In its lame duck session last month, Congress tucked a sleeper section into its 4,000-page omnibus spending bill. The controversial Financial Data Transparency Act (FDTA) swiftly came out of nowhere to become federal law over the vocal but powerless objections of the state and local government finance community. Its impact on thousands of cities, counties and school districts will be a buzzy topic at conferences all this year and beyond. Meanwhile, software companies will be staking claims in a digital land rush.
The central idea behind the FDTA is that public-sector organizations’ financial data should be readily available for online search and standardized downloading, using common file formats. Think of it as “an http protocol for financial data” that enables an investor, analyst, taxpayer watchdog, constituent or journalist to quickly retrieve key financial information and compare it with other numbers using common data fields. Presently, online users of state and local government financial data must rely primarily on text documents, often in PDF format, that don’t lend themselves to convenient data analysis and comparisons. Financial statements are typically published long after the fiscal year’s end, and the widespread online availability of current and timely data is still a faraway concept.
So far, so good. But the devil is in the details. The first question is just what kind of information will be required in this new system, and when. Most would agree that a complete download of every byte of data now formatted in voluminous governmental financial reports and their notes is overwhelming, unnecessary and burdensome. Thus, a far more incremental and focused approach is a wiser path. For starters, it may be helpful to keep the initial data requirements skeletal and focus initially on a dozen or more vital fiscal data points that are most important to financial statement users. Then, after that foundation is laid, the public finance industry can build out. Of course, this will require that regulators buy into a sensible implementation plan.
The debate over information content requirements should focus first on “decision-useful information.” Having served briefly two decades ago as a voting member of the Governmental Accounting Standards Board (GASB), contributing my professional background as a chartered financial analyst, I can attest that almost every one of their meetings included a board member reminding others that required financial statement information should be decision-useful. A key question, of course, is “useful to whom?”
An example of questionable disclosure practices is found in the Illinois budgeting and financial reporting process, specifically regarding pension contributions. In 1994, then-Gov. Jim Edgar led an effort to pass a bipartisan bill to solve the state’s $15 billion pension deficit. The plan would resolve the deficit within 50 years. The plan was structured to pay down the debt very slowly in the first 15 years and accelerate at the end. This ensured that sitting politicians in the early days of the plan would not be required to make the necessary tax increases or budget cuts to pay down the debt in a meaningful way.
This program is shown in charts to look like a skateboard ramp, appropriately named the “Edgar Ramp.” The problem is, the plan doesn’t work.
It is so unsuccessful that the Illinois pension deficit has grown from $15 billion to $317 billion as of June 30, 2020, according to Moody’s Investors Service. The state’s latest bond offering document emphasizes, “The state’s contributions to the retirement systems, while in conformity with state law, have been less than the contributions necessary to fully fund the retirement systems as calculated by the actuaries of the retirement systems.”
The latest Illinois Annual Comprehensive Financial Report discloses cash-flow problems, significantly underfunded pension obligations, other post-retirement benefit deficits and multiple references to debt-obligation bonds.
Transparency is not just a good thing for the public. A study of the 2012 Recovery Act (ARRA) showed that the biggest users of publicly available data were government officials, who used the information to track spending. Cities that do not already issue comprehensive annual financial reports (CAFRs) should adopt them for the benefit of policymakers and the public. Meet or exceed Generally Accepted Accounting Principles (GAAP) and Government Accounting Services Board (GASB) statements in your reporting. Clearly account for liabilities such as pensions, retiree health benefits and infrastructure maintenance and replacement. Have that accounting independently verified.
According to a January 2021 report from Truth in Accounting, the top 75 US cities have a combined unfunded public pension obligation of more than $180 billion. Cities often underfund these obligations to cover budget shortcomings elsewhere, an irresponsible game of whack-a-mole.
Treasury guidance forbids using ARPA money in pension funds to cover unfunded liabilities from before the COVID emergency. It does allow spending on current payments for either defined benefit or defined contribution plans. Cities could use ARPA funds to provide additional payments to those plans to encourage employees to switch from their traditional pension to a defined contribution plan—which is a much more financially sound position for cities to be in.
Unlike FASB, the SEC has no control over GASB. But the Commission is obligated “to protect investors in the municipal markets from fraud, including misleading disclosures [emphasis added].” Taken together, the SEC’s own statements make a strong case that it is obligated to prevent fraud in state and local governments’ financial reports, which are confusing and obfuscate the truth.
The state and local governments’ annual financial reports are based on shoddy accounting practices. If confusing and misleading disclosures are considered fraud, then annual reports produce fraudulent disclosures.
