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Recognizing Intergovernmental Financial Dependency and Related Risks

Recognizing Intergovernmental Financial Dependency and Related Risks. A Presentation to the Northern Virginia Chapter Association of Government Accountants Alexandria, Virginia September 20, 2006 By Edward J. Mazur, CPA Member, Governmental Accounting Standards Board.

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Recognizing Intergovernmental Financial Dependency and Related Risks

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  1. Recognizing Intergovernmental Financial Dependency and Related Risks A Presentation to the Northern Virginia Chapter Association of Government Accountants Alexandria, Virginia September 20, 2006 By Edward J. Mazur, CPA Member, Governmental Accounting Standards Board

  2. Subtitle: Understanding Our National Dilemma The views expressed in this presentation are those of Mr. Mazur. Official positions of the GASB are determined only after extensive due process and deliberation.

  3. Primary Assertion • Current flows of financial resources between respective levels of government should not be considered as sustainable. • A wide-spread lack of understanding of factors controlling these flows increases risk to state and local governments. • Government preparers and their CPAs need to better understand these flows and related risks, and communicate about them to financial statement users.

  4. Human Behavior is a Big Factor • Models that block understanding: • Mt. St. Helens syndrome • Left-hand separated from the right-hand • Models that aid understanding: • Be an eagle not an ostrich • Traditional approaches of our profession to inquiry and risk identification

  5. Where the Problem Starts • Financial Report of the United States Government---2005: ($Billions) • $2,185 Revenue • $319 Budget Deficit • $760 Accrual-Based Operating Deficit • $4,624 Publicly-held Debt • $3,346 Debt Owed to Government Accounts • $4,492 Fed Employee & VA Benefits Owed • $152 Cash and Receivables

  6. Unrecognized* & Unaudited Federal “Stewardship” Obligations • Present Value 75 Year Projections of Expenditures Net of Contributions & Earmarked Taxes: (Billions) • $5,704 Social Security • $8,829 Medicare Part A • $12,384 Medicare Part B • $8,686 Medicare Part D (Drug Benefit) Memorandum Total: $35,603 Billion *Not reflected in consolidated financial statements, but included in a separate section of the 2005 Financial Report of U.S. Government

  7. What Does GAO Say About the 2005 Fed Financial Statements? • Disclaims an opinion, and cites that: • Material weaknesses exist in government-wide financial reporting and DOD financial management • Financial condition & long-term outlook continues to deteriorate • Tax expenditures not disclosed • Government will not able to grow out of long-term fiscal imbalance problem

  8. Leadership from the U.S. Comptroller General • Since Sept. 2003, the Honorable David M. Walker has forcefully addressed the Nation’s long-term fiscal imbalance thru: • Roundtable meetings with thought leaders • Public forums in over 11 major cities • Speeches to national accountability groups • Articles in business & professional magazines • Providing non-partisan, objective information to citizens and local government and business leaders ( go to Our Nation's Fiscal Outlook: The Federal Government's Long-Term Budget at www.gao.gov )

  9. Current Fiscal Policy Is Unsustainable • The “Status Quo” is Not an Option • We face large and growing structural deficits largely due to known demographic trends and rising health care costs. • GAO’s simulations show that balancing the budget in 2040 could require actions as large as • Cutting total federal spending by 60 percent or • Raising federal taxes to 2 times today's level Source: GAO August 2006

  10. Faster Economic Growth Can Help, but It Cannot Solve the Problem • Closing the current long-term fiscal gap based on reasonable assumptions would require: • real average annual economic growth in the double digit range every year for the next 75 years. • During the 1990s, the economy grew at an average 3.2 percent per year. • As a result, we cannot simply grow our way out of this problem. Tough choices will be required. Source: GAO August 2006

  11. The Way Forward: Multi-Pronged Approach Re-examine Policies and Programs*: • Restructure existing entitlement program • Reexamine the base of discretionary and other spending • Review and revise our tax policy and enforcement programs Control Spending and Tax Policies through: • New metrics, measures, and control mechanisms that recognize and consider long-term implications. • *Reference Materials: “21st Century Challenges,” GAO, February 2005, GAO-05-325SP

