Your City’s Accounting Is Unnecessarily Obscure. It’s Time To Pull Back the Veil.

(Source: Unsplash.)

Who do we prepare local budgets for, the citizens of a community or distant Wall Street bond investors? Is it more important that an elected council member know what is going on with a city’s finances, or should our local accounting practices be more responsive to the needs of analysts at ratings agencies?

We all expect cities to put together budgets and maintain financial reports so citizens can understand what is going on and community leaders can make good decisions. That is what we expect, but that’s not how local government accounting actually works.

This member week, we are sharing insights into our new strategic plan, including our five priority campaigns. The goal of the Transparent Local Accounting campaign is to reveal the financial implications of the Suburban Experiment by increasing the transparency of local accounting practices. You can support this campaign by becoming a member of Strong Towns.

I am an accountant by training and experience. I’ve worked in corporate and small business finance for almost 40 years, and I have a good understanding of how to produce and analyze financial statements. I also have extensive experience in financial planning and budgeting, and I understand the importance of reliable projections to the sustained financial health and viability of an organization.

I knew that there were significant differences between private sector and local government accounting, but I didn’t fully appreciate the magnitude or implications of those differences until I waded into it. To say that local government accounting is unnecessarily complicated, confusing, and illogical is an understatement.

In local government accounting, the information necessary for honest evaluation of the true financial health of our local governments is buried or excluded. This hurts us all.

In the United States, the Government Accounting Standards Board (GASB), an independent, private-sector organization, dictates the financial practices and statement presentation standards for state and local governments. One of GASB’s stated objectives for financial reporting is to provide “information to determine whether current-year revenues were sufficient to pay for current-year services.” This supports the concept of the “balanced budget,” wherein appropriations should not exceed resources available to cover expenditures for the fiscal year. 

Unlike the business sector, where capital assets and long-term debt are reflected on the Balance Sheet, the GASB-defined Statement of Financial Positions for governmental funds shows only current assets and liabilities. Long-term liabilities, such as Pension and Other Post-Employment Benefits (OPEB), are buried in supplemental statements. Furthermore, depending on how a government reports its infrastructure assets, the extent of deferred maintenance and replacement cost obligations for that infrastructure is completely unreported. 

Most state and local governments in the U.S. are required to pass a balanced budget. However, a budget that fits the statutory definition of a “balanced budget” (following GASB guidelines) may not, in fact, be financially sustainable. A more appropriate goal, according to the Government Finance Officers Association (GFOA) should be a structurally balanced budget, defined as a budget where recurring revenues are sufficient to cover recurring expenses. Yet the data needed to determine recurring and future revenue and expenses is not clearly presented in most government financial reports.

Why are government financial reports presented under GASB standards so short sighted and misleading? One reason might be gleaned from their mission statement, which says they will “...establish and improve financial accounting and reporting standards to provide useful information to investors and other users of financial reports… [emphasis added]“

Investors, of course, are the people who buy and sell municipal bonds—a multitrillion-dollar industry—and the bond rating agencies who help determine the price of that debt. Their priorities and needs are very different from, and often not aligned with, the local council members working to keep their city’s fiscal house in order.

So how do I know if my town, county, and state government budgets are structurally balanced?

At Strong Towns we believe that strong cities, towns, and neighborhoods need financial data that is clear, complete, and as accurate as possible in order to make informed decisions about budgets, projects, and resource allocations. We’re obsessive about “doing the math.” That’s why we’ve made Transparent Local Accounting one of our priority campaigns. 

We seek to reveal the financial implications of the Suburban Experiment by increasing the transparency of local government accounting practices.

In the coming months, Strong Towns will provide data, resources, and tools to help you make sense of your local budgets, and empower you with the information to help you ask the right questions, evaluate options, and make better decisions about how to build prosperity in your town.

You can support the Strong Towns campaign for Transparent Local Accounting, as well as our other efforts to make cities stronger, by becoming a Strong Towns member today.

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