HomeMy WebLinkAbout04/12/2001, 2 - NEW FINANCIAL REPORTING MODEL: GASB STATEMENT NO. 34 council Mw�,°�� ^�
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CITY OF SAN .LUIS OBIS PO
FROM: Bill Statler,Director of Finance
SUBJECT: NEW FINANCIAL REPORTING MODEL: GASB STATEMENT NO. 34
CAO RECOMMENDATION
Review and discuss the new financial reporting model (GASB Statement No. 34) and its likely
impact on the City.
DISCUSSION -' Ge„ern u
•Am Ming Stmdar&Sert
What is GASB 34?
In June 1999, the Governmental Accounting Standards Board (GASB)—
which sets "generally accepted accounting principles" (financial reporting
rules) for all state and local governments—adopted the most sweeping
changes in financial reporting in its history. Known as Statement No. 34: • �� —
Basic Financial Statements—and Management's Discussion and Analysis—
for State and Local Governments, this represents a fundamental revision of the current financial
reporting model, which has been in place since 1979. Before approving these changes, GASB
held in-depth reviews and hearings for over 15 years. So, while adoption of the new model is
relatively new, the concepts are not: they have been under serious discussion for a long time.
Summary of Changes
While there are a number of significant changes (the Statement is 403 pages long), the following
summarizes the major ones:
Two Kinds of Financial Statements. Under the current model, the basic "building blocks" for
city financial statements are the individual funds, organized and presented by fund type
(governmental, proprietary and fiduciary). Under the new model, two distinct forms of
information will be provided in the basic financial statements:
1. Government-wide statements. These are consolidated financial statements for all of an
agency's operations on a full accrual basis of accounting. They will not be presented on a
fund basis; instead, fiscal operations will be consolidated and organized into two major
activities: governmental and business-type. "Fiduciary" assets (funds held by the City as an
independent third party such as the Central Coast Cities Self Insurance Fund, Whale Rock
Reservoir Fund and County Bomb Task Force) will not be included in these statements.
2. Fund statements. In meeting stewardship and accountability concerns, financial statements
will also be presented on a fund basis—but not using the same basis of accounting as the
govemment-wide statements for governmental funds. With some revisions, these fund-based
statements will be very similar to the current reporting model.
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Because there will be differences in the basis of accounting and scope of transactions, there will
be significant differences between these two financial statements—but they will not be obvious.
For this reason, a detailed reconciliation between them will be required as part of the audited
basic financial statements.
Focus on Major Funds. In the "fund section" of the report, statements will focus on major
(large) individual funds rather than on consolidated fund types. This is an improvement, since
aggregated fund totals rarely provide useful information.
Required Supplementary Information. In limited, defined circumstances, cities must provide
required supplementary information (RSI) in their audited financial statements. (At this time,
the City does not have transactions that require RSI in our statements.) Under the new model,
there are two new RSI elements that most cities (including San Luis Obispo) will need to include
in their financial statements:
1. Management's discussion and analysis (MD&A). We already prepare a comprehensive
transmittal memorandum as part of our annual financial report, so this requirement may have
a limited impact on us. However, due to the addition of government-wide statements (and
required topics), the scope (and related work effort) will certainly increase. Additionally,
since this will now be a required part of the basic financial statements, audit costs are likely
to increase.
2. Budget reporting. Comparisons of "budget-to-actual" results for the governmental funds
will no longer be required as part of the basic financial statements—but this will be RSI.
And there will be an added requirement: both the original and final budget must be presented.
Basic Financial Statements. The following summarizes the presentation of basic financial
statements under the new model (new sections are highlighted in gray):
MANAGEMENTS DISCUSSION AND ANALYSIS
FINANCIAL STATEMENTS
Government-Wide(Full Accrual) Fund
Governmental Activities Govemmental(Modred Accrual)
Business-Type Aclividies Proprietary(Full Accrual)
(No Intemal Service or Fiduciary Funds) Fiduciary(Full Accrual)
Notes to the Financial Statements
REQUIRED SUPPLEMENTAL INFORMATION
(Other Than MD&A)
No Account Groups. Currently, general fixed assets and long-term debt (not related to
enterprise funds) are not shown as fund assets or liabilities, but as "account groups" providing
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Council Agenda Report—New Financial Reporting Model: GASB Statement No.34
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this information for all non-proprietary funds. They will now be included in the government-
wide financial statements as assets and liabilities.
Notes to the Financial Statements. Already long and complex, these will become even more so
in order to meet the new model's disclosure requirements.
Depreciation for Governmental Activities. Under the current reporting model, depreciation is
not recorded for "governmental" capital assets, such as those purchased through the General
Fund. The traditional rationale for this is an appropriate focus on "available spendable
resources"—which is based on the simple fact that programs and projects cannot be funded
through the budget process based on the current net value of fixed assets. However, in order to
allocate the cost of these assets over their useful lives, the new model will require depreciation of
general fixed assets. Correspondingly, the "government-wide" financial statements will not
show capital expenditures (nor will they show the principal component of debt service payments
as expenditures)--but the fund-based statements will.
Biggest Change: Recording Infrastructure as Assets and Depreciating Them. Current
accounting principles do not require reporting the cost of infrastructure such as roads, bridges,
storm drains, street lights and traffic signals as capital assets—not because they aren't major
community investments, but because they are immovable, and only of value to the government
(except in the oft-told tale, there really isn't much of a market for the Brooklyn Bridge).