  12. What About State and Local Governments? 1. they generally assume a steady-state of intergovernmental flows 2. they lobby Congress based on individual programs 3. they compete against each other for Federal dollars

  13. Illustrative Dependencies • Commonwealth of Virginia 2005: • Government-wide revenues: $16.2 billion • Operating Grants & Contracts: $5.3 Primary Government, $1.5 Component Units • Governmental Funds Federal Grants & Contracts revenue: $5.6 billion, or 24 % of Total • Schedule of Federal Assistance not in CAFR • No discussion of Federal Revenues or risks in MD&A or Notes to F/S’s

  14. Commonwealth of Virginia (continued) • Single Audit Report’s Schedule of Federal Award Expenditures for 2004 (30 pages) illustrates: • $7.9 billion in direct expenditures----- • including $1.5 billion to non-state sub-recipients • $48.3 million in indirect expenditures • Examples: • Homeland Security $217 million • Health and Human Services $3.3 billion • Department of Education $1.5 billion

  15. Illustrative Dependencies (cont’d) • Henrico County, Virginia (2004) • Governmental Fund total revenues: • $576 million • Intergovernmental revenues: • $145 million, or 25% of total • “Transmittal Letter” has extensive coverage of State Aid reductions and impact of state fiscal strain • MD&A does not address intergovernmental pressures or risks

  16. “Limited” Observations on Current Reporting Practices for Intergovernmental Flows • Recognition is of highly aggregated amounts • Statistical Section trend info is aggregated • Size and reliance on intergovernmental revenues is little addressed in MD&A • Related risks not addressed in notes to financial statements

  17. GASB’s Evolving Interest • General concerns with inconsistent reporting and inadequate disclosure • Specific concern with risk disclosure • Timeline of interest: • April 05 Initial project drafts shared • August 05 Growing consensus on approach • November 05 GASAC endorses “future project” • January 06 Project elevated to “active research” status and staff assigned • April 07 Decision to designate as active project

  18. Current GASB Project ObjectivePer 2006 Technical Plan • “….To determine the need and desirability of creating a new standard for reporting or disclosure requirements specifically associated with intergovernmental financial dependency and related risks.”

  19. GASB Project’s Accounting and Reporting Issues • Should amounts on face of financial statements be disaggregated to promote clarity? • What kinds of associated disclosures should be made? • What are the risks to intergovernmental exchanges, flows, and assets held that might impact the financial position and results of operations of a state or local government?

  20. Research Opportunities for State and Local Government Preparers • List intergovernmental inflows by program of contributing government • List Federal source revenues to individuals, corporations and non-profits in jurisdiction • List direct operations of other governments located in reporting jurisdiction • List “obligations” of other governments held or guaranteed by reporting government

  21. Research Opportunities (Cont’d) • Create 10 year summary of flows by Program, and for asset holdings • List all changes to Program legislation, with financial impact, of governments providing inflows during past 2 years • List credit ratings for past 5 years of held securities of other governments • List significant changes in direct operations of other governments located in jurisdiction

  22. Research Opportunities (Cont’d) • Assess economic impact of direct operations of other governments in jurisdiction • Cite published disclosures of other governments providing inflows, as to their: • economic condition, • debt levels, and • estimated major obligations

  23. Exploring “Related Risks” • General risks: • Materiality of intergovernmental flows • Interconnectedness of tax systems • Degree intergovernmental flows fund core functions • % employee base funded by intergovernmental flows • Possible specific risks: • World monetary fluctuations • Changing matching requirements • Program funding reductions • Reduced foreign appetite for Federal securities • Devolution of responsibilities to other government levels • And more?

  24. Responsibilities of the Accountability Community • Study this issue • Read the Financial Report of the U.S. Government --- every year • Read your State’s Annual Report • Provide additional supplemental information to financial statement users • Support GASB’s Project with interest and commitment of effort

  25. Questions?And Contact Information • Ed Mazur • Tel. 804-272-8460 • Email edmazur@comcast.net • GASB Project Staff, Roberta Reese • Tel. 203-847-0700 • Email rereese@gasb.org

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