The User's Perspective

May 2006


Coming to a CAFR Near You: The New Statistical Section, Part 1

            The statistical section is the part of a comprehensive annual financial report (CAFR) where governments present historical information—typically for the past 10 years—about their finances and operations and about their constituents and economy. Although the statistical section has proven to be brimming with valuable information to a wide variety of users of governmental financial information, the basic standards governing its preparation are over 25 years old. In that period, there were many changes in government finance, such as the diversification of the debt that governments issue and the revenues they collect—general obligation debt and the property tax are no longer uncontested kings. The CAFR that the statistical section appears in also has changed around it, most notably with the addition of government-wide financial statements prepared on a full accrual basis under GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments.

            The statistical section standards also were problematic. They amounted to no more than a list of 15 schedule titles, which left many of the details regarding what to present and how to present it to the professional judgment of government finance officers. Consequently, considerable variation has developed—the information found in one government’s statistical section may be very different from what is in the next government’s statistical section. In addition, the standards were written in the context of general purpose local governments—cities, towns, villages. Other types of governments—for example, counties, states, school districts, colleges, airports—were left to determine how best to apply the standards. As a result, many schedules that did not appear relevant to them were simply not presented at all.

            Things are about to change. Governments are now in the fiscal year for which they have to implement GASB Statement No. 44, Economic Condition Reporting: The Statistical Section. This is the first of two articles describing how the information in the statistical section is changing, the new information that is being added, and the old information that may disappear. The article concludes in the next issue.

In a Nutshell: What Statement 44 Does and Does Not Do

            Statement 44 was intended to do four things. First, it adds new information to capture the changes that have taken place in government finance. For example, a new schedule is added to track changes in total indebtedness over the past 10 years, in addition to information about general bonded debt.

            Second, Statement 44 revises the current standards to make previously reported information more useful. It replaces the mishmash of information found in the “miscellaneous statistics” schedule with more comprehensive presentations of the information that CAFR users found most valuable in that schedule. Governments will now present 10-year trends in their employment, indicators of their operations, and statistics about their capital assets.

            Third, Statement 44 reorganizes the statistical section’s required information and clarifies the objectives of that information. This should enable governments other than general purpose localities to appropriately apply the standards to their own circumstances. There should no longer be any glaring gaps in the statistical section.

            Fourth, Statement 44 captures the new information governments are now reporting after implementation of Statement 34, including: full accrual financial information for the government as a whole, long-term debt ratios, and capital asset statistics.

            What Statement 44 does not do is change the status of the statistical section. It continues to be supplementary information and therefore is not audited. Governments are required to prepare a statistical section only if they present their financial statements in a CAFR. However, the GASB did make clear that any statistical section that accompanies a government’s financial statements, regardless of whether they are in a CAFR or not, should conform to Statement 44. If you see something called a statistical section included in a government’s financial report, you can expect that it contains the information that Statement 44 requires.

Reorganization and Explanation

            The information that governments were reporting in their statistical sections seemed to organize naturally into five categories—information about financial trends, revenue capacity, debt capacity, demographics and economy, and operations. Mindful of the difficulties that entities other than general purpose local governments had in applying parts of the standards, the GASB described the objectives of statistical section information and emphasized that a government, when specific requirements of Statement 44 do not seem applicable to it, should consider the overarching objective and what information could be provided to achieve it.

            In general, the GASB described the overall objectives of statistical information as providing additional historical perspective, context, and detail to help the reader utilize the information elsewhere in the financial report for the purpose of understanding and assessing a government’s economic condition. Although similar to the familiar term financial condition, economic condition is a more comprehensive concept of governmental financial health, encompassing financial position, fiscal capacity, and service capacity. Statement 44 proceeds to describe the objectives of the five categories of statistical section information:

  • Financial trends information is intended to assist users in understanding and assessing how a government’s financial position has changed over time.
  • Revenue capacity information is intended to assist users in understanding and assessing the factors affecting a government’s ability to generate its own-source revenues.
  • Debt capacity information is intended to assist users in understanding and assessing a government’s debt burden and its ability to issue additional debt.
  • Demographic and economic information is intended to (1) assist users in understanding the socioeconomic environment within which a government operates and (2) provide information that facilitates comparisons of financial statement information over time and among governments.
  • Operating information is intended to provide contextual information about a government’s operations and resources to assist readers in using financial statement information to understand and assess a government’s economic condition.

