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S5:E3 – Local Government Opioid Settlement Accounting

Over the next 18 years, over $60 billion of opioid settlement funds will be paid to state governments who will be passing some of it through to local governments. Join CRI Partners April Shuping, Becky Hammond, and Dean Mead, as they explain what questions local government finance officers should be asking and the resources available to help them to determine the correct accounting and disclosure for these new funds.

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April Shuping:

Welcome to another episode of It Figures with CRI. I am your host today, April Shuping. I am a partner in the auditing side of CRI in our Gainesville, Florida office, and I’m really excited to bring to you today a hot topic going around governmental accounting circles. I’ve got two really amazing experts who are going to help us understand how the opioid settlements you may have heard about or maybe seen coming in, how those opioid settlements really how they’re coming in, what created them, lots of great information and knowing how we account for them because that is one of the things we do here. So today, I want to introduce to you our speakers. We have with us Becky Hammond. Becky, can you tell us a little bit about what office you’re in and what your background is?

Becky Hammond:

Thanks, April. Yes, I am a audit partner in the New Orleans practice unit of CRI. I have about 23 years of governmental accounting, auditing and consulting experience. I’m also a member of our governmental line for the firm, which means I get to always be involved in all the awesome new things that are coming out and try to help educate our fellow partners and staff and also everyone else out there when we can. So I’m happy to join you.

April Shuping:

I look forward to hearing what you’re hearing out in the field. And to give us all the technical knowledge we ever could need on governmental accounting, we have with us Dean Mead. Dean, I know you don’t like to brag on yourself, but give us a little highlight of why you’re going to be the best at telling us how to do this accounting.

Dean Mead:

I can’t claim to be the best April, but I will certainly do my best. My name is Dean Mead. Hello everybody. I’m a partner at CRI. I have been, for about 20 months now, in the government and public sector practice, and before that, I spent nearly a quarter-century on the staff of the GASB and that’s where, to the extent that I have any accounting and financial reporting knowledge, I acquired almost all of it at the feet of David Bean, who was the director of the GASB for over 30 years. And I’ve been following the opioid settlement issue very closely and I’ve been making presentations on it and I’m eager to share what I’ve learned.

April Shuping:

That’s great. Thanks Dean. I know you’re my go-to person with any complicated government accounting questions, so I’m really excited to learn along with our listeners today. Well, let’s just jump right in. So I keep hearing rumblings about this massive opioid settlement that is supposedly being distributed by states to units of local government, and we have so many local government clients that I know it’s going to be really impactful to us. Can you tell me a little bit about the source and size of this funding and then how it’s being allocated, timing, what our governments can expect to see if they haven’t seen this funding yet.

Dean Mead:

As background, this all started with a lawsuit that was filed by 46 states, the District of Columbia and five US territories against Johnson & Johnson, which is probably the largest of the pharmaceutical firms that manufacture opioids, and three large pharmaceutical distribution companies. And the lawsuit accused them of causing the national opioid addiction problem and costing states and local governments a considerable amount of money. That lawsuit was settled in 2021 by an agreement to pay the governments up to $26 billion. In return, the governments agree not to sue those companies again and to ensure that the governments within each of the jurisdictions, each of the states also will not sue. And then to use almost all of the money in the settlement for opioid addiction prevention and treatment programs. That was called the National Opioid Settlement or NOS. And it set the precedent for resolving the many other dozen or so lawsuits that involved every one of the 50 states and almost all of the territories and many individual local governments and tribal governments, they all follow that same basic pattern.

And to date, the total award is somewhere close to $60 billion that will be distributed to the states and to some sub-state governments directly, and then by the states to their local governments over a period of up to 18 years, depending upon which settlement you’re talking about. And those distributions will be based on a formula that takes into account the overall population of the government, the number of overdose deaths, the quantity of opioids delivered to those states, and the prevalence of substance use disorder. The first payments to the states and other governments that were parties to the lawsuits actually occurred in July of 2022. And there have been several more payments that have been made since then and those payments are going to stretch out to about 2040. So in most, if not all of the states, the settlement money has already begun to flow to the governments below the state level.

April Shuping:

Wow, 60 billion. That’s a big number, Dean. That sounds really impactful to our local governments and to all of our local governments around the country. Becky, you’re out dealing with clients all the time. Have you been getting any questions from your clients in Louisiana about the accounting for those funds?

