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How to read and interpret municipal and governmental audited financial statements
 

How to read and interpret municipal and governmental audited financial statements

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ParenteBeard Partner John Compton presented to the Pennsylvania Institute of Certified Public Accountants in July 2013.

ParenteBeard Partner John Compton presented to the Pennsylvania Institute of Certified Public Accountants in July 2013.

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    How to read and interpret municipal and governmental audited financial statements How to read and interpret municipal and governmental audited financial statements Presentation Transcript

    • Governmental Financial Accounting and Reporting How to Read and Interpret Governmental Financial Statements
    • 2 John W. Compton, Jr., CPA, CGFM Partner, Public Sector Group ParenteBeard LLC 570.651.1742 John.Compton@ParenteBeard.com
    • Learning Objectives • Enhanced understanding of governmental accounting and financial reporting, to help make better informed decisions regarding: – Investing in governments – Lending to governments 3
    • Governments Defined…. 4
    • • Public corporations (states, counties, cities) • Others considered “governmental” if: – Popular election of officers – Board appointed/approved by SLGU officials – They have power to enact/enforce a tax levy – Potential of dissolution by with net position reverting to a government 5 AICPA State and Local Governments Accounting & Auditing Guide, P. 1.01
    • Examples of Governments “General Purpose” Gov’ts • States • Counties • Cities • Boroughs • Townships “Special Purpose” Gov’ts • School Districts • Public Universities • Operating Authorities – Water, Sewer, Transit, Solid Waste, Housing, etc. • Financing Authorities – Issue “conduit debt” • Hospitals, colleges, etc. Note: Federal government has its own accounting/reporting rules… 6
    • Operations of Government include: • Education • Public Safety • Transportation • Social services • Environmental services • Housing • Utilities (water, sewer, solid waste) • Administrative (judicial, courts) 7
    • Government Operations “Governmental” Activities • Education (primary, secondary) • Public safety (police, fire, correctional, regulation/licensing) • Social services (income maintenance, healthcare) • Environmental services (natural resources, parks, recreations) • Administrative (judicial, legal, financial and governance) Generally, funded through taxes and intergovernmental revenues “Business-Type Activities” • Education (higher ed) • Transportation (highways, airports, ports, parking, transit) • Housing • Utilities (electric, gas, water, sewer solid waste) Generally, funded through user fees 8
    • Standards Setting Body: Governmental Accounting Standards Board (“GASB”) The Governmental Accounting Standards Board is the private, nonpartisan, nonprofit organization that works to create and improve the rules U.S. state and local governments follow when accounting for their finances and reporting them to the public 9
    • Significance of State and Local Governments in the US…. 10
    • • 50 state governments • 89,004 local governments in the US • SLGs collected $2.1 trillion in 2010 – $6,803 for every person in the US • SLGs expended $2.4 trillion in 2010 – $7,775 per capita • $2.9 trillion debt outstanding – 3rd quarter 2012 • 16.8 million individuals employed – 11.7% of the US workforce (2010) 11
    • Governments are different from “Non-Profit” Organizations… Governments • Subject to GASB • No tax return filed with IRS • EBP not subject to ERISA • Ability to directly issue debt that pays interest exempt from federal taxation Non-Profit • Subject to FASB • Form 990 filed with IRS • EBP subject to ERISA • Tax exempt debt issued through a state or municipal financing authority Examples include hospitals, foundations, human service agencies such as YMCA’s, etc. 12
    • Why are Governmental Accounting/Financial Reporting Rules Different? 13
    • Governments vs. Business Enterprises • Governments are fundamentally different from business enterprises. As a result, separate accounting and financial reporting standards for governments are essential to meet the specific needs of the users of governmental financial reports. The standards for governments need to reflect their unique environment, including different organizational purposes and special legal powers, and to effectively address public accountability issues inherent to governments. Governmental Accounting Standards Board (GASB) 14
