My Invitation to Comment at GASB

June 15, 2017

I was invited to comment on a proposed GASB standard change regarding the accounting for special funds. Here is my testimony to the board. You can also view my supplemental charts and statistics (Attachment I – Article titled, “Some suburbs keep more money in reserve than needed” and Attachment II – Chart of adjusted unrestricted assets for four Villages in Lake County, IL.)



Project: 3-25I
Financial Reporting Model Improvements – Governmental Funds

May 22, 2017

By Sheila A. Weinberg
Truth in Accounting, Founder & CEO

Eliminating cynicism and mistrust through accountability and transparency

I am disappointed to report that the vast majority of respondents to the Invitation to Comment came from governmental officials, auditors and trade associations. It is a shame that the public is not well represented in the comments. It would be nice to see that in addition to attending the GFOA conference, the Board would be present at the meetings of other organizations like AFL-CIO, the State Policy Network, American for Prosperity, Americans for Tax Reform, or Citizens Against Government Waste and Chamber of Commerce.

Because less than 12 percent of ITC respondents are people who are not associated with governments, I am here to humbly represent the voice of the public.

For too long, ordinary citizens have not been provided with the information they need to be knowledgeable participants in their governments.

The Association of Government Accountants said it best:

“AGA believes that it is difficult to overstate how efficient reporting of government financial information contributes to a healthy democracy. Without accurate fiscal information, delivered regularly, in an easily understandable format, citizens lack the knowledge they need to interact with—and cast informed votes for—their leaders. In this regard, a lack of government accountability and transparency undermines democracy and gives rise to cynicism and mistrust.”

Unfortunately the lack of government transparency and accountability has already created public cynicism and mistrust. One of the reasons for this mistrust is governments seem to not have to follow the same rules as the public.

Bob Attmore and Marty Ives pointed out that the government keeps two sets of books. However I believe there are actually three sets of books.

The first set is budgets. These are prepared using some version of cash basis, which we call political math. Second, the government-wide financial statements are prepared using the economic resources financial reporting model. Finally the governmental funds statements are prepared using the modified accrual basis.

The confusion that arises from rising three different methods has made it impossible for the public to understand their governments’ finances. This disarray has had massive financial consequences.

“Balanced” budgets that have result in massive debt accumulation are just one example. Our 7th annual Financial State of the States report found that while 49 states have balanced budget requirements, 40 states have created financial holes totaling $1.3 trillion. Specifically, my home state of Illinois has accumulated $210 billion of unfunded bills, including pensions, while government officials claimed they were meeting the state’s constitutional requirement to balance the budget.

IIinois’ Truth in Budgeting Act attempts to fix budget calculations


In 1997, several state senators attempted to circumvent a disastrous financial outcome by improving the way the budget was calculated by introducing the “Truth in Budgeting Act of 1997.” 

One of its authors, Illinois State Senator Chris Lauzen stated:

“Basically the thrust of this legislation is that the budget that we report to the citizens of Illinois is calculated in the same manner under the same types of accounting rules, generally speaking, as the financial statements that we report to the New York bankers when we go for the bond rating.  The funds that are covered under the plan are the ones that are most affected by a difference in accounting methods.  Those are the General Revenue Fund, Common School Fund, Education Assistance Fund, Road Fund, Motor Fuel Tax Fund and Agricultural Premium.”

Senator Lauzen reiterated “that expenses would be recognized when incurred.  So if we establish a liability for greater Medicaid or greater expense in a certain area, even though we don’t anticipate paying it, we would include that expense in this year’s budget.”

The Truth in Budgeting Act was passed overwhelming and read in part:

For the purposes of Article VIII, Section 2 of the 1970 Illinois Constitution, the State budget for the following funds shall be prepared on the basis of revenue and expenditure measurement concepts that are in concert with generally accepted accounting principles for governments:
        (1) General Revenue Fund.
        (2) Common School Fund.
        (3) Educational Assistance Fund.
        (4) Road Fund.
        (5) Motor Fuel Tax Fund.
        (6) Agricultural Premium Fund.
  These funds shall be known as the "budgeted funds".

The modified accrual-based accounting used to do governmental funds statements circumvented the Act’s intent.

