Reexamining the State and Local Government Financial Reporting Model AAA Government & Nonprofit Section

1. Reexamining the State and Local Government Financial Reporting ModelAAA Government & Nonprofit Section Dean Michael Mead (GASB and Rutgers Business School) March 28, 2014 The views expressed in this presentation are those of Mr. Mead. Official positions of the GASB on accounting matters are determined only after extensive due process and deliberation.

2. Overview • Background • Research Plan • Initial Results • Questions

3. Background

4. Financial Reporting Model • Included in the GASB’s original technical agenda when it was created in 1984 was to revisit the financial reporting model set forth in NCGA Statement 1, Governmental Accounting and Financial Reporting Principles

5. 15 Years of Due Process • 7 GASB Research Reports: • The Needs of Users of Governmental Financial Reports – David Jones et al. (1985) • A Study of the Usefulness of Disclosures Required by GASB Standards – Leon Hay (1988) • Information Needs of College and University Financial Decision Makers – John Engstrom (1988) • Financial Reporting by State and Local Governments: A Survey of Preferences among Alternative Formats – Earl Wilson (1990) • Popular Reporting: Local Government Financial Reports to the Citizenry – Frances Carpenter and Florence Sharp (1992) • The Relationships between Financial Reporting and the Measurement of Financial Condition – Bob Berne (1992) • Small Government Financial Reporting – Rhoda Icerman(1996)

6. 15 Years of Due Process • Concepts Statement 1, Objectives of Financial Reporting (1987) • 4 Discussion Memorandums: • Accounting and Financial Reporting for Capital Assets of Governmental Entities (1987) • Measurement Focus of Governmental Business-type Activities or Entities (1988) • Capital Reporting (1989) • Reporting Contributions, Subsidies, Tap Fees, and Similar Inflows to Enterprise and Internal Service Funds and to Entities Using Proprietary Fund Accounting (1993)

7. 15 Years of Due Process • Statement No. 11, Measurement Focus and Basis of Accounting—Governmental Fund Operating Statements (1990) • Statement No. 14, The Financial Reporting Entity (1991) • Statement No. 15, Governmental College and University Accounting and Financial Reporting Models (1991) • Statement No. 17, Measurement Focus and Basis of Accounting—Governmental Fund Operating Statements: Amendment of the Effective Dates of GASB Statement No. 11 and Related Statements (1991)

8. 15 Years of Due Process • 6 proposals for public review: • Invitation to Comment (ITC), College and University Financial Reporting Model (1994) • Invitation to Comment, Governmental Financial Reporting Model (1994) • Preliminary Views, Governmental Financial Reporting Model: Core Financial Statements (1995) • Preliminary Views, College and University Financial Reporting Model: Core Financial Statements (1995) • Exposure Draft, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments (1997) • Exposure Draft, Basic Financial Statements—and Management’s Discussion and Analysis—for Public Colleges and Universities(1997)

9. 15 Years of Due Process • Statement 34 stakeholder feedback • 780 comment letters, 15 public hearings, 25 user focus groups, field test, many meetings with constituent groups, GASAC, and task force • Statement 35 stakeholder feedback • 379 comment letters, 11 public hearings, 7 user focus groups, survey of college and university report users, field test, many meetings with constituent groups, GASAC, and task force

10. Statement 34 and Related Pronouncements • Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments (June 1999) • Statement No. 35, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments (November 1999) • Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements (March 2000) • Statement No. 37, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments: Omnibus (June 2001) • Statement No. 41, Budgetary Comparison Schedules—Perspective Differences (May 2003) • Statement No. 46, Net Assets Restricted by Enabling Legislation (2004)

11. Statement 34 Implementation Dates • Phase 1: governments with annual revenue of $100 million or more • Periods beginning after June 15, 2001 • Additional four years for retroactive reporting of major general governmental infrastructure • Phase 2: governments with annual revenue of $10 million or more but less than $100 million • Periods beginning after June 15, 2002 • Additional four years for retroactive infrastructure reporting • Phase 3: governments with annual revenue of less than $10 million • Periods beginning after June 15, 2003 • Retroactive infrastructure reporting encouraged but optional

12. Financial Reporting Model Research In August 2013, the Board decided to begin pre-agenda research examining the effectiveness of the financial reporting model – Statements 34, 35, 37, 41, and 46, and Interpretation 6 The GASB is committed not only to establishing standards but also to ensuring that they continue to be effective Most of the requirements of Statement 34 became effective between 2002 and 2004; the provisions related to reporting existing general infrastructure assets were fully effective in 2006 and 2007

