August 2024
Introduction
Our firm has not crossed paths with anyone in local government finance or accounting these days that isn’t feeling the pressure of our current operating environment. From internal staff working in local government to auditors, consultants and other local government service providers, we are in a time where we are all trying to do much more with oftentimes much less.
The root of some of this pressure seems to come from the pull local governments are feeling from the significant challenges they are facing, with all these needs competing not only for local government resources, but time and expertise. Public expectations and available resources are often severely misaligned. Below are some of our observations of those competing interests:
Key Challenges Facing Local Governments
Rising Costs and Unfunded Liabilities
Healthcare and Pension Costs: Local governments are feeling the impact of rising costs, particularly in healthcare, pensions, and other post-employment benefits (OPEB).
Unfunded Liabilities: Many governments face substantial unfunded liabilities related to these benefits, requiring significant resources to address both current funding and the paydown of past underfunding.
Infrastructure Needs
- Aging Infrastructure: Roads, bridges, water and sewer systems, and public buildings require significant investment for maintenance and upgrades.
- Funding Challenges: Funding these large-scale projects can be difficult due to limited resources and competing budget priorities.
Regulatory and Compliance Burdens
Complex Regulations: Local governments must comply with an array of federal, state, and local regulations.
Recent Implementations: The introduction of new accounting standards, such as GASB Statement No. 87 for Leases and GASB Statement No. 96 for Subscription-Based Information Technology Arrangements (SBITAs), adds to the compliance burden.
Technology and Cybersecurity Challenges
Outdated Systems: Many local governments operate with outdated technology systems that are inefficient and vulnerable to cyberattacks.
Investment Needs: Upgrading technology and enhancing cybersecurity measures require substantial investment, which may not be readily available or may compete with other budget priorities.
Talent Acquisition and Retention
Attracting Talent: Local governments often struggle to attract and retain qualified finance and accounting professionals due to competition with the private sector and even other public sector entities.
Retention Issues: Limited career advancement opportunities and lower compensation compared to the private sector contribute to high turnover rates.
Financial Reporting and Transparency
Public Demand: There is increasing demand from the public for greater transparency and accountability in local government financial reporting.
Implementation Challenges: Adopting best practices for financial reporting and adhering to new standards, such as those outlined by GASB, can be challenging and resource-intensive.
Economic Uncertainty
Fluctuations in CPI: Local governments must navigate economic uncertainties, such as fluctuations in the Consumer Price Index (CPI) and cost of goods.
Housing Market Changes: The local housing market and fluctuations in EAV (Equalized Assessed Value) for properties add to the challenges.
Policy Impacts: Changing federal and state policies can also affect local governments, making financial planning and forecasting more difficult.
Debt Management
High-Interest Costs: Managing existing debt and issuing new debt in a period of high-interest rates requires careful planning.
Sustainability Concerns: Ensuring that debt levels remain sustainable is crucial for maintaining future financial stability.
Rethinking Financial Reporting: Insights from GFOA
The Transparency Dilemma
Recently, the Government Finance Officers Association (GFOA) issued an article titled “Why GFOA is Rethinking Financial Reporting.” While GFOA agrees that financial reporting is a key component of accountability to stakeholders, they contend that the current financial reporting approaches often produce an abundance of information that is not always understood by stakeholders, the preparation of the required financial reports often times consumes large amounts of effort that might be better spent by government officials on higher priority items (remember those eight competing interests above!), and maybe the current financial reports do not serve stakeholders in the best way possible.
And quite frankly, we could not agree more! Being a professional service firm, we certainly have an appreciation for adhering to technical standards, and publishing financial statements for local governments that meet all of the necessary reporting requirements. But what if those requirements and mandates, often for the sake of “transparency,” have now tipped the scale too far and the costs now outweigh those perceived benefits?
Some overarching themes from the Article:
Back to Basics
Since the implementation of GASB Statement No. 75 for Other Post-employment Benefits (OPEB), we have recognized the need for a return to simpler, more straightforward financial reporting. The current standards, in our view, have led to unnecessary complexity. This sentiment appears to be shared by the Government Finance Officers Association (GFOA) in their recent article.
Applying the 80/20 Rule
The GFOA article introduces the concept of the 80/20 Rule, which suggests that 80% of outcomes result from 20% of all inputs. The question is whether we can create a financial reporting system where 20% of the information meets the needs of 80% of users.
The article also discussed a survey conducted by GFOA among 3,000 of its members, revealing several key insights into the value and challenges of current financial reporting practices:
- Perceived Value: Slightly more than half of the respondents believed that the annual financial report was a good value, but 77% to 84% saw the annual budget document as far more valuable.
- Complexity for Elected Officials: Elected officials often find financial records complicated and primarily care about receiving a clean audit opinion.
- Public Understanding: If elected officials struggle to understand financial statements, it’s likely the general public does too.
- Timeliness for Investors: Municipal bond buyers and rating agencies desire more timely annual financial reporting, especially as audit issuance times have increased over the last decade.
- Staffing Challenges: Local governments are experiencing significant staffing issues, exacerbated by a decline in the number of accounting graduates and increasing retirements.
- Opportunity Costs: The extensive time spent on annual financial reporting diverts attention from addressing other critical needs of local governments.
While the discussion seems bleak in the article, GFOA does propose a set of possible solutions to the current local government financial reporting concerns.
Reevaluating Information Disclosure: The GFOA suggests critically assessing the value of information disclosed in annual financial reports. Not all information may be necessary, and focusing on what truly matters could streamline processes.
Applying the 80/20 Rule: Financial reporting should adhere to the 80/20 Rule, focusing on key information that has the most significant impact. Simplifying reporting can help avoid unnecessary complexity.
Less Can Be More: Simplifying reporting requirements, particularly those related to GASB Statements Nos. 87 and 96, could reduce the burden on local governments.
Leveraging Technology: Technology can modernize financial reporting, moving beyond merely reproducing old paper formats as PDFs. More dynamic and automated systems, including artificial intelligence, could be utilized.
Streamlining Report Production: Efficient production of financial reports can be achieved through the strategic application of the 80/20 Rule, focusing resources on the most impactful areas.
Lauterbach & Amen’s Ongoing Advocacy
Engagement with the Industry
Lauterbach & Amen has been actively involved in advocating for our clients on various financial reporting issues. Several of our partners serve on professional association committees, directly providing feedback to GASB, focusing on the balance of cost versus benefit.
Direct Conversations with GASB
In late 2023, we engaged with GASB’s leadership to discuss the significant costs associated with recent standards like GASB Statement Nos. 87 and 96. This led to an in-person meeting in Chicago, where industry experts joined us to discuss these challenges. GASB leadership outlined their commitment to aligning projects with industry needs and soliciting feedback from stakeholders.
Looking Ahead: The Path to Real Change
L&A works to advocate for our clients by also providing industry training on new standards and mandates, best practices, and efficiencies regarding finance and accounting functions for local governments. Equipping our clients with the tools and education needed to navigate some of these more complex changes is one of the best ways we think we can serve the industry.
It is likely that real change on these topics will take time, but more importantly it will take engaged stakeholders. We will continue to lead the charge on engagement with any and all stakeholders and will continue to provide critical feedback on potential new developments related to financial reporting for governments and also local government issues.
Contact Us
If you want to discuss any of these topics further, please reach out to Jamie Wilkey at jwilkey@lauterbachamen.com or call 630.393.1483.
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