Focus of the Statistical Section

            In general, the information in the statistical section should relate to the primary government. In other words, information about discretely presented component units—legally separate organizations for which the elected officials of the government are financially accountable, such as many public benefit corporations—typically would not be included. However, governments are required to use the same decision-making process they follow for deciding whether discretely presented component units should be included in the notes or in management’s discussion and analysis. The decision essentially boils down to the finance officer’s professional judgment as to whether information about the component unit is essential to fairly presenting information about the primary government.

Financial Trends Information

            Two new schedules will appear in the statistical section to report trends in the government-wide, full accrual information required by Statement 34. (See Figure 1 for a complete list of schedules a typical general purpose government would present. Figure 2 contains a list for a typical business-type government.) Governments will present the components of net assets—invested in capital assets net of related debt, restricted, and unrestricted—and changes in net assets. The change in net assets information will not be just revenues and expenses but all changes in net assets so that the schedule will drive toward the annual bottom line surplus or deficit. Ultimately, these schedules will cover the most recent 10 fiscal years. Initially, however, the schedules may contain only the most recent year, though the GASB encourages governments to initially extend as far back as the year they implemented Statement 34. Some business-type entities, such as airports or utilities, may have full accrual information that they can report for a full 10 years immediately, but most governments did not have such information before implementing Statement 34.

            The financial trends information in most statistical sections was previously limited to schedules of revenues and expenditures. Some governments presented the information for their general fund, some for all governmental funds, and others for the general fund plus select other funds. To ensure some conformity, Statement 44 requires that this information be provided for the governmental funds as a whole. Additionally, governments will present all changes in fund balance in order to lead to the annual total increase or decrease in fund balance.

            Statement 44 adds to this schedule the useful information that previously was presented in a separate schedule of debt service ratios. The schedule of changes in fund balance will show the principal and interest components of debt service separately and will present a new ratio of debt service expenditures to noncapital expenditures. The old debt service schedule divided debt service by total expenditures, but financial statement users have indicated to the GASB that dividing by noncapital expenditures is a more meaningful and less volatile measure.

            At the outset, the schedule of changes in fund balances may not have a consistent trend. Most governments should have ready access to the information necessary to flesh out the old revenue and expenditure schedules to create a full 10-year trend, and the GASB encourages governments to do so. However, the general minimum requirement of Statement 44 is prospective implementation—in other words, the schedule could have the old information prior to the implementation year and the new information afterwards. If a government does not revise the information for prior years, it is required to clearly note when the information changes and describe the nature of the difference in the information.

            The last of the four financial trends schedules also is new. Although some governments have presented trends in fund balances for some time, most did not. However, this information is clearly valuable to the public (see the article on fund balance in this issue). Therefore, Statement 44 requires the reporting of reserved and unreserved fund balances for the past 10 fiscal years. The schedule should show balances for (1) the general fund and (2) all other governmental funds in the aggregate. If a government designates a portion of its unreserved fund balance, it may report the designated and undesignated parts separately in the schedule, but it is not required to do so.

Figure 1. The Impact of Statement 44 on a Typical General Purpose Government’s Statistical Section

Schedule

Impact of Statement 44

Net assets

Newly added

Changes in net assets

Newly added

Fund balances

Previously provided optionally, now required

General governmental expenditures

Combined and expanded to include all changes in fund balance for total governmental funds

General revenues

Assessed and estimated actual value of taxable property

Revenue base information for most significant own-source revenue

Property tax rates

Direct and overlapping revenue rate information for most significant own-source revenue

Property tax levies and collections

Retained and clarified for consistency (when property taxes are the most significant own-source revenue)

Principal taxpayers

Principal payers of most significant own-source revenue for the first and last years of the 10-year period

Special assessment collections

Eliminated; special assessments supporting debt will be reported in pledged-revenue coverage schedule

Ratios of outstanding debt

Newly added

Ratio of net general bonded debt to assessed value and net bonded debt per capita

Retained and expanded to include all debt supported by general resources

Computation of legal debt margin

Retained and 10-year trend added for key information

Computation of overlapping debt

Retained and expanded to include all governmental activities debt

Ratio of annual debt service for general bonded debt to total general expenditures

Key information combined with changes in fund balances schedule

Revenue bond coverage

Retained and expanded to include all debt backed by pledged revenues

Demographic statistics

Retained and expanded to include economic information

Principal employers

Newly added

Property value, construction, and bank deposits

Eliminated

Miscellaneous statistics

Replaced with next three schedules

Government employees

Newly added

Operating indicators

Newly added

Capital assets

Newly added


Revenue Capacity Information

            This may be one of the most important areas of clarification in Statement 44. The prior standards listed four property tax schedules—property values, overlapping tax rates, levies and collections, and principal taxpayers. Governments that did not have a property tax often did not present any schedules. In the general purpose local government context of the prior standards, the property tax was by far the most significant revenue over which such governments had control. Statement 44 clarifies that the standards were not intended to require exclusive reporting of property taxes but to focus on the most significant “own-source revenue” of the government—sales taxes, income taxes, water and sewer fees, and so on.