The new reporting model requires that infrastructure be reported at its "historical" (not current)
value, and then depreciated like other assets as discussed above. There are several complicated
options for how to do this, including not depreciating
infrastructure assets at all if there is an adopted - ..
maintenance plan, and assets are being maintained in Determining which of the many
accordance with that plan. options we should use in
reporting infrastructure will be a
Of all the changes, infrastructure reporting is the most major accounting policy decision.
significant and controversial one. Virtually all city finance
officers across the country vigorously opposed this change when it was under "due process"
consideration as being very expensive to implement without a demonstrated value.
Will City Finances Look Better or Worse Under the New Model?
Until we begin the conversion process, it is too soon to tell. At the fund level, it should make
little difference. However, at the government-wide level, showing capital assets on the balance
sheet may increase our equity position; on the other hand, there will be new liabilities (such as
long-term debt, insurance liabilities, uncompensated absences and post-employment retirement
benefits) that will reduce equity. For the handful of cities that have prepared sample statements
under the new model, the answer seems to be: not better or worse just different.
Implementation
As set forth in the table below, the effective date for the new model varies depending on the
financial size of the agency and its fiscal year. (The chart assumes a fiscal year beginning July 1
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and ending June 30). Also, there are different effective dates for implementing the new model
and prospective reporting of infrastructure (assets added or deleted from the effective date of the
new model) versus retroactive
reporting infrastructure back to at least Basic Model
(Prospective Retroactive
1980. Infrastructure Infrastructure
Total Revenues Re ortin Reporting
For us, GASB 34 will be effective for Effective for
2002-03. Cities that have long-term $100 million or more 2001-02 2005-06
debt for infrastructure assets will want $10 to$100 million 2002-03 2006-07
to retroactively report infrastructure in Under$10 million 2003-04 Not Requited
conjunction with the new model to
better match long-term liabilities and assets. We fall into this category,
So, What's the Big Deal?
Under GASB 34, local and state government basic financial statements will become longer and
more complex—and thus more difficult to prepare and audit. This will be especially true when
converting to the new model. This increased.difficulty and complexity directly translate into
increased costs—both one-time during implementation and ongoing thereafter—for staff
resources as well as audit fees and consultant services in converting financial statements and
developing the needed infrastructure information.
Will the effort and cost be worth it? Goals for the new model include:
1. Improving financial reporting.
2. Enhancing awareness of fiscal issues facing states and local governments.
3. Recognizing the importance of adequately maintaining infrastructure.
It is unclear whether the new model will achieve these goals. Finance officers are especially
concerned about the potential for infrastructure reporting to result in misunderstandings about a
city's fiscal condition. Only time will tell if the new model makes it easier or harder for
statement users to understand a city's fiscal situation, and to compare it with other cities.
How much will it cost? In evaluating costs, we will need to consider both the one-time and
ongoing costs to prepare the additional financial information, develop and maintain the
infrastructure data and audit the results. Because it is so new, no one in California has issued
financial statements in full compliance with all GASB 34 requirements. As such, it isn't possible
to project implementation plans and costs based on the experience of others (and as reflected
above, most cities will be implementing this major change at the exact same time).
However, a handful of cities have undertaken "pilot" statements. In these limited cases, much of
this work was done for free by outside accountants and engineers. Based on the experience of
these "pioneer" cities and information we have gathered from others, most cities plan on using
outside accounting and engineering resources to help in implementing the new model. We are
still finalizing our implementation plan and estimated costs, and they will be presented to the
Council as part of the Preliminary 2001-03 Financial Plan.
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Why Implement It?
If GASB 34 is going to be difficult to implement and the benefits are unclear, why do it?
1. The new model is supported by a number of users and professional associations. The
National Association of State Auditors, Comptrollers and Treasurers has endorsed the new
model, and so have the credit rating agencies (who are the primary `-`users" of these reports).
There are many public works' officials who believe the new reporting model will result in a
better understanding of infrastructure,needs. And a number of well-respected municipal
finance professionals think the new reporting model better tells a city's fiscal story, and is a
significant improvement over the current model.
2. It's "GAAP." This is probably the most compelling reason for implementing the new model.
GASB is the acknowledged authoritative body in setting generally accepted accounting
principles (GAAP) for local and state agencies. Maintaining citizen confidence in our
stewardship of the assets entrusted to us requires credibility and integrity in our accounting
and financial reporting systems. And preparing audited financial statements in accordance
with industry standards is an essential foundation in gaining and sustaining this trust. For
this reason, despite its reservations about some of the changes in the new model, the
California Society of Municipal Finance Officers (CSMFO), which represents 1,200 local
government finance professionals throughout the State, has strongly encouraged its members
to implement GASB 34.
3. It's our adopted policy to issue "GAAP"statements. Because of the importance of issuing
credible, audited financial statement in meeting our stewardship and fiduciary
responsibilities, the Council has adopted the Financial Plan policy that the City should
prepare our financial statement in accordance with generally accepted accounting principles.
4. Federal grant regulations require "GAAP" statements. It is too soon to tell how non-
compliance with this requirement would affect our federal grant programs. However, this is
an important funding source to place in potential jeopardy: in 1999-00, the City received $4.3
million in federal funding. Of this amount, $1.7 million was related to the Community
Development Block Grant program, $502,000 was for low and moderate-income housing,
$628,000 was for transit operations and $1.5 million was for street and bridge improvements.
SUMMARY
GASB 34 represents a major change in financial reporting for local and state governments.
While there are concerns about the value of some of these changes (most notably infrastructure
reporting), there is widespread agreement that cities should implement these changes in order to
prepare audited financial statements in accordance with generally accepted accounting
principles. However, implementing the new model will mean careful planning, staff training and
allocating the resources necessary to successfully make this change.
G: GASB Financial Reporting Model/Council Agenda Report