13. Research Activities • During 2013 the follow activities were conducted: • 11 research roundtables in 8 cities, focusing on either general purpose or special-purpose governments, consisting of a mix of financial statement preparers, auditors, and users • Archival research with annual financial reports • Literature review • The primary purpose of the initial research is to identify any major, overarching issues that have arisen since Statement 34 was implemented • Beginning in 2014, based on the results of the initial work: • Broad surveys • In-depth individual and organizational interviews

14. Timeline Research is expected to last until the middle of 2015 At that time, if the Board believes that significant improvements can be made to the standards, it will begin to deliberate over potential changes to propose for public review and comment Although this review will not take 15 years, like the project that resulted in the issuance of Statement 34, it is reasonable to expect that Board deliberations and the public review and input process will last at least several years

15. Initial Research Results

16. Methodology • Archival research with randomly selected governments stratified by type and size Sampling plan Collection progress 12-31-13

17. Methodology • Research roundtable participants selected to represent the breadth of the GASB’s stakeholders, a mix of familiar faces and many new ones • 8 research roundtables on general purpose governments held in NYC (2), Boston, Chicago, Atlanta, San Francisco, Dallas, Los Angeles • 3 research roundtables on special-purpose governments held in NYC, DC, and San Francisco

18. Research Roundtables

19. Research Roundtables • Purely exploratory in nature • Asked completely open-ended questions about: • Budgetary comparisons (general purpose only) • Fund financial statements (general purpose only) • Current financial resources/modified accrual (general purpose only) • Government-wide financial statements • Enterprise fund financial statements (special-purpose only) • Infrastructure reporting • Management’s discussion and analysis • Segment reporting (special-purpose only) • Cost-benefit considerations • Capital asset and long-term liability disclosures

20. GAAP Compliance • All but 12 of these were because MD&A was missing • 4 left out a component unit • 4 included a component unit that was not audited

21. MD&A: Archival • Reference to component units almost nonexistent • Use of bar and pie charts is common for phase 1 governments, but much less so for smaller governments • Description of currently known facts, decisions, or conditions that are expected to have a significant effect on financial position or results of operations • Missing entirely for almost half of phase 1 special districts and about a third of phases 2 and 3 • Principally presents economic data, information about subsequent year’s budget, and revenue and spending projections

22. MD&A: Roundtables • General purpose: preparers and users generally favorable, auditors evenly divided • Special-purpose: users generally favorable, preparers and auditors slightly more unfavorable • Positives: very valuable when it is done right, provides context and transparency, good for less experienced readers • Negatives: it often is not done right, boilerplate, lacks discussion and analysis

23. Government-Wide Financial Statements: Archival • Presentation of prior year almost completely limited to special-purpose governments • Statement of net position • Order of liquidity/maturity far more common than classified format (except for BTAs, which are required to use it) • Overwhelming majority of governments use net position format over balance sheet • Statement of activities • Very few governments present an allocation of indirect costs in the statement of activities, all phase 1—slightly more school districts do so • About 5% reported extraordinary items and 5% reported special items in the most recent fiscal year

24. Government-Wide Financial Statements: Roundtables • Users evenly split (though buy-side were more unfavorable), auditors and preparers slightly more unfavorable than favorable • Positives: only long-term view of government available, more comparable across governments and to private sector, • Negatives: not widely used, too aggregated, not comparable across governments, added complexity, not well understood • Statement of net position • Positives: valuable to report capital assets and all long-term liabilities, reflects reality • Negatives: prefer classified format, reporting fully depreciated capital assets not useful, deferrals don’t make sense, negative net position difficult to explain, makes financial situation look more negative that it is

25. Government-Wide Financial Statements: Roundtables • Statement of activities • Positives: revenues and expenses by function/program valuable for assessing what taxpayers pay for, shows cost of running government, provides information for ratios • Negatives: format is complicated and hard to understand, method of aggregation reduces value, elected officials do not make decisions based on this information, hard to prepare

26. Infrastructure Reporting: Roundtables • All participants tended to be more unfavorable than favorable, predominantly because of the modified approach • Positives: capital assets are essential to service provision, all assets should be included, good for accountability, modified approach condition information • Negatives: information may not be reliable or relevant, not useful for assessing deferred maintenance, “more of a liability than an asset” • Modified approach • Positives: physical condition information, better than depreciation with regard to fully depreciated assets • Negatives: difficult and costly for many governments to do, auditability concerns (particularly with the condition information)

27. Fund Financial Statements: Disaggregation • Preparers and users generally favorable, auditors more favorable but not as markedly • Positives: Consistent with some users’ focus on general fund, major funds an improvement over fund types, insight into financial activity between funds • Negatives: major funds are not comparable and sometimes change from year to year, harder to identify interfund activity, funds they want are not major

28. Fund Financial Statements: Current Financial Resources and Modified Accrual • Preparers and users generally favorable (though not quite as strongly as for other features), auditors slightly more favorable than unfavorable • Positives: focus is closely related to information governments use to make decisions and allocate resources, good for assessing liquidity and available resources, familiar, important middle ground between budgetary basis and full accrual • Negatives: does not reflect long-term implications, multiple accounting bases is confusing, • Possibility of using full accrual in governmental funds raised by some, most of them auditors • Reconciliations are useful but can be confusing and difficult to prepare

29. Budgetary Comparisons: Archival • Large majority present as RSI • 96% of states, 77–88 % of school districts, 70–89% of cities, 57–86% of counties • Final budget-to-actual variances common: between 92 and 100% • Practically none present an original budget-to-actual variance • Financial statement format more common than budget • Use of GAAP fund structure mixed

30. Budgetary Comparisons: Roundtables • Preparers and users generally favorable, auditors slighlty more favorable than unfavorable • Positives: Transparency, accountability, useful for assessing management, addition of original budget, • Negatives: Lack of comparability, not detailed enough, not as important as other information in the financial report, costly to prepare • No consensus about presentation as RSI versus basic financial statement

31. Cost-Benefit Considerations • Benefits • Users: the additional information, discipline, and transparency justify the cost of the reporting model • Auditors: benefits outweigh costs when information is timely; more comparable information; better information on intergenerational equity • Preparers: long-term asset and liability information; greater transparency • Costs: • Users: possibility of smaller governments not following GAAP as standards become more complex; timeliness • Preparers and auditors: presenting information on multiple accounting bases; more audit costs; including component units; timeliness

32. Next Steps

33. Next Stages of the Research • Surveys • Preparers • Preparers that use the modified approach • Auditors • Users • In-depth interviews

34. Shameless Plea for Your Participation

35. Get Involved and Stay Informed At any time, you may bring issues about Statement 34 and its related pronouncements to the GASB’s attention by using the email address director@gasb.org If the GASB asks you to participate in surveys or individual and organizational interviews in 2014, please be prepared to take part in the process—get involved and stay involved Follow the progress of the research at www.gasb.org – see “Pre-Agenda Research” under the “Projects” tab

36. Visit the GASB at www.gasb.org Questions?

37. Dean Michael Mead • Dean Mead is Research Manager at the GASB, overseeing the GASB’s research agenda, managing external research, interfacing with the academic community, and coordinating constituent outreach. • Dean is an adjunct member of the accounting faculty at Rutgers Business School, where he teaches governmental financial analysis, governmental accounting & auditing, and advanced topics. He is a member of the American Accounting Association, Governmental Research Association, Association for Budgeting and Financial Management, Municipal Analysts Group of New York, National Federation of Municipal Analysts, and other organizations. He serves on the editorial boards of Public Budgeting & Finance and Journal of Governmental Financial Management. • Dean is the author of the GASB’s User Guide Series. He has published articles in journals such as Public Budgeting & Finance, Journal of Policy Analysis and Management, State and Local Government Review, Journal of Public Health Management and Practice, and Journal of Government Financial Management. He has recently contributed chapters to The Handbook of Municipal Bonds, Handbook of Local Government Fiscal Health, Management Policies in Local Government Finance, and Public Financial Management.

39. Website Resources Meeting the needs of constituents is one of the GASB’s key goals. In support of this goal, the GASB makes a variety of resources available through its website, www.gasb.org, including up-to-date information and resources addressing: Current projects Recent proposals and final pronouncements Free copies of proposals and final pronouncements A free view of the GASB Codification Educational resources Resources for users.

40. Plain-Language Materials The GASB is committed to communicating in plain language with constituents about its standards and standards-setting activities. Key major proposals may be accompanied by a supplement that explains the document using a minimum of technical language. Plain-language articles typically accompany major proposals and final Statements.

41. The Newly Updated and Expanded GASB User Guide Series What You Should Know about Your Local Government’s Finances What You Should Know about Your School District’s Finances An Analyst’s Guide to Government Financial Statements—now available What You Should Know about the Finances of Your Government’s Business-Type Activities