Using GASB Standards to Account for Opioid Settlements

Major nationwide lawsuits against manufacturers and distributors of prescription opioids for their roles in the ongoing opioid crisis were settled in 2021 and 2022, awarding state and local governments over $54 billion, with additional pending lawsuits that may see that amount continue to grow in the coming years. As a result, state and local governments in the U.S. will receive a massive inflow of new resources, hard on the heels of contending with the unprecedented amount of grant money received in connection with the COVID-19 pandemic. However, the opioid settlement dollars differ from the pandemic-era grants and prior national settlements in important ways that affect when governments will receive payments and what they can be used for. Those differences affect how the money should be accounted for and reported under the generally accepted accounting principles or GAAP established by the Governmental Accounting Standards Board (GASB).

What Are the Opioid Settlements?

In 2021, the resolution of joint lawsuits involving 46 states and the District of Columbia against Johnson & Johnson and three of the biggest opioid distribution companies—the National Opioid Settlement (NOS)—awarded state and local governments $26 billion. Several more settlements with pharmaceutical companies and pharmacy chains followed in 2022, involving nearly all states and D.C., adding another $18 billion in awards, with a separate lawsuit against a large consulting firm resulting in a $573 million settlement.

Additionally, states and tribal governments not involved in those settlements have reached agreements of their own with some of the companies, amounting to billions more dollars.

Which Governments Will Receive Settlement Payments and When Will the Payments Arrive?

Settlement awards are being allocated to states based on a formula intended to reflect the impact of the opioid epidemic on each state. Each state then allocates its total award between itself, its county and local governments, and in some cases, state-managed funds or trusts. Although the allocation must adhere to overall guidelines in the settlements, state governments are able to alter it through legislation or certain agreements. Consequently, the state-local split varies substantially.

States began receiving payments from the settlements as early as July 2022. Johnson & Johnson will pay its $5 billion settlement over nine years, with almost three-quarters paid in the first three years. The distributors’ $21 billion settlement will be paid out over 18 years. The payments from the companies involved in the 2022 settlements will occur over periods of a few years to 15 years. Distributions from states to other governments will occur after the states have received those payments.

What Limitations Exist on How Governments Can Use the Settlement Money?

Limitations will exist that are fairly restrictive compared with past windfalls, such as the 1998 Tobacco Master Settlement Agreement or the pandemic-driven grant programs authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan Act (ARPA).

The NOS requires that at least 70% of funding must be spent on “opioid remediation efforts,” such as example expanding access to treatment, buying Naloxone (overdose-reversal medication), prevention and recovery programs, treatment for pregnant and postpartum women, and treatment for the incarcerated in jails and prisons. Another 15% of the settlement payments can be used for administrative and legal costs related to opioid lawsuits and for governments to reimburse themselves for past opioid-related expenses. Only 15% of the payments can be used for any purpose. The 2022 settlements copied those proportions.

These spending limitations also come with significant accountability and transparency requirements. Each state must establish an advisory commission to provide input and recommendations about how to spend money on opioid remediation efforts, with significant public reporting requirements that include participating governments to report to the settlement fund administrator any spending other than for remediation efforts. Additionally, states are establishing reporting requirements for themselves and their sub-governments, and nearly four out of five states have created a website or online dashboard to report how funding is allocated and being used for. (National Academy for State Health Policy)

How States Determine the Amounts County and Local Governments Will Receive

States can settle on their own formula or process for allocating money to their governments, meaning there are 50 different outcomes for how they will determine the amounts county and local governments receive. (Opioid Settlement Tracker) States are also at different stages in their progress toward determining allocation. Some states, such as North Carolina, already have established the dollar amounts and timing of the distributions. Other states have decided on the percentage shares that their governments will receive but have not yet determined the amounts or timing, or the amounts may be subject to annual determinations by the state legislature or the state remediation fund. Other states still need to determine how to allocate the local portion of their settlement payments.

When Can Governments Report Their Shares of the Opioid Settlement in Their Financial Statements?

GASB standards refer to awards from legal proceedings as imposed nonexchange transactions. According to GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, as amended, a government should recognize an asset related to such transactions “in the period when an enforceable legal claim to the assets arises or when the resources are received, whichever occurs first.” Revenue generally should be recognized in the same period. That suggests that recognition of a judgment receivable and revenue could have occurred as early as the dates the settlements were finalized on. That is unlikely, however, because the recognition of any financial statement item depends on the measurable amount the amount that is known or can be reasonably estimated.

That is a significant caveat. In order to recognize a receivable at the time of the settlements — when the participating governments had an enforceable legal claim to payments — a government would need to know how much it would receive and when. Otherwise, the settlement would be viewed as a contingent gain that should be disclosed in notes to financial statements because the amount could not be determined. For instance, Michigan, which has a September 30^th fiscal year-end, disclosed information about the settlements in its 2021 financial statements but noted, “It is impossible to calculate with precision the total amount the State of Michigan will receive as a result of opioid litigation.”

What Needs to Happen for the Opioid Settlement Payments to Be Measurable and Reportable as Assets and Revenue?

For counties, cities, and other localities, being able to measure the amount it will receive—and therefore recognize a receivable — depends on where each state is in the process of allocating the local portion of settlement funds. It may already be possible to recognize a receivable for the entire amount to be received for governments in a state that has published the dollar amounts and fiscal years for payments to each locality. However, if a state has not yet established the amounts localities will receive, and it is not possible for localities to reasonably estimate the amounts based on available information, those governments cannot recognize a receivable. And if a state has decided that amounts will be determined as part of an annual legislative or administrative action, rather than in advance, localities will need to wait until each year’s amounts have been determined before they can recognize receivables. In the latter two circumstances, it would be appropriate for a government to disclose the settlements and the fact that the amount it will receive cannot be estimated at present.

When governments do have sufficient information to recognize a receivable, or when cash payments arrive, the purpose constraints on the use of the resources will affect how those resources will be reported. The legal limitations established in the settlements and, in some cases, by state governments or the funds they created to distribute payments, should result in an appropriate percentage of the resources being reported as restricted net position and/or restricted fund balance.

Still have looming questions about the opioid settlement resources and the key factors governments should consider when determining how to account for their share? CRI is ready to help governments understand the provisions for allocating settlement payments in their state and provide guidance on how to account for them. Contact your CRI advisor, who can assist in complying with your state’s reporting requirements related to the use of settlement funds.