Financial Shenanigans?

What is going on with the $600,000 transfers out of the medical benefits account?

Tisha Mannino

I am not sure, but what could be going on is that in accounting, the income statement is not cash flow based.  Thus, every year, an organization has to have an expense that takes into account, expected current expenses earned as well as an accrual for future expenses because teachers by virtue of working another year, “earn” their future medical expenses in retirement. 

Simply, since medical benefits for teachers for example, continue after they retire, there is a current expense that takes this future payment into account. Now, this technically should go into an account on the balance sheet that will be used to pay benefits as they happen.  This is how it works in the private sector.  But, government entities are not really held accountable to this. Think Social security which is going to run out in 2023 (according to recent CBO report) because the government has never invested these funds to grow in a separate account, but instead uses the cash from social security to pay out of the general account and puts IOU’s into the social security liability account.  More complicated than that, but largely true. 

Anyway, the school district could be “raiding” the balance sheet medical benefit liability to pay other current expenses and this only comes home to roost in the future when the cash flows from medical expenses start to draw down and eventually exceed the liability on the balance sheet.  Hopefully this explanation makes sense. And, if a CEO and CFO did this in the private sector, they would be jailed for accounting fraud.

To be fair, there is a big difference between a public company and a school district as the incentives differ.  In the case of public companies who were caught doing this type of stuff, they were managing earnings to show earnings growth which could in turn positively affect the stock price.  School districts don’t want to lose state and government funding, which are part of  their revenues.  As a result, it becomes a use it or lose it game.

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