Loading...
HomeMy WebLinkAbout2001-03-06 City CouncilTO: City of Palo Alto City Manager’s Report HONORABLE CITY COUNCIL ATTENTION: FINANCE COMMITTEE FROM:CITY MANAGER DEPARTMENT:ADMINISTRATIVE SERVICES DATE: SUBJECT: MARCH 6, 2001 CMR: 148:01 GOVERNMENTAL ACCOUNTING STANDARDS STATEMENT NO. 34 BOARD This is an informational report and no Council action is required. BACKGROUND In June 1999, the Governmental Accounting Standards Board (GASB) - which sets financial reporting rules for all state and local governments - established a new framework for the financial reports of state and local governments. The new financial reporting requirements represent the biggest single change in the history of governmental accounting. Statement No. 34: Basic Financial Statements - and Management’s Discussion and Analysis - for State and Local Governments represents a fundamental revision of the current financial reporting model, which has been in place since 1979. These new requirements were developed to enhance the understandability and usefulness of the external financial reports of state and local governments. Palo Alto must reflect the changes required by GASB 34 in its financial statements for fiscal year 2001-02. DISCUSSION The goals for the new model include improved financial reporting, enhanced awareness of fiscal issues facing states and local governments, and recognition of the importance of adequately maintaining infrastructure. Only time will tell whether the new model will achieve these goals. It is very clear these will be expensive changes to make. Governments must implement GASB 34 to comply with generally accepted accounting principles (GAAP). Maintaining citizen confidence in the City’s stewardship of its assets requires credibility and integrity in accounting and financial reporting systems. Preparing audited financial statements in accordance with authoritative industry standards, such as GASB 34, is an essential foundation in gaining and sustaining this trust. CMR:148:01 Page 1 of 4 The new model is supported by a number of users and professional associations. The NatiOnal Association of State Auditors, Comptrollers, and Treasurers has endorsed the new model, and so have the credit rating agencies (who are the primary "users" of these reports). California Society of Municipal Finance Officers (CSMFO), which represents over 1,000 local government finance professionals throughout the State, has strongly encouraged its members to implement GASB 34. The most significant changes required by GASB 34 are: Addition of a Government-wide Reporting Statement. This is a consolidated financial statement for all of the City’s operations that combines governmental and enterprise activities using a full accrual basis of accounting. A detailed reconciliation will be required between this new statement and the statements presented on a fund basis. o Addition of a Management Discussion and Analysis (MD&A). This is a narrative similar to the transmittal letter in the Comprehensive Annual Financial Report (CAFR). However, as a newly required part of the "basic" financial statements, the MD&A will likely result in increased audit costs. A transmittal letter will still be required but will be reduced in scope. Expansion of Budgetary Reporting. Both the originally adopted and the final amended budget must be presented for the General Fund and "major" Special Revenue Funds. These budget to actual comparisons can be presented with the basic financial statements or as required supplemental information. o Reporting and Depreciating Infrastructure as Capital Assets. Current accounting principles do .not require reporting the historical cost of infrastructure assets such as roads, bridges, storm drains, streetlights, and traffic signals. However, the new reporting model requires capitalization of all assets, including General Fund infrastructure assets, in the financial statements at historical cost or estimated historical cost. Furthermore, this requirement applies retroactively to major general infrastructure assets that were acquired in fiscal years beginning after June 15, 1980, or that received major renovations, restorations, or improvements since that date. Once capitalized, governments will depreciate these infrastructure assets according to appropriate methods. Governments., can avoid the mandate to depreciate general infrastructure assets if: a) those assets are managed using an asset management system meeting certain specifications set forth in GASB 34, and b) the government documents that the assets are being preserved at (or above) a condition level established and disclosed by the government. To elect this option, CMR:148:01 Page 2 of 4 a government would have to perform condition assessments of its infrastructure assets at least every three years and disclose condition levels as well as anticipated and actual maintenance outlays. Staff is currently working with Maze and Associates (the City’s extemal auditors) to determine the best method to use with the various types of infrastructure. From a financial perspective, some types will make sense to depreciate and others will not. Staff will report back with recommendations for the categories along with impacts. Depreciation for All Capital Assets. Under the current reporting model, depreciation is not recorded for governmental fund capital assets. In order to allocate the cost of these assets over their useful lives, the new model will require depreciation of all capital assets, including governmental infrastructure assets, in the government-wide financial statements. 6.Notes to Financial Statements. Already long and complex, these will become even ¯ more so in order to meet the new model’s disclosure requirements. Under GASB 34, state and local basic financial statements will become longer and more complex - and thus more difficult to prepare and audit. This will especially be true when converting to the new model. This increased difficulty and complexity directly translate into increased costs - both one-time during implementation and ongoing thereafter - for staff resources as well as for audit fees and consultant services. The requirements regarding depreciation of capital assets, including infrastructure assets, will be particularly costly to implement, as will the conversion of data for the government-wide financial statements. RESOURCE IMPACT Staff estimates a cost of $70,000 in the 2000-01 fiscal year, for a contractual agreement for infrastructure valuation, and will include this in the mid-year report. Staff has not yet determined the estimated cost for continued implementation of GASB 34. Staff anticipates returning to Council with the 2001-03 Proposed Budget to request additional resources to implement GASB 34 and to discuss the issue further. CMR: 148:01 Page 3 of 4 PREPARED BY: DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: SeniorFinancial Analyst Director, ~ministmtive Services HARRISON Assistant City Manager CMR: 148:01 Page 4 of 4