In a letter written to elected and government officials, we highlighted that the state was not adhering to the Truth in Budget Act because under GAAP because the full pension expense needed to be included in the budget calculations and it was not.

The Illinois Comptroller’s office responded that they were using GAAP because the law called for GAAP “for governments” and the law indicated specific funds that needed to comply. The Comptroller’s office highlighted that GASB GAAP requires the governmental funds to be accounted for using the modified accrual basis, not the economic resources basis of accounting. Therefore, the budget did comply with the Truth in Budgeting Act.

The intent of the Truth in Budgeting Act, which was for the state budget to be calculated using full accrual accounting, was negated by the fact that GASB GAAP does not require governments to calculate the governmental funds’ statements on the economic resources basis, as the government-wide statements and corporate statements are calculated. It is disappointing at best that the GASB statements are allowed to be considered GAAP, when they clearly are not in line with the GAAP set by the Financial Accounting Standards Board. It has been our experience that even CPAs in state legislatures do not understand that GAAP is not GAAP.

The legislators’ attempt to avoid the financial crisis that Illinois is currently experiencing was thwarted by the short-term, outdated governmental fund accounting.

In my next example I will highlight how the short term method of calculating governmental funds statements has led governments to believe they have reserves, when they are actually deeply in debt. I will also highlight the real consequences of such accounting.

Some suburbs keep more money in reserve than needed

This was the headline in the Daily Herald, a Chicago suburb newspaper, on August 7, 2013. To the author’s credit he had studied the 2012 Comprehensive Annual Financial Reports of 85 suburbs. He had looked at the fund balance reported in the governmental fund statements. He specifically identified the Villages of Hainesville, Hampshire, Inverness and Lincolnshire as having what the author considered excess “reserves.”

We reviewed these Village’s CAFRs and calculated their adjusted unrestricted assets, which we defined as the reported unrestricted assets minus any unreported unfunded pension and other post employment benefits.

This review revealed that Hainesville, who had a limited amount of unfunded pension benefits, did have a positive adjusted unrestricted assets amount similar to the reserve amount noted in the article.

The article noted, “At 8.5 percent, Hampshire's reserve fund was the lowest of any municipality studied.” The Village’s General Fund balance was $2.2 million, which was reported on the Statement of Revenues, Expenditures and Changes in Fund Balances – Governmental Funds. Hampshire's 2012 CAFR report unrestricted assets of $509,725, but its unfunded actuarial accrued liability (UAAL) was $803,447, leaving this Village with adjusted unrestricted assets of negative $293,722.

Another quote from the article is, “Inverness Village Administrator Curt Carver said it's the Board's policy to keep a reserve that amounts to at least 100 percent of a year's worth of expenses. In 2012, that level was at 208.7 percent, or nearly $6.2 million.” The Village reported a negative $941,217 of unrestricted assets on the government-wide Statement of Net Position and we found their pension fund had UAAL of more than $400,000. Therefore the Village’s adjusted unrestricted assets totaled a negative amount of more than $1.3 million. A far cry from the $6.2 million of “reserves” the reporter highlighted.

The article went on to point out, “Lincolnshire Mayor Brett Blomberg defended the Village's $11.6 million reserve fund, which was 140.8 percent of the Village's expenses in 2012, saying the small property tax levied by the Village goes only to cover police pension obligations.” Our review of the Village’s government-wide Statement of Net Position and CAFR notes showed a different story.

Lincolnshire reported its unrestricted assets at only $1.1 million, but part of this amount was a result of the Village reporting a Net Pension Asset of $4.4 million. A review of the CAFR notes revealed unfunded pension liabilities for the police pension fund of $3.4 million and for the municipal workers pension fund of $3.7 million. Therefore, instead of an $11.6 million reserve, the Village was actually in need of more than $10.4 million to pay its unfunded debt.

Highlighting the fact that having misleading information leads to misinformed discussion, Lincolnshire Mayor Blomberg told the reporter that “occasionally we have discussed eliminating the property tax for the police pension plan.” As mentioned above, when the Mayor made this statement, this plan was underfunded by $3.4 million.

While it could be said that the reporter doesn’t understand government financial statements, each government official mentioned in the article all defended their Village’s positive fund balance. The article did not state that any of these officials discussed their government’s offsetting liabilities.

