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GREAT GASB! Financial Reporting for State & Local Governments (2001)

by Michael Messina

The way state and local governments report their finances is about to change dramatically. The Governmental Accounting Standards Board (GASB), which develops the financial reporting procedures for governments, has issued a new financial reporting model called Statement No. 34, “Basic Financial Statements — and Management’s Discussion and Analysis — for State and Local Governments,” more commonly referred to as GASB 34. While the model was issued by GASB in June 1999, those governments first required to start using the model have until the fiscal year beginning July 1, 2001. However, some jurisdictions have already implemented the standards on a voluntary basis. Whether these changes will affect AFSCME is difficult to predict. Knowledge of the changes and what they mean is a good place to start.

What is GASB?


GASB’s mission is to determine generally accepted accounting principles for state and local governments. The board consists of seven members, each of whom has extensive experience with government finances. GASB has been working on the project that led to GASB 34 for more than 15 years.

What are the changes?


Generally, the way state and local governments report their finances will change in the following three ways:

  1. A financial statement that examines the government as a whole entity, rather than just separate funds, must be reported.
  2. How governments measure financial performance of functions and activities will be different.
  3. Infrastructure and its general depreciation must be reported.

Government as a whole entity


The new standard requires that state and local governments provide an overall financial statement that covers the entire jurisdiction rather than the current practice of separate fund accounting. Presently, government budgets and Comprehensive Annual Financial Reports (CAFRs) divide governmental accounting into separate funds, typically making functional distinctions. For example, these documents typically include a general fund, a variety of special revenue funds, trust funds, enterprise funds, debt service funds, capital projects funds and internal service funds.

While the reporting of separate funds will not change, GASB 34 requires the addition of government-wide reporting. Specifically, a single, overall Statement of Net Assets and a single, overall Statement of Activities must be prepared.

The Statement of Net Assets will show the overall financial activity of the complete government entity. In essence, the financial data from each separate accounting fund will be combined to show the difference between total assets and total liabilities, or the “bottom line” for the jurisdiction. Theoretically, the statement will show whether the government is better off at the end of the year than it was at the beginning.

The Statement of Activities will show the cost of each major function or activity the jurisdiction provides. The statement will also show whether the government’s revenues were sufficient to cover the cost of service delivery during the year.

Measuring financial performance


State and local governments currently use two completely different ways of measuring financial performance. One measure is used for general government functions such as public safety. The other measure is used for certain functions, such as water or electricity, which the government runs like a business. For general government functions, the jurisdiction reports how much it spent to deliver the service. But for the business-like functions, the jurisdiction reports the cost of delivering the service.

The dollar differential can be significant between the two measures. For example, if a county buys a $20,000 vehicle for the sheriff’s department, that total amount would be reported in the general fund as having been spent during the year. On the other hand, if the water department bought the same vehicle, the price of the vehicle would be depreciated over its useful life. If it is assumed that the vehicle will last five years, the jurisdiction would recognize only $4,000 in the enterprise fund, or one-fifth of the price, as the cost of that vehicle for each of the next five years.

These different measures have evolved for good reason. For general government functions, the objective is to show how taxpayer money is spent and that it was spent according to the legally adopted budget. For enterprise fund activities, such as governmental utilities, the objective is to show that utility rates are generating enough revenue to cover the cost of operating the utility. Money spent (general fund) has a short-term focus, while costs (enterprise fund) have a long-term focus.

GASB 34 acknowledges the need for continued use of both measures. However, the new Statement of Activities will show the cost (as opposed to what was spent) of the delivery of general government services in the same manner that the cost of providing business-like functions is reported.

Infrastructure and Depreciation


Perhaps the most complicated aspect of GASB 34 for state and local governments concerns infrastructure and its depreciation. Infrastructure means those assets that are immovable, such as sidewalks, roads and bridges. Governments have not been required to report on the infrastructure of general government functions. Under the new financial reporting model, governments must now determine the value of their infrastructure, which will generally have to be done retroactively, and depreciate it over its useful life. This requirement is consistent with the overall shift in emphasis from the amount of resources spent on service delivery to the cost of providing services.

Implementation dates


The implementation dates for GASB 34 will vary depending on the size of the government, as determined by total annual revenues. Those governments with total revenue in excess of $100 million are required to implement for fiscal years beginning after June 15, 2001. Those governments with total revenue between $10 and $100 million are required to implement for fiscal years beginning after June 15, 2002. And finally, for those governments with revenue less than $10 million, implementation should begin for fiscal years beginning after June 15, 2003. Governments have been given an additional four years to determine retroactive reporting of infrastructure assets.

What does GASB 34 mean for AFSCME?


It is difficult to predict what GASB 34 will mean for AFSCME members, negotiators, and those analyzing public-sector budgets. The requirement that employers note promises of retiree health benefits as a liability, in combination with recent court rulings, could cause problems. (See “Age Discrimination & Retiree Health Benefits” in this issue for more information on retiree health benefits.) Including infrastructure may mean that government spending will look higher than it now does, which could give ammunition to those who call for tax cuts, government downsizing and/or contracting out. The Reason Foundation, a pro-privatization organization, alleges that once governments calculate the cost of providing major functions and activities as required, they will turn to the private sector to lower costs. Of course, this reflects one of the primary myths of privatization — that private-sector delivery of services is less costly.

For more information regarding GASB 34, or to report your experiences with GASB 34, please contact the Department of Research and Collective Bargaining Services or call (202) 429-1215.

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