Becky Hammond:

I certainly have. A number of my clients have started receiving these payments in Louisiana and they’re certainly coming to me and asking how do we recognize these revenues? And there are a number of questions involving the recognition process for this. And the first question really is are we going to have to recognize a receivable for the entire stream of those up to 18 years of payments? And that really depends on the state that you’re in and how the settlement fund is structured and how the program is structured under that state. Some states are, I believe, just giving out the stream of payments just as a payment each year. Some are asking for documentation to show how you’ve spent the funds before they will do it as basically a reimbursement or a grant type program and treating it kind of as non-exchange grant type program. Some are calling in an exchange transaction whether you’re signing an agreement and it’s deemed to be an exchange transaction.

So I think it’s very important that as auditors and accountants, if we’re trying to get our handle on how we’re going to recognize this revenue, that we first understand the agreement in depth and which type of situation this is. We got to make a determination of what type of transaction it is, exchange, non-exchange, and then follow the GASB guidance for that type of exchange. It’s definitely a considerable consideration and once you decide that you have to recognize the revenue, let’s say we are going to recognize the receivable for the entire 18 years, we also have to determine should there be an allowance for a part of it and what percentage of that should we allow for? And these are pretty significant decisions that are going to have to be made up front so that we can be consistent.

April Shuping:

Yeah, it sounds like there’s a lot of questions out there and consistency is a pretty core principle of how we like to do our accounting and accounting standards, comparability across governments. So with all that information, Dean, is there going to be a kind of a single approach that all of our local governments can follow on the reporting of this funding? Kind of like with the COVID-19 federal grant accounting and reporting guidance where we actually got some direct guidance from GASB on that specific funding source?

Dean Mead:

My key takeaway from what Becky just said is no, unfortunately. The pandemic era grants were specific federal grant programs. It was confusing because it was all being done on the fly and the money went out really before the rules about how you could spend the money. And so governments were waiting for that, but it didn’t matter what state you were in, the rules applied equally to every government regardless of where you were located. That’s definitely not the case with the opioid settlements. They contain some overarching requirements like the percentage of money that has to be spent on opioid prevention and treatment programs and the formulas for sharing money with the localities, what types of programs are acceptable as prevention or treatment? And of course, as I mentioned before, the requirement that governments promise not to sue the companies in the future. Despite that kind of overarching structure within that, the states have a tremendous amount of leeway to determine how they’re going to distribute the money to their political subdivisions.

So as a result, to borrow a saying, if you’ve seen one state’s arrangement for distributing the money, you’ve seen exactly one state’s arrangement for distributing the money. That being said though, Becky I think is right in identifying what are probably the three most common approaches that states are taking. And there’s a fourth one as well that’s kind of a hybrid of those. The first of those is some states have determined that their local governments are parties to the lawsuits just as the states were. And what that may mean is that those governments can recognize the receivable and revenue upfront for the future settlement payments. But whether they can actually do so depends upon other factors, as is always the case with revenue and receivable recognition, such as being able to measure the amounts that they’re going to receive and to determine whether they will in fact be collected. So it’s not a given, even if a government is determined to be a party to the transaction, that they’re going to be able to recognize all of the future payments upfront.

The second that Becky mentioned is essentially arranged like an expenditure driven grant. The governments, the local governments are told how much they are eligible to receive each year and then they can spend on approved projects or programs and submit their paperwork to the state to get reimbursed. That’s the way a lot of state grants work, a lot of federal grants work. And so that should be very familiar to governments that are in that kind of situation. Basically, what they have to wait to do is until they’ve spent on something that is approved and thereby met the eligibility requirements of the program, that’s the point at which they can recognize a receivable from the state and revenue. The third is arranged like another kind of grant program where the states would distribute the formula-based amounts to the local governments each year, restricting those resources to be used only for approved opioid treatment and prevention programs.

And that type of program generally results in a government recognizing a liability until it has spent the money on an approved purpose. And at that point, it gets rid of the liability and it can recognize revenue. And then the last twist on this is there are some states that are requiring local governments to apply in advance to say, “This is what we’d like to spend it on, this is how much we think it’s going to cost.” And then if the state approves it, at that point, they administer it like either the second or third examples that I just talked about where they either spend first and get reimbursed or they receive the money first and that money is restricted to being used for approved programs.

April Shuping:

All right, well the answer of that is complicated. So definitely everybody needs to brush up on their non-exchange transactions and really get a customized individual approach almost to how they’re do this accounting. That’s a lot. So when we have states that are doing this significantly different language in their agreements with local governments with different requirements, different guidelines, what would be the best way for a local government to find out what they should be doing in their individual situation? I mean obviously, address your GASBs and all of that, but how do they even know what the impact is on them, what their agreement is? What documents should they be getting and where should they go to get those?