Figure 2. Applicability of Required Schedules to a Typical Business-Type Government

Schedule

Presented by Business-Type Government?

Net assets

Yes

Changes in net assets

Yes

Fund balances

No (unless governmental funds are reported)

Changes in fund balances

No (unless governmental funds are reported)

Revenue base

Yes

Direct and overlapping rates

Yes, though it may not have any overlapping rates

Principal revenue payers

Yes

Property tax levies and collections

Unlikely; only if it presents revenue capacity schedules for a property tax

Ratios of outstanding debt

Yes

Ratios of general bonded debt

Unlikely; most have only revenue-backed debt

Direct and overlapping debt

No (unless governmental activities are reported)

Debt limitations

Unlikely (only if debt limits apply)

Pledged-revenue coverage

Yes

Demographic and economic indicators

Yes

Principal employers

Yes

Government employees

Yes

Operating indicators

Yes

Capital assets

Yes


            First and foremost, this clarification should ensure that all governments present revenue capacity information and not just those with a property tax. Further, it should lead governments previously reporting a property tax that is actually small relative to another own-source revenue to begin reporting information about the larger revenue source. This potentially could result in information previously presented being discontinued. Although governments are only required to present information about one revenue source, the GASB’s implementation guidance has encouraged governments to consider the needs of the users of their statistical sections before dropping property tax information wholly. The GASB also has encouraged governments with two own-source revenues of relatively equal size to present revenue capacity schedules for both.

            Governments generally will present three schedules. First, the revenue base schedule will present the base against which a government applies rates to generate its most significant own-source revenue, for the past 10 years. Governments reporting a property tax will present both assessed value of taxable property by major component (for example, residential, commercial, utility, and so on) and the total estimated actual value of taxable property. The schedule should explain how the actual values are derived. Finally, the schedule should include the total direct rate the government applies to this base; this should help the reader to crosswalk the information in the revenue capacity schedules.

            Second, the schedule of direct and overlapping rates will show a government’s own rates and those of the governments below the state level that overlap geographically and apply rates to the same revenue base. Each of the rates the government itself applies—such as multiple rates for different levies or different rates applied to different types of property—should be reported individually. Any legal restrictions on a government’s ability to raise its own rates should be identified on the schedule. State-level governments are not required to present overlapping rates because of the potential size and complexity of the resulting schedule; regional governments are encouraged but not required to include overlapping rates. Both state and regional governments, however, will present their own direct rates.

            Third, governments will report the 10 largest payers—in terms of revenue base or taxes levied—of their most significant own-source revenue. (See Figure 3 for an example.) For each payer, the schedule will include either the amount of revenue base it accounts for or the actual taxes levied on it, as well as the percentage of either amount relative to the total revenue base or taxes levied. Some governments may present fewer than 10 payers, if fewer account for half or more of the revenue base or taxes levied. Although this schedule used to cover only the current year, Statement 44 improves its usefulness by requiring a comparison between the first and last years of the 10-year period covered by the statistical section.

Figure 3. Sample Schedule of Principal Revenue Payers

   

            Some governments may not legally be allowed to identify individual payers; it is generally not allowed, for instance, to identify individual income tax payers. This is a prime situation in which governments are challenged to consider the overall objective of the required information. Such governments should present other information that conveys the degree to which they are or are not dependent on a small group of payers. At this point in the implementation of Statement 44, a clear trend has not developed, but the GASB has encouraged governments to consider information such as income tax revenue by income level.

            If a government’s revenue capacity schedules report a property tax, it will also present a schedule of levies and collections. This schedule is very similar to what governments have been presenting for many years but with a very significant change. The schedule continues to include the amount levied for each of the last 10 years, the amount collected prior to the end of each year, and the percentage collected. However, in the past, some governments have then reported the amount collected on each levy in subsequent years, whereas others have reported the amount collected each year on all prior levies. The latter information is no more than a breakdown of each year’s revenue between the current levy and prior levies. The GASB’s research found that that information is not as useful as the distinction between the portion of the levy collected in the first year and the portion collected in subsequent years, which Statement 44 now requires. With the amount collected during the period of the levy and the amount collected subsequently, the schedule can present a total amount collected for each levy and a total percentage of the levy collected. (See Figure 4 for a simple example of what this schedule might look like.)

