fiscal Sustainability Reporting. Through this project the Board hopes to address one of FASAB's federal financial reporting objectives called the stewardship objective. This objective includes enabling readers to determine whether future budgetary resources will likely be sufficient to sustain public services and to meet obligations as they come due.
At the June meeting a FASAB staff member had presented a review the definitions and characteristics of fiscal sustainability from four English speaking countries. It was noted that if the U.S went in the direction of having fiscal sustainability reporting as a requirement of the basic financial report, it would be the first country to do so. The United Kingdom has a sustainable investment rule which states that net debt will be maintained below 40 percent of GDP. Many Board members expressed concern over setting targets instead of standards.
Some of the Board members expressed the need to determine and understand the audience, including its segments, and the best ways to communicate to each segment. Robert Reid, Treasury's FASAB representative, informed the other Board members that his department is working on an easy to use website which would allow the users to access the information desired.
There was concern expressed about the dependency states have on the federal government funding and the risk that the federal government may not be able to sustain funding states’ activities.
At the September meeting a FASAB staff member presented some possible objectives of fiscal sustainability reporting for the Board’s consideration. Some of the FASAB members believe that the social insurance commitments should be a part of this reporting.
Because of this the fiscal sustainability project was placed on the “fast track.” An exposure draft is expected at the next Board meeting, December 4-5, 2007.