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Financial Accounting Hass And Associates


New accounting rules put city's net assets at risk When an employer sponsors a defined benefit pension, the employer is deferring some of the payment to the employee for the services the employee is rendering. The employer is in reality borrowing money from the employee, taking the employee's services today in exchange, in part, for a payment in the future. When defined benefit plans were first developed, the accounting rules did not require that the employer recognize that it was, in essence, incurring a liability for these future promises of compensation. Over time, the accounting rules have been tightened to reflect the financial reality of the transaction. Also, employers and employees now almost universally set money aside each year to fund these future benefits. The problem, however, is that it is difficult to know how much money to set aside today for a benefit that will not be paid for several decades. Over the years, actuaries have developed mathematical models for estimating whether the money that has been set aside will be sufficient to pay the benefits that have been earned. If these actuarial estimates show that the amount is insufficient, the plan is said to have an unfunded liability, that is, the employer owes the employees more than it has set aside. For many years, private companies have been required to show these estimated liabilities on their financial statements. However, the accounting rules for governmental entities have been much less rigorous. As a result, governmental entities normally show only a fraction of the actual shortfall on their balance sheet. For example, the city of Houston's last financial statement only showed about $2.5 billion in pension and retiree health care debts. But according to the actuarial studies the real debt is more than $5 billion. However, that is about to dramatically change. The Government Account

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