Dean Mead:

Well, the ideal situation for a government is that the state has been proactive and said, “This is the way that you should account for these transactions,” and distributed that widely and made sure that all the governments are aware of that. That’s the ideal. That is not necessarily the reality. So there are a few places that governments should be looking. Governments were required to sign an agreement with their state that among other things is a promise that they won’t sue the companies in the future. And if they do, that not only they are in danger of losing their grant money, but every other government in the state, which is a tremendous amount of pressure. That agreement document may contain a lot of the information that they need to determine which one of those approaches their state is taking to distributing the money and therefore how they ought to account for it.

I’d also recommend that governments visit their state attorney general’s website, since the state attorney general were the people who were suing, who brought the lawsuit, and they’re likely to have a section of their website that’s devoted to the opioid settlements. Also take a look at the website of the existing agency or the commission that the state created specifically for the purpose of distributing the money. There’s likely to be some valuable information there, and my observation has been they all have websites. And then another place that they ought to look is wherever it is that they traditionally look for the state imposed regulations and requirements for accounting and financial reporting, if that’s the state auditor’s office, state controller’s office, it varies from state to state. But wherever it is that a government typically looks for the state-based guidance on accounting, there’s a good chance that they might find something specific to the opioid settlements there.

April Shuping:

That’s some really good direction, a nice starting spot. So once a government goes out and finds those resources, are there some key elements in the agreements? I’m guessing with my experience with legal documents, they’re quite substantial, and even grant documents, are there some key elements to those agreements that our local governments and our auditors should be looking out for that can really help guide that accounting? Just like some, definitely this is the language you’re looking for or a clause.

Dean Mead:

Yeah, there are four things that come to mind right away, some of which we’ve already touched upon. First and foremost, do you know how much you’re going to get and when you’re going to get it? Most of the states, if not all of them, by this point, have done one of the things they’re required by the settlement to do, which is to apportion the local government share of the settlement payments and to tell their governments how much they’re going to get. And in a lot of cases, those are attached to the agreement that the local government signed. I’ve seen that in a lot of cases. If you find the state agreement, there’s an appendix that lists how much they’re going to get or what their percentage is, which is not as helpful as the actual dollar amount. But again, that’s another form of variation in how governments are administering this from state to state.

If you don’t have information about when and how much you’re going to receive, at a minimum, there’s really nothing to account for. And at that point, perhaps it would be appropriate to disclose something in notes to financial statements about the existence of the settlement and the fact that you don’t know how much you’re going to get, but the idea of recognizing assets and revenue at that point is off the table. The second thing is you want to know if your government is a party to the settlements because that’s a very different approach to accounting that, based on the guidance GASB has given, is viewed as an exchange transaction. And that accounting obviously is very different from grant accounting under the non-exchange standards. So the way the states, for instance, are accounting for the settlement is very different from what their local governments, or most of their local governments are going to have to do to account for their share.

The third thing is whether there are any eligibility requirements to be met, which will determine when they can recognize a grant receivable or cash, and whether they have to recognize the liability, and ultimately, when they can recognize revenue. And then fourth, you want to ask if there’s any reason to believe that those future payments are not going to be received. Theoretically, the idea of the settlement is the governments don’t sue the companies anymore and the companies don’t try to file for bankruptcy. We’ve already seen at least one of them has. So it’s reasonable I think to ask, are these companies actually going to be around for 18 years in order to make the payments that they’ve agreed to make?

And related to that, you want to ask if all of the contingencies that are in the settlements have been met. There are several contingent requirements that affect how much money governments are going to receive. And if those haven’t all been resolved yet, there may be some question as to whether those amounts will ever be received. And answers to those questions inform collectibility, which in turn affects how much revenue can be reported.

April Shuping:

That’s really helpful. I think it’s going to give a lot of direction to some of us who might not even know where to start. So definitely look for those key terms, brush up on your GASB 33, non-exchange transaction requirements and figure out these contingencies. Thanks, Dean. I think I learned a lot in that and feel a little more comfortable with this. Becky, other than all the great information Dean just gave us, are there any other rumblings you’ve been hearing out in the field that might complicate the accounting for this? Any other concerns, things running through the grapevine in the government auditing world that we might want to address while we’ve got Dean here?

Becky Hammond:

Absolutely, well, I think one of the biggest concerns is our contingencies related to these payments. Anytime you have a stream of cashflows going out to 18 years with large companies, the first question is are we really going to get all 18 years worth of payments? Are they going to file bankruptcy before we get all of the money? Are there other restrictions that we need to be aware of? Are the rules going to change halfway through? So certainly, when we talk about if we’re booking a receivable for the whole period, then that’s part of the allowance for doubtful accounts discussion is what’s the likelihood of bankruptcy? I think you have to go off of what you know now according to our accounting standards and say, well, some of them have filed bankruptcy, some have not. What is that information in our current knowledge bank? And we have to ask those questions and probably dig in a little deeper to get an informed bank of facts to be able to make these decisions. What do you think, Dean?

