Emerging Issues in
Government Accounting
& Auditing
1
Today’s Agenda
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State Fiscal Outlook
Legislative and Regulatory Issues
Public Pensions
Transparency Issues
GAO’s Green Book
Other Emerging Issues
State Fiscal
Outlook
Improving, but…
Time to Celebrate?
www.nasbo.org
4
State Fiscal Overview
• Fiscal 2015 marks the 5th consecutive annual
increase in general fund spending and revenues
• Signs of fiscal distress have subsided and the
fiscal environment for most states indicates
continued stability and slow growth
• Some states are facing difficult budget
environments due to various issues (oil)
• Fiscal improvements over the last several years
have not returned states to normal patterns of
growth
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Top Issues
•
•
•
•
•
Infrastructure
Education (FL, UT)
Tax Cuts (AR, ME)
Shortfalls (Some States)
Other Revenue Issues (Tolls, Sin
Taxes)
• Health Care (Medicaid Issues)
6
Current Fiscal Situation:
Indicators
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Slow Budget Growth Continues
General Fund Expenditure Growth (%)
12
10
8
*Average
6
4
%
2
0
-2
-4
-6
-8
*37-year historical average annual rate of growth is 5.5 percent
Source: NASBO Fall 2014 Fiscal Survey of States
*Fiscal 2015 numbers are enacted
8
GF Spending Still Below Pre-Recession Peak
Adjusted for Inflation
General Fund Spending: FY 2007-FY 2015
$800
$771
$752
$750
*
$729
$695
$687
$700
$655
$667
$661
$650
$623
$645
$600
$550
$500
FY 2007
FY 2008 FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
Source: NASBO Fall 2014 Fiscal Survey of States; Fiscal 2015 numbers are enacted
*Aggregate spending levels would need to be at $771 billion to remain equivalent with real 2008 spending levels.
www.nasbo.org
9
States Restoring Some Cuts Made During
Recession
Fiscal 2015 Enacted General Fund Spending Changes by Category ($ in
Billions)
12
$11.1
10
$8.5
($ in Billions)
8
6
$5.8
$4.4
4
2
$1.0
$1.3
0
-2
-$0.6
Source: NASBO Fall 2014 Fiscal Survey
10
GF Revenue Also Below Pre-Recession Peak
Adjusted for Inflation
General Fund Revenue: FY 2007-FY 2015
$800
$748
$750
$716
$700
$680
$726
$669
$655
$650
$763
$650
$626
$610
$600
$550
$500
FY 2007
FY 2008 FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
Source: NASBO Fall 2014 Fiscal Survey of States; Fiscal 2015 numbers are enacted
*Aggregate revenue levels would need to be $763 billon to remain equivalent with real 2008 revenue levels.
www.nasbo.org
11
State Revenue Grows in 3rd Quarter of 2014 after
Declining in 2nd Quarter
Year-Over-Year Real Change in
Quarterly State Tax Revenue
15
10
5
0
%
-5
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-10
-15
-20
Source: Fiscal Studies Program, Rockefeller Institute of Government; U.S. Census Bureau
*3rd quarter of 2014 is based on 45 early reporting states
www.nasbo.org
12
States Reserves Haven’t Reached Peak Levels
Balances as a Percent of Expenditures
14.0%
12.0%
11.5%
10.5%
10.1%
10.0%
8.6%
8.0%
8.9%
8.4%
7.3%
7.1%
6.0%
5.7%
5.2%
4.0%
2.0%
0.0%
FY 06
FY 07
FY 08
FY 09
FY 10
FY 11
FY 12
FY 13
FY 14
FY 15
Balances as a Percent of Expenditures
www.nasbo.org
13
Minimal Midyear Budget Cuts So Far in Fiscal 2015
$40
$ In Millions
$35
Recession ends
28
$25
$20
$15
$10
20
50
41 39
37 37
35
$30
Recession ends
40
Recession ends
22
9 8
13
$5
7
13
5 2 4
2 3 1
$0
20
8
11
8 7
10
0
Number of states
Source: NASBO Fall 2014 Fiscal Survey
30
23
18
16
Number of States
Enacted Budget Cuts Made After the Budget Passed
($ In Millions)
Amount of reduction
*Fiscal 2015 midyear cuts are ongoing
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Background on State
Spending Trends
www.nasbo.org
15
Spending by Funding Source
(Percentage)
Total State Expenditures by Funding Source,
Estimated Fiscal 2014