    • • Major differences between government and businesses: – Organizational – Relationship with Stakeholders – Sources of Revenue – Potential for Longevity – Role of Budget 15
    • Organizational differences Government’s purpose • Enhance well-being of citizens by providing public services in accordance with public policy goals – Governments provide these services because economic incentives are not sufficient for business to provide them Business’ purpose • Wealth creation, interacting only with those segments of society that fulfill their mission of a financial return for stockholders – Predominant business performance measures – net income and EPS – have no meaning in a governmental environment 16
    • Stakeholder Differences… Governmental • Citizens and taxpayers • Legislative • Oversight bodies • Holders and potential holders of government debt More diverse list of stakeholders, who are interested in a variety of different things Business • Owners • Creditors Stakeholders primarily concerned with profitability and financial position… 17
    • Stakeholders Interested In… • Citizens: range of services provided/cost of services • Business owners: costs imposed (taxes) and services provided • Legislative/Oversight: How efficiently a government is using its resources and whether the government is complying with budgetary/contractual provisions • Holders/Buyers of Debt: Creditworthiness 18
    • Governmental Relationships with Stakeholders • Individuals citizens must pay taxes as agreed to by the citizenry or its elected officials • Not all taxes paid correlate directly with services received • As such, governments have a higher accountability threshold than a commercial business… – Stewardship responsibilities are reflected in fund accounting and in budgetary reporting 19
    • Sources of Revenue Governmental Revenues • Taxation - a legally mandated nonexchange transaction – No “earnings process” as most business transactions involve – Need for accountability drives unique gov’t FR model Business’ Revenues • Voluntary exchange transactions between willing buyers and sellers – Earnings process is significant to accounting/reporting – Buyers aren’t looking for financial accountability from sellers; focus is on quality of goods or services 20
    • Potential for Longevity • Because of ongoing power to tax, governments rarely liquidate… – 204 governments filed under Chapter 9 bankruptcy during the period from 1990 through 2011 – 19,703,365 businesses filed for Chapter 11 bankruptcy during the same period – Historically, municipal bankruptcies represent .001 percent of business bankruptcy filings 21
    • Potential for Longevity • The ability of governments to continue to exist in the future is generally not in doubt; rather, the sustainability of the level of service is the concern – As a result, governmental financial statements emphasize the allocation of resources to programs and the net costs of such programs 22
    • The Role of Budgeting in Governmental Accounting/Financial Reporting 23
    • Role of the Budget • Special, legal significance; expressions of public policy priorities • Legally authorizes raising and use of public funds • Primary method by which management shows accountability • Prominent position in a governmental financial statement • Documents short-term financial plans, but may not fully demonstrate inter-period equity By comparison, budgets in a business enterprise are an internal management tool and are generally considered proprietary in nature… 24
    • 25 Statement of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual - General Fund Year Ended June 30, 2012 Final Budget Original Final Positive Budget Budget Actual (Negative) Revenues Local sources $ 30,055,436 $ 28,917,280 $ 29,781,958 $ 864,678 State sources 36,929,557 36,929,557 37,267,665 338,108 Federal sources 5,820,424 7,038,580 7,828,436 789,856 Total revenues 72,805,417 72,885,417 74,878,059 1,992,642 Expenditures Regular programs 29,160,311 29,192,282 28,632,326 559,956 Special programs 11,271,983 11,290,831 10,929,278 361,553 Vocational programs 2,155,951 2,149,660 2,151,496 (1,836) Other instructional programs 952,668 984,030 962,432 21,598 Nonpublic school programs 30,832 - - - Adult education programs 101,450 101,450 18,299 83,151 Pupil personnel services 2,530,319 2,532,519 2,335,740 196,779 Instructional staff services 2,297,930 2,359,322 2,004,144 355,178 Administrative services 4,760,824 4,767,318 4,894,011 (126,693) Pupil health 973,731 973,731 997,707 (23,976) Business services 787,742 789,742 707,189 82,553 Operation and maintenance of plant services 7,156,467 7,191,484 6,373,017 818,467 Student transportation services 2,813,819 2,813,819 2,688,541 125,278 Central & other support services 768,835 770,328 755,963 14,365 Student activities 1,095,561 1,094,551 1,025,422 69,129 Community services 27,417 27,417 96,620 (69,203) Debt service 641,264 578,016 579,963 (1,947) Refund of prior year's receipts - 249,850 20,866 228,984 Total expenditures 67,527,104 67,866,350 65,173,014 2,693,336 Excess of Revenues Over Expenditures Before Other Financing Sources (Uses) 5,278,313 5,019,067 9,705,045 4,685,978 Other Financing Sources (Uses) Proceeds from extended term financing 300,000 220,000 - (220,000) Budgetary reserve (690,000) (539,356) - 539,356 Transfers out (6,566,526) (6,319,556) (7,265,735) (946,179) Transfers to Agency funds - (58,368) (51,694) 6,674 Total other financing uses, net (6,956,526) (6,697,280) (7,317,429) (620,149) Net change in fund balance (1,678,213) (1,678,213) 2,387,616 4,065,829 Fund Balance, Beginning 6,089,069 6,089,069 13,190,570 7,101,501 Fund Balance, Ending $ 4,410,856 $ 4,410,856 $ 15,578,186 $ 11,167,330 From an analytical standpoint, this information is useful to see how well management is planning, and also whether it is “living within its means”…
    • The “GASB 34” Financial Reporting Model 26
    • The GASB 34 Financial Reporting Model • Implemented circa 2003 for most governments • “Dual perspective,” includes: – Fund-level financial statements • Provide short-term fiscal accountability, closely associated with budget – Aggregated, full accrual financial statements • Include long-term assets and liabilities – Essentially, two full sets of financial statements with reconciliations between the two 27
    • Elements of a Governmental Financial Statement Under GASB 34 • Management’s Discussion & Analysis • Statement of Net Position (accrual basis) • Statement of Activities (accrual basis) • Fund-level financial statements (modified accrual basis, except for BTA’s, which are full accrual) • Reconciliations between fund-level modified accrual and top- level full-accrual • Notes to financial statements • Required supplementary information (OPEB, Pensions) 28
    • Management’s Discussion & Analysis • Narrative, introductory piece, written by management • Discusses CY results vs. PY, addressing reasons for variances • Addresses budgetary variances, reasons why • An analysis of financial position, and results of operations • An analysis of budget vs. actual, and reasons for variations • Addresses significant capital asset and long-term debt activity 29
    • Fund-level financial statements • Funds are accounting entities (i.e., not $$$) • Number and type of funds will vary by government… • Intended to provide fiscal control over use of resources – Partitions activity in such a way as to align with budgets, grant awards, project budgets, where an entity-wide statement would be unwieldy – Example: capital bond proceeds kept separate from general fund • Generally speaking, the “General Fund” is where the action is – However, other funds can very well be significant; need to understand purpose and evaluate accordingly… 30
    • 31 Balance Sheet, Governmental Funds Major Funds Capital Debt General Projects Service Totals Assets Cash and cash equivalents $ 756,385 $ 500,000 $ 118 $ 1,256,503 Investments 15,499,838 - 4,888 15,504,727 Assets held for capital projects - 57,529,386 - 57,529,386 Taxes receivable 3,202,573 - - 3,202,573 Due from other funds 2,190,186 1,683 - 2,191,869 Due from other governments 2,403,827 - - 2,403,827 Other receivables 420,708 259,755 - 680,463 Inventories 639,277 - - 639,277 Prepaid expenses 84,555 - - 84,555 Total assets $ 25,197,349 $ 58,290,824 $ 5,006 $ 83,493,179 Liabilities and Fund Balances Liabilities Accounts payable $ 1,446,375 $ 46,064 $ - $ 1,492,439 Construction contracts payable - 1,998,070 - 1,998,070 Construction retainage payable - 662,767 - 662,767 Due to other funds 174,834 4,593 - 179,427 Due to other governments 6,895 - - 6,895 Accrued salaries and benefits 6,924,487 - - 6,924,487 Deferred revenue 1,031,276 - - 1,031,276 Other current liabilities 35,296 - - 35,296 Total liabilities 9,619,163 2,711,494 - 12,330,657 Fund Balances Nonspendable 723,832 - - 723,832 Restricted 16,947 53,470,871 - 53,487,818 Committed 5,341,657 2,108,459 - 7,450,116 Assigned - - 5,006 5,006 Unassigned 9,495,750 - - 9,495,750 Total fund balances 15,578,186 55,579,330 5,006 71,162,522 Total liabilities and fund balances $ 25,197,349 $ 58,290,824 $ 5,006 $ 83,493,179 Each column represents an individual “fund” Short-term focus, modified accrual basis of accounting (excludes LT assets and liabilities such as capital assets and debt…) “Fund balances” represent fund equity Significant assets are cash and investments, inter- governmental receivables, taxes receivable; payables are short term such as A/P and due to employees….
    • 32 Reports results of operations for each fund for the year Modified accrual basis, excludes items such as depreciation expense; includes principal paid on debt as expense Effects of changes in long- term assets/liabilities excluded Generally, activity here closely aligns with the respective funds’ budget Statementof Revenues, Expenditures And Changes in Fund Balance Major Funds Capital Debt General Projects Service Totals Revenues Local sources: Real estate taxes $ 19,628,447 $ - $ - $ 19,628,447 Other taxes 9,388,357 - - 9,388,357 Other revenue 600,897 29,616 - 630,513 Tuition 115,847 - - 115,847 Earnings on investments 48,410 150,789 6 199,205 Total local sources 29,781,958 180,405 6 29,962,369 State sources 37,267,665 - - 37,267,665 Federal sources 7,828,436 - - 7,828,436 Total revenues 74,878,059 180,405 6 75,058,470 Expenditures Instruction 42,693,831 - - 42,693,831 Support services 20,756,312 - - 20,756,312 Noninstructional services 1,122,042 18,146 - 1,140,188 Debt service 579,963 - 2,627,849 3,207,812 Refund of prior year's receipts 20,866 - - 20,866 Capital outlay - 12,065,202 - 12,065,202 Total expenditures 65,173,014 12,083,348 2,627,849 79,884,211 Excess (Deficiency) of Revenues Over Expenditures Before Other Financing Sources (Uses) 9,705,045 (11,902,943) (2,627,843) (4,825,741) Other Financing Sources (Uses) Transfers in - 502,633 5,697,849 6,200,482 Proceeds from issuance of long term debt - 35,719,000 - 35,719,000 Cost from issuance of long term debt - (443,008) - (443,008) Principal payments on long term debt - - (3,065,000) (3,065,000) Transfers to Agency funds (51,694) - - (51,694) Transfers out (7,265,735) - - (7,265,735) Total other financing (uses) sources, net (7,317,429) 35,778,625 2,632,849 31,094,045 Net change in fund balances 2,387,616 23,875,682 5,006 26,268,304 Fund Balance, Beginning 13,190,570 31,703,648 - 44,894,218 Fund Balance, Ending $ 15,578,186 $ 55,579,330 $ 5,006 $ 71,162,522
    • A word about fund balance… • Key focus of analysts in evaluating financial condition of a government • Best practices suggest that governments maintain approximately two months’ worth of operating expenses in fund balance – Would equate to approximately 17% of annual operating budget… • Fund balance components include: – Nonspendable (inventory, prepaid accounts) – Restricted (legally) – Assigned (board “setting aside” for specific purpose) – Committed (management “setting aside”) – Unassigned (available for appropriation) 33
    • 34 Fund Balances Nonspendable $723,832 Restricted 16,947 Committed 5,341,657 Assigned - Unassigned 9,495,750 Total fund balances $15,578,186 In our previous example, this government has $5.3M “committed” by its governing body (for future anticipated pension costs) And $9.5M in “unassigned” fund balance (i.e., available for appropriation) Collectively, this government’s committed and unassigned fund balances are $14.8M, which is approximately 20% of its General Fund annual operating budget of $72.5M
    • GASB 34 (“top level”) financial statements • Added to the governmental financial reporting model via GASB Statement No. 34, circa 2003 –Aggregates fund accounting, converts to full-accrual –Intent is to provide a set of statements, more similar to commercial enterprises, with a “long-term” perspective 35
    • “Statement of Net Position” • In essence, the government’s “balance sheet”… • Presented on full-accrual basis of accounting • Includes long-term assets and liabilities, excluded from fund- level statements • Assets – liabilities = net position • Net position (equity) is one way of measuring a government’s financial health – For many governments, a large portion of equity its net investment in capital assets; it is not unusual for remaining net position to be a deficit 36
    • 37 Statement of Net Assets June 30, 2012 Business - Governmental Type Component Activities Activity Total Unit Assets Current Assets Cash and cash equivalents $ 10,478,810 $ 228,622 $ 10,707,432 $ 90,501 Investments 19,831,707 152,616 19,984,323 1,171,843 Taxes receivable, net 3,202,573 - 3,202,573 - Due from other governments 3,406,699 277,801 3,684,500 - Other receivables 887,033 61,172 948,205 - Internal balances 551,832 (551,832) - - Due from trust and agency funds, net 1,554,573 (37) 1,554,536 - Inventories 684,359 35,851 720,210 - Prepaid expenses 259,480 17,278 276,758 - Total current assets 40,857,066 221,471 41,078,537 1,262,344 Capital Assets 50,643,023 291,465 50,934,488 - Deferred Charges 1,620,275 - 1,620,275 - Assets Held for Capital Projects 57,529,386 - 57,529,386 - $ 150,649,750 $ 512,936 $ 151,162,686 $ 1,262,344 Liabilities and Net Assets Liabilities Current liabilities: Accounts payable $ 1,516,636 $ 30,990 $ 1,547,626 $ - Construction contracts payable 1,998,070 - 1,998,070 - Construction retainage payable 662,767 - 662,767 - Current maturities of bonds payable 3,330,000 - 3,330,000 - Current portion of capital leases payable 202,200 - 202,200 - Accrued salaries and benefits 7,041,964 36,159 7,078,123 - Accrued interest payable 1,117,481 - 1,117,481 - Due to other governments 4,539,007 - 4,539,007 - Deferred revenue 14,594 - 14,594 - Other current liabilities 9,254,417 8,902 9,263,319 - Total current liabilities 29,677,136 76,051 29,753,187 - Bonds Payable 88,814,000 - 88,814,000 - Compensated Absences 742,472 34,189 776,661 - Capital Leases Payable 135,637 - 135,637 - Other Postemployment Benefits 2,352,998 - 2,352,998 - Total liabilities 121,722,243 110,240 121,832,483 - Net Assets Invested in capital assets, net of related debt 15,653,838 291,465 15,945,303 - Unrestricted 13,273,669 111,231 13,384,900 1,262,344 Total net assets 28,927,507 402,696 29,330,203 1,262,344 Total liabilities and net assets $ 150,649,750 $ 512,936 $ 151,162,686 $ 1,262,344 Note addition of long-term assets here… ...and long-term liabilities here Analysis at this level would be very similar to a commercial business...
