VSCPA Issue Summary on HB 2590

HB 2590: Financial accounting and reporting system; establish alternative system for postemployment benefits.

Main Issues

• HB 2590 will ultimately require the State Comptroller to prepare and issue annual financial statements that will not be in compliance with generally accepted accounting principles (GAAP) as established by the Governmental Accounting Standards Board (GASB) regarding the manner in which postemployment benefits other than pensions are accounted for and reported. These Other Postemployment Benefits (OPEB), principally disability- and health care-related, are currently required to be presented on an accrual basis consistent with GASB Statement No. 45, which was effective for the Commonwealth for the fiscal year ending June 30, 2008.  
• The Virginia General Assembly would be required to set accounting standards for some postemployment benefits, thus overturning a law established in the Code of Virginia in the early 1980s requiring that the Commonwealth’s annual financial statements to conform with GAAP.
• Departure from GAAP-based financial statements could cause confusion and concern among bond rating agencies and those individuals and institutions seeking to purchase the debt of the Commonwealth and its local governments and agencies.
• Failure to follow GAAP would force the external auditors of Virginia local governments, and the State Auditor of Public Accounts relative to the financial statements of the Commonwealth, to issue a qualified or adverse GAAP opinion in the same audit report because the financial statements would not be presented in conformity with GAAP.
• Virginia law stipulates that only CPAs can perform attest services. Code section 54.1-4413.3 defines the standards of conduct and practice and specifically stipulates that attest services must be performed under the standards set by nationally or internationally recognized standard setting bodies or their successors. Failure to follow such standards could result in enforcement action against CPAs by the Virginia Board of Accountancy (BOA).
• Requiring auditors to use a specific set of standards established by and for the Commonwealth may cause an increase in audit fees due to the need to establish audit practices unique to Virginia requirements, as well as the need to explain and report on the differences between non-GAAP requirements of Virginia and those applied and accepted nationally.
• GASB standards, including those applicable to the reporting of OPEBs, are subject to a rigorous, public vetting and exposure process before becoming effective.
• Failure to have standards set by objective, independent standard setters could compromise the reliability of those standards.

• HB 2590 would place the calculation of OPEB benefits for current and future state retirees on a “pay-as-you-go” basis, and, therefore, would not require recognition and reporting of actuarial established OPEB obligations for the current 80,115 state retirees and for the more than 100,000 active state employees. For example, rather than report a total expense for pre-Medicare health care at $127 million for the year ended June 30, 2008, the Commonwealth — under this proposed legislation — would only be required to report, as cost for the year, the $32 million that was actually contributed.
• The liabilities and obligations of the Commonwealth reported within its Comprehensive Annual Financial Report at $19.5 million for disability coverage and $95.1 million for pre-Medicare health care coverage for the year ended June 30, 2008, would be significantly understated in the Commonwealth’s annual financial statements for subsequent years.