NTF ISSUE PAPER: REFORM NEBRASKA BUDGET ACCOUNTING STANDARDS

NTF Issue Paper: legwatch174.doc. 3-19.
NEBRASKA TAXPAYERS FOR FREEDOM ISSUE PAPER:
REFORM NEBRASKA BUDGET ACCOUNTING STANDARDS.

BACKGROUND. One of the major reasons why taxpayers do not examine and analyze local government budgets and other budgetary materials is because these documents appear difficult to read and understand. Taxpayers hesitate to contact their elected representatives on city councils, county boards, school boards, etc., if they fear they will not communicate accurately from what they read and see in these documents. Taxpayers decline to appear and speak at budget hearings or at other public venues, if they feel unsure of their prospective statements. There is a nationwide conservative movement now reaching Nebraska, a tidal wave of demand that state legislators reform local government budgeting practices, so that taxpayers can find a more accurate explanation of local government finances and use such information to lobby and monitor elected officials.

THE BILL. State senators now have an opportunity to eliminate the confusion and distortions that clever local officials use to calculate finances and report them in their budgetary documents. Conservative State Sen. Joni Albrecht (pronounced allbright) introduced LB 581, requiring local subdivisions to construct budget statements in accordance with generally accepted accounting principles utilizing the accrual basis. Most private businesses use the full accrual accounting method.

THE PROBLEMS. Some local governments calculate their balanced budgets in confusing ways as they assume millions in debt. Although state and local government financial statements that use a cash basis claim to fairly represent their financial conditions and changes in finances, these models show misleading and incomplete information regarding funds. Elected officials prefer the cash basis over the accrual basis, because when reporting actual expenses paid, the cash basis shows an amount less than the actual amount for the period in which the reporting occurs. This reduces the amount of the deficit provided for public consumption. Some budgets keep millions in deferred compensation and other costs off operating statements and balance sheets. Such ruses allow officials to claim a balanced budget but in reality build huge unfunded obligations and deficit spending. These accounting methods are incomplete and deceptive, because officials do not include all costs and liabilities incurred during each budget year. Cash basis budgeting allows adoption of programs and promises without acknowledgement of their full cost. Such lack of accountability creates an incentive for elected officials to entice voters at the expense of future taxpayers. Cash basis accounting fails to show transparency on public sector assets and liabilities and therefore presents a short-term view of public finances. This accounting allows governments to make financial commitments they cannot fulfill in the future. Such accounting hid the stark $7 billion in liabilities in Detroit, MI. Municipal workers and retirees suffered greatly by deep cuts in pensions and health care benefits. City officials projected future spending but not billions in long-term financial commitments, leaving the budget balanced in print only. Suppose you buy a $35,000 car in 2019, but with a dealer special promotion, no payments due until 2022. Most would say the buyer incurred the $35,000 bill in 2019, the answer mandated by accrual accounting. However, many local governing bodies operate under the rule that a bill not incurred until the money leaves the bank account. This lack of true accountability is the root cause of fiscal mismanagement by some NE local governments. They make long-term commitments for programs like employee compensation and public works projects like golf courses. They write their budgets on a yearly basis, as if beginning all over again every year with new revenues and expenses. They leave out revenue not received or expenses not incurred that year. A stark example: In 2010, Virginia reported a cash basis surplus of almost $50 million in a $34 billion budget, which looks flush. However, using accrual accounting, the surplus morphed into a $674.3 million deficit! Some localities announce an increase in employee pensions, thereby amassing large new financial liabilities legally binding. Under cash basis accounting, the new pension liabilities will not appear in the budget until the locality pays out decades later. Such is why the Financial Accounting Standards Board outlawed cash basis accounting in most of the private sector. The International Federation of Accountants and the Big Four national accounting companies have asked local governments to change to accrual accounting for years, because it offers the taxpaying public better information about finances and makes it more difficult for officials to hide long-term obligations, like the Detroit debacle. The liberal City of New York switched in 1975 to avoid bankruptcy. Switching is not painless. City and other officials sometimes must cut spending and entitlements to balance their budgets. By switching now, localities avoid tougher future fiscal decisions.1

ADVANTAGES. Accrual accounting offers a more accurate report on the financial performance and situation of government subdivisions. It matches within the same accounting period revenue earned with all costs incurred earning such revenue.2 Transactions and economic events recorded and reported when they occur, regardless of when actual cash transactions occur, whereas the cash basis of accounting records financial transactions when income received and expenses paid. Provision of fuller costing and management information on delivery of public services to facilitate resources management and performance evaluation. Comparatively, the accrual method recognizes as income what a government earned or entitled to receive, even before payment received, and recognizes as an expense what the government must pay when billed, even before payment made. Accrual accounting considered a better means to measure a large entity, like a city, financial condition. Australia and New Zealand, which have adopted accrual accounting, now portrayed as paragons of fiscal responsibility.

THE BEST WAY. Accounting firms have the skills to help governments and entities within them to change. The accrual method requires local governments to report their financial situations and activities more accurately. General Fund statements must use a long-term, full accrual-based method. Issuing budget and financial reports on an accrual basis offers a more accurate measure of local government finances. Use of accrual accounting standards can help management improve agencies and departments, promoting greater efficiency, showing true costs, minimizing waste, and controlling inefficient spending. These tenets should apply to annual government financial statements and performance evaluations.3 Accrual accounting may not stop fraud, but it will report the financial condition of an entity more accurately. Governments must become accountable not only for cash resources used in a budget but also for resources acquired by past budgeted funds and promises made for future use of resources. A recent report by the Organization for Economic Co-operation and Development (OECD) and the International Federation of Accountants noted that “financial reporting is one of the foundations of good fiscal management.” The report concluded that implementing accrual accounting means government financial reporting is more comprehensive, with not only cash movements in and out of the funds reported to the public, but a range of other financial operations, also inventories of government assets and liabilities. Accrual accounting reports not only cash but also other resources present or due at any point in time. The financial statements allow taxpayers to hold officials accountable for financial resources, efficiency of operations, and the resulting financial situation of a government subdivision.4

TAKE ACTION NOW. There exists a need for additional transparency in local government reporting, and public sector financial statements should show the economic impact of political decisions made. Such would lead to the better use of public resources. NE taxpayers deserve a right to understand and analyze accurately local budgets and other financial documents in order to contact or face their public officials regarding taxing and spending. Lobby your state senator to vote YES on LB 581, using the above content. Contact your city council member, county board member, school board member, natural resources district board member, university regent, etc. and demand that their budgeting, if not already using the accrual accounting method, switch to this method immediately. Email netaxpayers@gmail.com for state senator and other public official contact information.
 
Research, documentation, and analysis for this issue paper done by Nebraska Taxpayers for Freedom. This material copyrighted by Nebraska Taxpayers for Freedom, with express prior permission granted for its use by other groups in the NE Conservative Coalition Network. 3-19. C