Figure 4. Sample Schedule of Property Tax Levies and Collections

   

Debt Capacity Information

            This is one place where significant changes in government finance were not being captured in the statistical section. Although general obligation (G.O.) debt was the overwhelmingly dominant form of borrowing for general purpose local governments 25 years ago, it was not the primary form of debt for many other types of governments. In the time since then, many local governments have greatly diversified their debt portfolios to include many other types of debt.

            Statement 44 captures these changes by adding a new schedule of ratios of all outstanding debt. (See Figure 5.) Outstanding debt will be shown by type—for instance, G.O., revenue-backed bonds, loans, certificates of participation, capital leases—and divided between governmental and business-type activities. It does not include, however, other non-debt long-term liabilities such as claims and judgments, compensated absences, net pension obligations, or net OPEB obligations.

            Two ratios are presented—total debt divided by population and by personal income. Some flexibility is afforded here, though. Personal income information generally is available annually only for larger jurisdictions; smaller jurisdictions may calculate a ratio of debt divided by estimated actual value of taxable property instead. Also, if personal income or resident population are not particularly relevant to a government, it may use a more relevant comparable indicator. For example, a public college or university might divide debt by enrollment instead. Because many governments do not have complete debt information for the last 10 years, they may only begin this schedule prospectively, or dating back only as far as the year they implemented Statement 34.

Figure 5. Sample Ratios of Outstanding Debt Schedule

   

            The new, broader debt schedule is a complement to the previous schedule of general bonded debt. Statement 44 clarifies that the latter schedule should include G.O. debt and all debt repaid with general resources, and not just G.O. debt as many governments were doing. Two ratios will be presented—total general bonded debt divided by estimated actual value of taxable property (not assessed value) and population. Again, there is some flexibility to change the denominator if debt is not repaid with property tax revenues or if resident population is not relevant.

            In the past, governments often reduced the general bonded debt number by any amounts set aside in sinking funds and calculated ratios based on this net number. However, there is no guarantee that those resources will actually be used to pay down debt, and some may pay interest, which would not serve to reduce the outstanding debt amount at all. Therefore, Statement 44 states that governments may subtract only accumulated resources that are legally restricted (as defined in GASB Statements 34 and No. 46, Net Assets Restricted by Enabling Legislation) to repaying principal. Some governments also deducted G.O. debt that was repaid with proprietary fund resources; that is no longer allowed, either—all G.O. debt should be included.

            The schedule presenting the computation of a government’s portion of the debt of governments it overlaps with geographically was expanded to include all governmental activities-related debt. Previously, the types of debt included varied from government to government. As with overlapping revenue rates, the potential for lengthy schedules led the GASB to exempt states, regional governments, and counties from presenting this schedule, though regional and county governments are encouraged to do so. Statement 44 also seeks more uniformity across governments by specifying how overlapping debt should be calculated and requiring governments to explain their calculations.

            The schedule with the computation of the legal debt margin—the difference between a government’s outstanding debt and the total amount it is legally allowed to borrow—continues to be required. Statement 44 improves upon the schedule by giving it an historical dimension. Although the computation itself is presented only for the current year, the schedule will now also include the key information pieces in the computation for the past 10 years—the debt limit amount, the debt applicable to the limit, the legal debt margin amount, and then a ratio of either the margin or the applicable debt divided by the debt limit.

            The fourth and final debt capacity schedule contains information about pledged-revenue coverage. Governments previously presented a schedule of revenue bond coverage. However, the GASB concluded that was too narrow to suit the needs of statistical section users, who were also concerned with the sufficiency of revenues to cover the repayment of other types of debt backed by a pledged revenue. The schedule should now include non–G.O. debt secured by a pledge of a specific revenue stream and should present for the past 10 years the relevant gross revenues (and specific operating expenses, if applicable, to be subtracted to obtain net available revenues), principal and interest requirements, and a coverage ratio (gross or net revenues divided by the sum of interest and principal payments). The schedule also should identify the nature of the revenues pledged for each type of debt presented.

Still to Come…

            The continuation of this article in the next issue will cover demographic and economic information and the new operating information, as well as requirements to disclose sources, assumptions, and methodologies and to provide narrative explanations in the schedules.