Dean Mead:

I think the thing that worries me the most is the requirement that nobody sue and the possibility that if a government does sue, that that will stop the payments not just to them, but to everybody in that state. And looking at Florida for instance, we’ve got over 1800 governments below the state level. That’s a lot of governments to say none of them will ever take it upon themselves to sue. And if there is a state where not every local government or every government that’s eligible to receive the settlement payments has signed onto the agreement and legally bound themselves not to sue, that situation still exists. One of those governments that said, “No way are we promising not to sue,” and then they proceed to sue, that could trigger those provisions in the settlement as well.

But if you ask the question, well, how do I set the odds for that and determine my recognition approach based upon that? It’s impossible to know. I think even if you’re in a state where they’ve identified how much money you’re going to get and what years you’re going to get it in, and it’s fairly straightforward to receive that money, it’s still going to be questionable as to whether you can look at that future stream of payments and say, I am in a position where I can recognize some significant portion of that as an asset and/or as revenue.

April Shuping:

Yeah, it seems like we still have some things to learn on this and some places to land. We also have to always remember our unavailable revenue deferred inflow issues when we’re doing our multi-year revenues coming in or funds coming in. So one more complication between our modified accrual and our full accrual statements as well to keep in mind once we do nail down what these actual entries will be to record them. Becky, whenever I hear about these funds, it reminds me so much of some of the different CARES Act and COVID funds that came. Are these going to be considered federal or state grant expenditures for single audit purpose reporting? Will these have to be tracked that way?

Becky Hammond:

They definitely will not. The sources of the funds for this are not from the federal government or any departments of the federal government. So these would not be subject to the Single Audit Act or and have to go through the single audit procedures.

Dean Mead:

There are going to be though requirements specifically related to the settlements in terms of reporting by the governments that receive the money. Every state is establishing some reporting mechanism that the recipient governments will use to document how they’ve used the money that they’ve received. That’s a requirement under the overall settlement. And each of the states then is expected to implement that. So even if this isn’t subject to state single audit reporting requirements, it has reporting requirements of its own that are going to be applied. And whether from an accounting perspective, it’s treated as grant revenue, legal settlement revenue isn’t going to make much of a difference. It’s restricted and it’s going to end up being in program revenue, and it’s really impossible to see source of revenue within that presentation in the financial statements anyway.

April Shuping:

So not a lot of difference in the accounting and definitely sounds like we’ll have some grant-like reporting requirements. But with my auditor hat on, that’s good news to me because that’s one less major program that I’m going to have to worry about for the next 18 years of auditing. So a little bit of good news here. And I am sure that the state governments are all scurrying around to get those reporting requirements set up, and if the COVID funding gives us any indication of the future, this will probably change and be tweaked as we move forward. So we’ll just keep an eye out for that. All right, so great information. I feel a lot more educated. I hope our listeners got some good tidbits out of this on a topic that sounds a little complicated and really hasn’t quite settled yet. Dean, what else should our local government finance teams consider, do? What are the next steps when we are looking at this, to actionable items?

Dean Mead:

I would encourage them to reach out to their CRI advisor if they haven’t done so already for any help they might need if they’re having difficulty understanding what the requirements are or how they are required by their state to report. If you’re not a CRI client at present, there’s a way to submit questions and to ask for help on CRI’s website, which is cricpa.com or confer with your present auditor. They are dealing, like we are, with multiple governments that have this same issue. And so I think you can count on us or your auditor to be on top of the issue and to know how you should be reporting the revenue in your state.

April Shuping:

Great. Great tips and yeah, just the biggest takeaway is you’re not alone out there with dealing with this. Don’t feel like you’ve got to reinvent the wheel yourself. Pull on some trusted advisors. We here at CRI are always happy to help whether you’re a client or not. We learn from every problem we help solve. So great topic today, guys. I know I enjoyed it. Thank you so much Becky, for giving us that in-the-field perspective from the auditors and the clients, and Dean for your technical knowledge. I think clearly, you’ve got a really good handle on what we need to look for, where we need to go, and depending on what we see, how we account for it. So I’m going to be looking forward to working with you on my own clients going forward. So thanks everybody again for another really fun podcast. Again, cricpa.com, where you can sign up for webinars on exciting governmental accounting and auditing topics going forward. And please tune in for our next podcast. We love doing them and we love having you here.

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If you want more CRI insights or are interested in learning about our firm, please visit our website at cricpa.com. Thanks for listening to this episode of It Figures, the CRI podcast. You can subscribe to It Figures on iTunes, Spotify or wherever you prefer to listen to your podcasts. If you liked what you heard today, please leave us a review.

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