It is confusing and misleading that the GASB requires state and local governments to keep two sets of books. Annual financial reports include governmental fund statements that are prepared using an accounting basis called the “modified accrual basis,” which in essence uses short-sighted cash accounting, while the consolidated financial statements are prepared using accrual accounting standards similar to those used by corporations.
This video contains 15 testimonies before the Governmental Accounting Standards Board (GASB) in March and April of 2021 by citizens, elected officials, think tank leaders, and more. All of whom argued against GASB’s proposals to continue cash-basis-like accounting for governmental funds statements. Cash-basis accounting supports bad government budgeting practices like counting borrowing proceeds as revenue, and underfunding pension funding requirements, in order to “balance budgets.” On the other hand, full accrual accounting shows expenses as they are incurred, especially when a government makes a promise to pay in the future.
Publication Date: 6 May 2021
Publication Site: Truth in Accounting channel at YouTube
I will give a very simple example: suppose Netflix makes a deal where instead of you paying for a year’s subscription at a time, you can get a big discount if you pay for 2 years’ subscription.
Subscribers love the deal and pay for it….
….and then Netflix says their sales doubled in their financial reports. That’s IF they followed cash-based accounting, which records cash flows.
But they don’t, because accounting standards boards (outside the government sphere) know that this is just a trick to boost how financials look under cash accounting. And there are loads of these tricks. I just gave one simple example. The trick of getting people to pre-pay for sales to boost the numbers is a well-known ploy on the revenue side. A well-known ploy on the expenses side is to put off paying bills.
This is obviously distorting recognizing the true economic arrangement underlying these transactions, and some of the tricks make for a more fragile economic position for specific businesses. It was always the marginal businesses, which were barely hanging on, where cash-basis accounting tempts into trickery, which usually ends in financial failure. So accounting standards have developed to prevent this stuff.
Past GASB and GASAC meeting webcasts are available below. To view or hear a recording, click on the date of the meeting. Recordings are available within 24 hours of the meeting conclusion and remain on the site 90 days following the meeting date.
Help with problems viewing or hearing webcasts, contact FAF Technical Support. Please do not use the “Submit Feedback” button on the right-hand side of the page to submit technical problems.
The question of whether pensions and other retirement benefits should be more prominently reported by state and local governments is a burning controversy for the Governmental Accounting Standards Board.
What?s at stake is whether the public is being misled by when a governmental general fund is listed in financial statements as balanced while omitting those long-term debts.
GASB requires long-term obligations to be reported in governmentwide reports, but critics say lawmakers too often look only at cash flow funds.
?I implore GASB to stop this confusion and bewilderment,? wrote Sheila Weinberg, founder & CEO of Truth in Accounting in a comment letter. ?Our representative form of government is being harmed.?
Illinois is among the states that critics say have downplayed their tens of billions of dollars of unfunded long-term debts and should be forced by new GASB rules to become more transparent.
GASB officials, on the other hand, say that state and local governments have been required to disclose their long-term debts since the publication of GASB 34 about 20 years ago.
Several months ago, the Governmental Accounting Standards Board (GASB) issued two new Exposure Drafts for proposals that would lead to a new government accounting concept statement and related standard. GASB invited comment on those proposals, a process in which Truth in Accounting participated directly and also encouraged others to participate.
… The following information is on the State of Illinois, the city of Chicago and the Chicago Public School (“CPS”) system … The severe financial decline in those three entities have not been at all adequately communicated to the various users of the information. The accounting standards and reporting have not required it. Those governmental units are financially unsustainable and their services to their citizens have not been sustained. The financial accounting standards have been fundamentally flawed for decades and border on gross negligence.
… The GASB must have a higher level of accounting standards. There are no independent third parties overseeing their government accountings standards like there is with FASB and nongovernmental entities. The financial and service sustainability of State and local entities are in question. The services they provide are of the utmost importance to the public and their citizenry. … Requiring fund balance accounting using total financial resources focus measurement and accrual basis of accounting is the tool necessary for the political system and the public to successfully address these issues.
Although for more than half of my 53-year career in auditing, I managed to avoid any involvement with government GAAP. Yet I found myself interested in two articles about it in the April CPA Journal: “Is Government GAAP Necessary?” by Sheila Weinberg, and “The Future of Government Accounting Standards” by Joel Black. What appealed to me about both articles is that they were critical of the archaic, shortsighted, and conceptually groundless second set of “basic” financial statements prepared on the hybrid “modified accrual basis” that have been required in addition to full accrual financial statements since 1999 by GASB 34. Both authors are to be complimented.
The Black article is a scholarly summary of the long history of government GAAP and an explanation of the rationale for several differences from commercial GAAP. Accordingly, I believe the article would make a useful training tool for young staff. Black’s criticism of modified accrual basis reporting and his implied support for probable future improvements to the current model that he characterizes as “not major” follow: