When the recession snowball rolled downhill in California, it stopped at the city level. Because California laws require the state to reallocate portions of local property taxes in order to balance the budget, cities were faced with a choice: cut community services, raise taxes, or downsize. Corona chose to downsize and outsource.
Eight years later when the economy was on the rise again, the five-member city council directed that outsourcing would continue to be the strategy of choice in meeting budget constraints. Now the city does not hesitate to outsource anything that can be done better by someone else. Last year the city was listed as the seventh fastest growing large city in the nation, and its forward-thinking leaders take its leading-edge position very seriously.
The effects of GASB Statement 34 are far reaching and require significant time and resources to implement. Because it has outsourced much of the massive undertaking of GASB 34 implementation, Corona will actually be able to implement the reporting structure two years early and the reporting of infrastructure assets four years early. Elray Konkel, director of finance for Corona for the past five years, is leading the proactive approach in preparing for the new accounting methods and reporting requirements, and they are well ahead of most cities in the US.
Laying the Groundwork
Konkel, a CPA and former auditor, entered government service in 1983 and has followed the progression of GASB’s focus on the measurement, focus and basis of accounting statements for many years. As a member of GASB (through belonging to the nationwide Governmental Financial Officers Association), he has read informational materials and has also attended many training seminars. When he saw the light at the end of the tunnel getting closer, he began discussing plans for implementing GASB 34 with the city council.
Preparing for the need to put infrastructure assets on the balance sheet, he asked the city’s accounting firm two years ago to look sternly at the asset records. Konkel admits they are in a better position than many cities that have no records of assets. The city had an outside firm do a physical inventory back in 1985, and many of the 100-year-old city’s assets were added during the last 20 years.
Also, two years ago, they put out to bid among independent appraisal firms the process of appraising all of the city’s assets (land, equipment, machinery, streets, stop lights, water and sewer operations, buildings, etc.). “That has been a bit of a hairy process,” he admits. “But it is a very important part of the implementation of GASB 34 that most cities are going to have to go through because most cities don’t keep really good infrastructure records.” It’s also a costly process – Corona will pay $45,000 just for the inventory.
Konkel determined that the next step was to analyze the new model of statement with their current statement and determine how they would be affected. He told Caporicci, Cropper & Larson, LLP, the city’s CPA audit firm, about the project; and the audit firm suggested that they partner with the firm’s newly formed GASB 34 Strategic Alliance as the beta test site for the alliance.
Currently, the city’s finance staff and the alliance are working together on restating last year’s financial statement. “The alliance deserves accolades for all the work they are doing,” Konkel comments. “But my staff is also very busy. This is happening at the time my accounting staff is preparing the budget, so they are playing dual roles. On top of that, we just got done with the audit, and now we are doing it all over again in the new and different format.”
Konkel believes his city will come out of this process looking better than ever. “We are very open here in Corona,” he explains. “What I think our city will see with GASB 34 is a different bent. It’s more than seeing if the general fund is healthy. It’s whether we are better off than we were last year. Are we maintaining our infrastructure? We are going to be able to say on a year-by-year basis, our streets are maintained at this percentage by engineering standards, and we spent X dollars last year on the maintenance and repair and upkeep of those streets to maintain that percentage. They will be able to see that in the financial statements and read it there for the first time. It is going to take things more into a ‘how are we doing’ approach and more of a multi-year approach.”
Not all cities, though, will be pleased with what the results indicate. Konkel believes some cities use smoke-and-mirror techniques that don’t show up on financial statements in order to balance their budgets. With the transparency that will result from GASB 34, communities will know exactly what their governments are doing. It is, perhaps, one of the reasons that some of Konkel’s counterparts in California have opposed the implementation of GASB 34.
Another interesting outcome of GASB 34 is that the new financial statements will have to use the government’s adopted budget, rather than an amended one. Governments sometimes make multi-million-dollar changes in the middle of a year. Under the old accounting format, those did not have to be disclosed; under GASB 34, they do. People will be able to see which governments are doing a good job of budgeting and which ones have to make constant adjustments.
Infrastructure added almost three-quarters of a billion dollars to the Corona balance sheet. The city is a developing community and will need to add nearly one-half billion dollars of debt financing to the statement. “My balance sheet is going to be a totally different animal because there will be things on it that were never there before,” Konkel says. “For some people, their balance sheets are going to be upside down and they will have to go to their legislative bodies and explain their deficits. For many, it will be a tough explanation. I’m betting there will be a few people asked to hit the road and find other things to do. People want more accountability from their governments. They want to know where the money went.”
Lessons from the Outsourcing Primer:
- Communities need to start the GASB 34 implementation process by doing an inventory and valuation of assets.
- The GASB 34 statements will reveal adjustments to a government’s adopted budget, which will compare the government’s “budgeted” costs to its “actual costs.
- Governments are notorious for not doing things quickly, but the sooner a government begins the inventory of assets process, the better off they will be.
About the Author: Ben Trowbridge is an accomplished Outsourcing Consultant with extensive experience in outsourcing and managed services. As a former EY Partner and CEO of Alsbridge, he built successful practices in Transformational Outsourcing, Managed services provider, strategic sourcing, BPO, Cybersecurity Managed Services, and IT Outsourcing. Throughout his career, Ben has advised a broad range of clients on outsourcing and global business services strategy and transactions. As the current CEO of the Outsourcing Center, he provides invaluable insights and guidance to buyers and managed services executives. Contact him at [email protected].