AUSTIN, Texas—Legislation allowing Texas and public entities within the state to disregard an accounting standard that governments publish their retiree health liabilities on their financial statements is drawing a mixture of criticism and praise.

The Norwalk, Conn.-based Governmental Accounting Standards Board--the private organization that promulgated Statement 45--as well as accounting organizations and other public entity benefit managers predicted that Texas will suffer financially if it does not follow the accounting practice.

However, lawmakers and representatives of retired employees disagree, and Texas Gov. Rick Perry is expected to sign the legislation.

Faced with a projected $50 billion in future retiree health liabilities, Texas lawmakers last month passed H.B. 2365 by nearly unanimous votes. The legislation would give Texas and any of its public entities permission to ignore GASB Statement 45, an accounting standard requiring state and local governments to disclose their liability for "other post-employment benefits," which include retiree health, dental and vision benefits and some forms of life insurance (see box, page 21).

GASB 45 was issued in 2004 and takes effect this December for large public entities. It recommends that these liabilities be funded in much the same manner as pensions, using an actuarial approach, rather than a pay-as-you go basis as they traditionally have been.

The first iteration of H.B. 2365 forbade any Texas public entity from following GASB 45. However, the measure was changed to give public entities the option of using either GASB 45 or the so-called Texas Standard after several public entities stated their preference for the GASB standard in testimony before the Texas Legislature.

The legislation defines the Texas Standard as a "statutory modified accrual basis for governmentwide and fund-level internal and external financial statement reporting."

State Rep. Vicki Truitt, R-Fort Worth, said she wrote the bill after representatives from Terrant and Travis counties told her that applying GASB 45 would make many public entities appear insolvent when they were not.

"We want to disclose (retiree health liabilities), but we do not believe it to be a hard liability that should be listed as such on the financial statements," Rep. Truitt said.

She added that the state's constitution prohibits lawmakers from making appropriations more than two years in advance, and GASB 45 requires that retiree health liabilities be projected 30 years into the future.

Moreover, retiree health obligations in Texas are not guaranteed because collective bargaining agreements are barred by statute for most public entity employees, with the exception of police and firefighters, she said.

"These are things granted on a session-by-session basis," said Andy Homer, director of government regulations for the Texas Public Employee Assn., a nonunion organization that represents some 15,000 active and retired state workers. TPEA testified in favor of the bill.

For example, in 2003 when the state was facing a $10 billion budget shortfall, the Legislature voted to increase the eligibility requirements for retiree health benefits, thereby reducing those obligations, Mr. Homer said.

While lawmakers and public entity retiree representatives support the measure, the GASB, other accounting organizations and some public entity benefit managers, expressed concerns that Texas' decision to essentially flout GASB 45 could backfire by making the state appear to be a greater credit risk.

Potential audit troubles

"The Big Four accounting firms have said this could result in not getting a clean audit opinion. The bond rating agencies have said this will be a factor in their credit ratings," said a spokesman for GASB in Norwalk, Conn.

"It may or may not be a factor in bond rating," said Douglas Benton, vp and senior credit officer in Moody's Investors Service's Dallas office. "As a rating agency, we don't create or require governments to adhere to any specific accounting principles because we're not a regulatory body behind GASB. We're not like the (Securities and Exchange Commission) where we demand compliance with accounting standards," Mr. Benton said. "However, GASB has become the standard in a lot of states."

Although Standard & Poor's Corp. doesn't specifically require that entities use generally accepted accounting principles, "if you do not follow GAAP accounting, it's a negative credit factor and could adversely affect ratings," said Parry Young, a director in the public finance department at S&P in New York.

"As a rating agency, we want certain pieces of information, and one thing we would like to know is how well the entity is managing their OPEB liability," added Sherman Myers, a director at S&P in New York.

Indeed, the objective of GASB 45 is to create a uniform way for public entities to report their long-term retiree health liabilities, according to GASB.

"In Texas, they don't want to see these liabilities on their watch. They said that in their own testimony. To us, that will result in flawed information to the public and the public will not get the truth," the GASB spokesman said.

The American Institute of Certified Public Accountants in New York said any public entity that forgoes GASB 45 will receive an adverse opinion stating that their financial statements are not in accordance with GAAP.

"The AICPA's position is that we support GAAP reporting by state and local government entities," said a spokesman for the organization. "We support the GASB, and we always have."

However, "if you begin to pick and choose which accounting principles you like and don't like, then you don't have generally accepted accounting principles," said Relmond Van Daniker, executive director of the Alexandria, Va.-based Assn. of Government Accountants, which also has come out against the Texas legislation.

Several public entity benefit managers also criticized the Texas action.

"Everybody keeps saying GASB 45 is not binding. On the other hand, I can assure you that the bond rating agencies are going to want to look at retiree health liabilities," said Darrell Wells, director of risk management for Odessa, Texas, who also is in charge of the city's health benefit program for active and retired employees.

"They know this is going to be a huge number. They know there will be back scatter from the media and citizens" and financial markets if the liabilities are reported, and they are significant, Mr. Wells said. "The Legislature would be asked to put in large amounts of money to fund retiree health," he said. "But there's not enough money to go around."

Paul Hackleman, benefits manager for San Mateo County, Calif., said Texas public entities that opt out of GASB 45 "are going to find themselves at some financial disadvantage in terms of either money that they're borrowing or bonds that they're trying to float or anything where they're trying to get money from creditors."

Will other states follow suit?

But Rep. Truitt doesn't expect such repercussions.

"We don't believe it will affect the state's bond rating," she said. "The issue is creditworthiness and the key is making all the information necessary available to those who need it to determine creditworthiness, and the legislation we passed does that. It's not that we're not offering full disclosure. We will offer full disclosure. We just won't do it as a liability."

As far as the Texas rebellion against GASB, Rep. Truitt said she expects other states to join Texas and she is preparing a presentation for the this year's annual meeting of the National Conference of State Legislatures.

"Other states are interested in finding out what Texas did," said Arturo Perez, fiscal analyst for the Denver-based NCSL. "It's possible they may take actions."