    • “Statement of Activities” • In essence, the government’s “income statement”… • Presented on full-accrual basis of accounting • Statement reads from “left to right” • Gross cost of programs net of program revenues equals net cost to taxpayers • Illustrates changes in “net position” from a long-term view – Increase in net position indicates improving financial position; decrease in net position indicates deteriorating financial position 38
    • 39 Statement of Activities Year Ended June 30, 2012 Net (Expense) Revenue Program Revenues and Change in Net Assets Charges Operating for Grants and Governmental Business-Type Component Expenses Services Contributions Activities Activity Total Unit Governmental Activities Instruction $ (44,973,667) $ 637,482 $ 16,012,589 $ (28,323,596) $ (28,323,596) Administrative and financial support services (11,533,716) 1,057,419 588,105 (9,888,192) (9,888,192) Operation and maintenance of plant services (7,312,651) - 372,872 (6,939,779) (6,939,779) Instructional student support (4,121,168) - 210,139 (3,911,029) (3,911,029) Pupil transportation (2,689,645) - 1,200,980 (1,488,665) (1,488,665) Student activities (636,222) 6,000 32,441 (597,781) (597,781) Community services (96,620) - - (96,620) (96,620) Interest on bonds payable (3,331,132) - 3,677,808 346,676 346,676 Total governmental activities (74,694,821) 1,700,901 22,094,934 (50,898,986) (50,898,986) Business-Type Activity Food service (3,265,260) 763,758 2,220,968 $ (280,534) (280,534) Total, primary government $ (77,960,081) $ 2,464,659 $ 24,315,902 (50,898,986) (280,534) (51,179,520) Component Unit Williamsport Area School District Education Foundation $ (47,761) $ - $ 18,494 $ (29,267) General Revenues Grants, subsidies and contributions 23,556,089 - 23,556,089 - not restricted Property taxes levied for general purposes, net 19,853,942 - 19,853,942 - Other taxes levied 9,120,464 - 9,120,464 - Miscellaneous income 139,272 - 139,272 - Investment earnings 252,046 98 252,144 19,075 Total general revenues 52,921,813 98 52,921,911 19,075 Change in net assets 2,022,827 (280,436) 1,742,391 (10,192) Net Assets, Beginning 26,904,680 683,132 27,587,812 1,272,536 Net Assets, Ending $ 28,927,507 $ 402,696 $ 29,330,203 $ 1,262,344 Starts with expenses by function… Reads “left to right” to arrive at cost of programs, net of program revenues Arrives at net cost of programs that are funded by general (tax) revenues…. “Net position” here improved $2M…
    • Other Considerations • GAAP vs. OCBOA • Pending GASB pronouncements – GASB 67 and 68 relating to pensions 40
    • GAAP vs. OCBOA • Large majority (~ 60,000) of SLGUs are small governments – Per GASB, approximately 1/3 of all SLGUs account for 98% of all SLGU revenue; likely using GAAP – Many of the remaining 2/3’s use an “other comprehensive basis of accounting” (OCBOA) • Cash basis, modified cash basis, etc. – Be skeptical of OCBOA statements….! 41
    • GASB Statement Nos. 67 and 68 • Effective for most governments circa 2015 • Many governments have defined benefit pension plans • Funded status of plan will now be reported on the government’s statement of net position • For many governments, this will be significant 42
    • Summary • Accounting/financial reporting rules are different, but understandable with reasonable effort • Focus on: – budgetary compliance/history of living within means – adequacy of General Fund fund balance (ideally, 2 month’s worth of budgeted expenses) – (unfunded) long-term liabilities; plan to address – For BTA’s, are user charges sufficient to cover costs of providing service 43
    • Resources • Governmental Accounting Standards Board – gasb.org – Technical accounting matters • Government Finance Officers Association – gfoa.org – Best practices, practical advice 44
    • 45 Contact information: John W. Compton, Jr., CPA, CGFM ParenteBeard LLC 570.651.1742 John.Compton@ParenteBeard.com