The Effect of GASB Statement 34
If you don’t know whether your local city, county or state governments spend more than they take in, or whether they are able to pay the costs to maintain their assets, you’re not alone. Most people can’t figure out how to read governmental financial statements. The Government Accounting Standards Board (GASB) has been pushing for reform and has issued GASB Statement 34, changing the way local governments present financial information to the media, creditors, bond raters, citizens, elected officials.
“I like to see government make better decisions and, clearly, when government accounting does not include assets and liabilities, you can’t make good decisions,” comments Adrian Moore, director of privatization research at Reason Public Policy Institute. “The people in the private sector just slap their foreheads and ask how on earth an organization can be managed when it buys equipment that disappears from the books – or when the organization owes somebody money but it’s not on the books. That is the way the government has always worked.”
GASB 34 requires local governments (also including special districts like school districts, water districts, redevelopment) to include information their public infrastructure assets (such as bridges, roads, storm sewers, etc.), as well as information about how they are maintained. It also requires a change to accrual accounting.
The Resistance Factor and its Effect
Ratified unanimously by the board in June 1999, GASB 34 still has met with resistance. Most agree that reform is good, but few want to go through the agony of the transformation. The Government Finance Officers Association (GFOA), which has objected to the new standards, argues that the new information is not valuable to elected officials and that the primary objective of government accounting is to provide information to elected officials.
Moore, however, says that elected officials completely disagree, saying it will be very valuable. “I think the GFOA and its members just don’t want to do the work,” he says. “It is much harder to do accrual than cash accounting.”
Moore says that everywhere he speaks on GASB, he finds that only a very small percentage of the audience has heard of it; this indicates professional finance people are not telling elected officials about it. “The deadline is going to come and, all over the country, governments are going to be out of compliance,” he predicts. “The finance officers will say the elected officials never actually passed a bill saying they should make the transition, and the elected officials will say they never knew about it. When Standard and Poors and Moodys start to raise red flags about noncompliance and credit ratings go down, the governments will be thrashing to solve the problem. Which governments will be caught in that bear trap in June 2001?”
Moore, a government reformer, spoke on GASB 34 to the Republican caucus of† Wisconsin’s State Assembly last summer. “The finance people said they had not yet figured out how to explain it to elected officials (laymen),” he recalls. “Their 2001 budget will be under the new accounting standards, and they figured out that their current budget would be 600 million dollars in the red under the new standards. By their next budget, they have to find 600 million bucks!” While not all governments will be in that same boat, some will be. Wisconsin is being proactive and now is talking about what to do; they have a year to put their plan in place.
Looking at How to Solve the Problem
Moore believes the new transparency to everybody about what things really cost is going to drive a lot of outsourcing. The new standards will also create a push for more efficiency and, again, outsourcing will be the solution.
“The market for outsourcing during the transition – wow! – The government does not have people who understand private sector finance, and they don’t have the expertise to make the transition,” he comments. “They have to value all the assets they own, and who is going to do that leg work? Most city agencies can’t even begin to tell you what assets they own or where they are. Then figuring out what all this stuff is worth is yet another area where there is going to be a lot of outsourcing.”
The range of how to handle transition and implementation goes from handling it in-house (with additional resources approved from their governing bodies) – to purchasing new software and sending their staff to GASB workshops – to hiring consultants to build new systems and train the government staff – to total outsourcing.
Moore believes small districts and small towns are more likely to handle it in-house because they have fewer resources and don’t have to meet the deadline as early as large and medium-sized districts. “It is really the states, the big cities and counties, and maybe big school districts that are going to be really up against the wall trying to do this,” he says. “They will have to look at outsourcing as the solution.”
Although departmental managers and agency heads are often still unaware of GASB 34, the time when they will be affected by the transition is drawing close. Mostly likely that will come in the form of a request to produce an inventory of everything the department or agency owns. Or it may happen at budget time, when the government will look at them a little bit differently because their assets and liabilities are going to show up. They will have to maintain the things they own, and it will affect their appropriations.
“The consequences are very large and very extensive,” says Moore. “It will have a substantial effect on everybody in government, and it’s coming soon – in about a year everything has to be in place for large governments, so it is affecting them now as far as inventories are concerned. Yet, ignorance is still widespread. People will find out how well their governments work by how they manage this transition.”
Lessons Learned from Reform of Government Financial Systems in New Zealand
“Although some believe GASB Statement 34 is a radical change in standards, far more radical things have been done in places like New Zealand. New Zealand converted its government accounting systems almost purely to private sector accounting, and they now keep their books just like corporations do. While it is held up as a model, we in the United States are moving much more slowly.
One of the steps was the adoption of accrual accounting. They also changed the way they account for capital and the way they budget capital. Accrual accounting requires an agency to catalog everything it owns and how much it is worth. Let’s say, for example, that each year your capital budget is $20 million. So if you need a new truck, you have to increase your capital or find the money somewhere else. This gave them an incentive to figure out which things they owned they really needed and which things they didn’t.
If they owned a tractor they only used once every five years, for example, the old accounting system provided no incentive not to own it. But if they sold it and then rented it every five years, that money could be used to buy a new truck. They also eliminated the civil service system and everyone is paid on performance-based contracts now.
This reform took place over five years, so it was much more dramatic than what we are looking at with GASB 34. But I think that generally the forward-looking planners in our government are looking at eventually going that direction.”
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].