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 subdivisions (depending on the state, counties, localities, school districts, and/or special districts), 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 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. At most, 15% of the payments can be used for any purpose, but the states may restrict how even that amount can be used by their governments.

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 reporting 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 ways they will determine the amounts sub-state 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.

Those potentially confusing circumstances highlight three things every government should do when evaluating how to account for any payments it may receive related to the opioids settlements:

1. Review the document the government signed to become eligible to receive settlement payments. Depending on what state you are in, it may be called a state-subdivision agreement, memorandum of understanding, memorandum of agreement, or a similar name.
2. Contact the state attorney general’s office or check their website for information about the settlements and how they are being allocated to local governments.
3. Contact the state office or department that provides accounting guidance to local governments, such as the state comptroller, auditor, or treasurer, or a state department of education.

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

The answer to that question depends primarily on what state you are in because, as already mentioned, no two states are alike in how they are allocating and administering the settlement money. Here are four questions that you should ask when taking the three steps above:

1. How does the state view the payment of settlement money to local governments?

The answer to this question informs what kind of transaction the receipt of settlement money is and, therefore, which GASB guidance to follow. Some states are arranging the payments to their governments like restricted, expenditure-driven grants – a type of nonexchange transaction – even requiring governments to apply for funds. In some cases, the states provide settlement monies in advance, restricting them to be spent only on opioid abatement activities.

2. Have contingencies in the settlement been resolved?

The answer to this question informs whether and when an asset can be recognized. A certain portion of the payments from the companies are contingent on the percentage of governments in a state that sign on and agree not to sue the companies in the future. Another percentage is contingent on no governments in a state taking future legal action against the companies. Ask your state whether the contingencies have been resolved. If contingencies remain unresolved, it may not be possible to recognize an asset prior to meeting eligibility requirements for settlement payments or the payments actually being received.

3. How much will we receive and when?

Recognizing any financial statement item depends on its amount being measurable – i.e., the amount is known or can be reasonably estimated. Measurability depends on knowing the amount and timing of the settlement payments. As noted previously, the states are at various stages of progress in determining percentage allocations, dollar amounts, and the years in which payments will be made.

4. Is there any reason to believe the payments won’t be made?

Recognition also depends on the amounts being collectable. Are the settlement payments protected from a company filing for bankruptcy in the future? What happens if another government sues one of the companies? Even if collectability is not a bar to recognition at present, it bears close watching over time – determinations about collectability are not set in stone.

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 they 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 if a state 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, or have structured the payments like expenditure-driven grants, governments may need to wait until their states have determined the payment amounts before they can recognize receivables. Until a government can recognize cash or a receivable for settlement payments, it may be appropriate for it 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. However, it is possible that any cash or receivable will be offset by a liability for resources received before eligibility requirements have been met and/or, in the governmental funds only, a deferred inflow for unavailable revenue – with no remainder to be reported as net position or 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.