Correctly defining fiscal accountability

Many of those who responded to the ITC pointed to the need for “fiscal accountability” as the reason the short-term perspective needs to be maintained. In a footnote of the ITC GASB indicates “Fiscal accountability reflects a shorter time perspective than that conveyed by the information in the government-wide financial statements and focuses on financial, rather than economic, resources.”

Paragraph 203 of GASB #34 states:

“Fiscal accountability is the responsibility of governments to justify that their actions in the current period have complied with public decisions concerning the raising and spending of public moneys in the short term (usually one budgetary cycle or one year).”

We believe fiscal accountability encompasses much more than this short-term approach – indeed, accountability, by definition, includes responsibility for the long-term consequences of current decisions and actions.

Introducing the above-noted definition of accountability, GASB #34 paragraph 203 included:

“The financial statements of governments traditionally have focused on two different forms of accountability—fiscal accountability for governmental activities and operational accountability for business-type and certain fiduciary activities. (footnote 69)”

In turn, footnote 69 included:

“The terms fiscal accountability and operational accountability are used, for example, in American Accounting Association, “Report of the Committee on Concepts of Accounting Applicable to the Public Sector, 1970–71,” Accounting Review, Supplement to Vol. 47 (1972), pp. 81 and 86.”

Page 81 of the document referenced in footnote 69, includes a section titled, “Accountability for Financial Resources.” In this section, the committee stated:

By far the dominant concept of accountability as practiced in government today is fiscal accountability. At every level of government, rules and policies are established to insure dollar honesty and integrity in fiscal affairs. No funds can be spent except in consequence of legal authorization. Moreover, no government administrator can enter into an agreement, place an order, or otherwise commit the government to payment of funds without legislative authorization to do so. Consequently, the accounting system is charged with keeping a record of all legal authorizations as well as all commitments, agreements, encumbrances, obligations, and expenditures that use any portion of the authorization granted.

We believe this language authoritatively establishes a foundation for a long-term economic resources-basis for fiscal accountability, even though it was cited as an authority for shortsighted cash-like accounting. 

We believe GASB #34 effectively hijacked the definition of accountability to justify the use of the modified accrual basis for governmental funds statements. Many state and local governments then flew wildly off-course, accumulating massive debts outside the formal budget process – and (until only recently) off the balance sheets reported to their citizens.

We respectfully request that GASB documents use the term fiscal accountability as it was originally defined and abandon the use of short-term and near-term bases of accounting.  These reporting models were developed when governments were mostly involved in cash transactions. Practices and definitions came from time when governments did not make long-term commitments, like pensions and retiree health care benefits.

Short-term approach is short-sighted and outdated

The near-term and short-term approaches mentioned in the ITC will continue these outdated practices. These approaches are short-sighted and will not fully account for retirement benefits when the employees earn the benefits and when governments incur these costs. Short-sighted accounting has and will continue to leave millions and billions of dollars of retirement costs off governmental fund statements.

Claims of balanced budgets have lulled the voters and taxpayers into a false sense of security, while governments were incurring these massive debts. Governmental funds statements have reinforced these false claims. Now that retirement debt has grown to such a level that it has become hard to service. Elected officials and the public are slowly beginning to understand the problem. If budgets and the government funds statements would have been done using ERMF, then elected officials and the public would have understood the problem as it was growing and would have had a chance to make changes. Now some governments are in crises and draconian changes to their retirement benefit and/or taxing structures will have to be made.

It is incorrect to believe that governmental fund statements should be prepared using a short-term approach, because it most closely aligns with the budget. Yes, it would all tie, but it would be all wrong. Accounting should highlight the short-sightedness of cash based budget calculations, not reinforce them.

An informed electorate is the basis of a sound democracy

Governments derive their just powers from the consent of the governed.  Governments therefore have a special responsibility to report on their actions and the results of those actions.

This isn’t just a numbers game; what we have is a crisis in democracy.

Thomas Jefferson once noted, ". . . wherever the people are well informed they can be trusted with their own government." The way governmental funds are currently calculated misinform citizens. If governmental funds statements are not calculated using the economic resources basis, citizens will continue to lack the information they need to be knowledgeable participants in their governments. I implore you to provide citizens with the information they need to make educated judgments about their governments and their elected officials.

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