ALEXANDRIA —A top adviser to the General Assembly says Virginia can use a loophole to ignore new accounting standards designed to protect taxpayers, despite state law requiring its compliance.

Robert Vaughn, director of the House Appropriations Committee, said the state should ignore new pension accounting proposals put forward by the Government Accounting Standards Board because they could increase the state’s contribution rate to the system.

“At some point the elected members throughout the country will have to decide when GASB became the policymakers instead of those elected to govern the state,” Vaughn said.

The GASB, based in Norwalk, Conn., works to “establish and improve standards of state and local governmental accounting and financial reporting” that it says will “result in useful information for users of financial reports, and (guide) and educate the public, including issuers, auditors, and users of those financial reports,” according to its website.

Vaughn’s proposal walks a thin line with state law, which requires Virginia to file financial reports “in accordance with generally accepted accounting principles.” Those principles are set by GASB.

Virginia Comptroller David Von Moll disagreed with Vaughn’s approach.

“You have to follow the (generally accepted accounting principles)when doing fact reporting. That’s what the law requires,” he said.

But Vaughn said a loophole could fulfill Virginia’s law, while at the same time ducking the proposed standards.

“As long as you note that you’re not in full compliance then you have met their requirements,” he said. “That’s the transparency right there.”

Vaughn’s approach falls within the bounds of federal law.

Mark Zehner, deputy chief of the Securities and Exchange Commission’s Municipal Securities and Public Pension Unit, said that governments operate under different rules than the private sector, which must follow the guidelines of the Financial Accounting Standards Board, GASB’s sister organization.

“The commission does not have the statutory authority to require any municipal entity to follow any particular accounting standard,” said Zehner, though he could not comment on Virginia specifically. “Issuers should flag any of its material deviations from (generally accepted accounting principles) for investors and, if practicable, provide a quantifiable explanation of those deviations.”

In July, GASB proposed new standards to increase transparency in public accounting. The changes would move pension debt from the footnotes of financial disclosures, known as Comprehensive Annual Financial Reports, to the general reporting sections. The measure would prevent Virginia from claiming a surplus if it does not get control of its pension debt, which is estimated at $19.9 billion by the state and $50 billion by some economists.

Even more damaging, however, would be GASB’s change in valuing the debt.

Pension funds operate under amortization periods that assume when the bill will come due — Virginia estimates its debt based on a 30 year cycle. GASB’s proposal would cut that down to 15 years. Just as the price tag on a new car seems steeper if the buyer only has five years to pay it off, rather than 10, lawmakers will confront the same debt, but with less time to cover costs, which could increase how much taxpayers contribute to the pension system.

Vaughn, who is helping to shape the next budget, said that is unacceptable when the state faces a budget deficit of up to $1.5 billion and 2 percent to 6 percent budget cuts.
But some, including former Social Security commissioner Andrew Biggs, say that tamping down contributions by dodging GASB rules could hurt taxpayers even worse.

“If you’re giving substantially less than what GASB is requiring then you are doing your taxpayers a disservice,” said Biggs, who serves as retirement scholar at the American Enterprise Institute. “Future taxpayers are going to have to pay for not only the services they use, but they will have to pay for the services that were already performed.”

The American Enterprise Institute, based in Washington, D.C., is a conservative-leaning think tank “dedicated to research and education on issues of government, politics, economics and social welfare,” according to its website.

GASB said in a statement that its rules are meant to keep taxpayers informed and are more important than ever as Virginia begins its budget season.

“GASB’s standards help constituents to determine the ability of their government to provide services and repay its debt (and) help government officials demonstrate accountability to constituents,” spokesman John Pappas said in a statement.

Von Moll, who is in charge of signing off on state financial reports, said he would not be satisfied with the approach advocated by Vaughn.

“I would not go into this with that attitude,” he said. “I generally support GASB’s disclosure work.”

GASB is still in the process of finalizing its proposals, which would not go into effect for at least two years.

The Joint Legislative Audit and Review Commission will release its own recommendations concerning the state’s retirement program on Dec. 12.