Bonds
2.1%
Other State Funds
27.1%
General Funds
40.5%
Federal Funds
30.3%
Source: NASBO State Expenditure Report
16
Total State Expenditures by Function
Estimated Fiscal 2014
Medicaid
25.8%
Elementary &
Secondary
Education
19.5%
Higher
Education
10.1%
Public
Assistance
1.4%
Transportation
7.7%
Corrections
3.1%
Source: NASBO State Expenditure Report
All Other
32.4%
17
Total Expenditure Percentage Growth in
Spending Categories Over 10 Years
Percentage Growth in Spending Categories
Between Fiscal 2005-Fiscal 2014 (Total
Funds)
70
60
50
40
30
20
10
0
62.7
28.9
31.2
31.6
36.1
41
41.3
1.5
Source: NASBO State Expenditure Report
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Structural Imbalance
Year ago % change, calendar year
9
8
7
CMS state Medicaid spending forecast
Avg. state tax
growth since 1986
6
%
5
4
Moody’s Analytics state tax revenue forecast
3
2
13
14
15
16
17
18
19
20
Sources: Moody’s Analytics, CMS, Census Bureau
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Outlook
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Final Issues
–Significant Income Tax Volatility
–Crowd Out!
–Information Technology
–Performance
–Health Care
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Legislative and
Regulatory Issues
Money Market Mutual Funds (MMMF)
• Final Rule issued by SEC on July 23,
2014
– Institutional prime, retail, and municipal
(tax-exempt) funds must maintain a
floating net asset value (NAV) instead of a
stable NAV
– Effective date for floating NAV provisions
is October 14, 2016
– www.sec.gov
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Money Market Mutual Funds (MMMF)
• Concerns:
– Governments purchase MMMFs as part of
their investment portfolios
• Floating NAV would require changes to laws
• Adjustments to accounting systems
– MMMFs are the largest investors of S-T
muni bonds
• This change may make MMMFs less attractive
to investors, limiting the MMMFs’ purchasing
power
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Money Market Mutual Funds (MMMF)
• Concerns:
– Local government investment pools (LGIPs)
• Current GASB standards that require LGIPs to
operate in a manner consistent with SEC rule 2a-7
governing money market funds
• Final rule would put many out of GASB compliance
– Would require LGIPs to report its share of any unrealized
gains or losses to each participant, and
– Each participant must report these gains or losses on
their balance sheets
• As a result, many LGIPs would be faced with higher
operational costs
– GASB has added the issue to their technical
agenda
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Money Market Mutual Funds (MMMF)
• GASB
– Added project to technical agenda in
December 2014
– Key questions:
• Will GASB continue to link to SEC definition
(floating NAV)
• Or, will it de-link from SEC and create its own
criteria (continue to allow for stable NAV)
– Exposure Draft expected in 2nd quarter
2015
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Municipalities Continuing Disclosure
Cooperation (MCDC) Initiative
• SEC initiative
– Encourages issuers and underwriters of municipal securities to
self-report certain violations of the federal securities laws
• In return, SEC will recommend favorable settlement terms
to municipal issuers and underwriters who self-report that
they have made inaccurate statements in prior bond
offerings about their compliance with continuing disclosure
obligations.
• Deadlines:
– September 10, 2014 for dealers
– December 1, 2014 for issuers
• Currently monitoring SEC enforcement
– Will help determine materiality in the SEC’s view
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SEC Enforcement Actions
• The SEC also continues to aggressively pursue
enforcement actions against state and local
governments.
– In June 2014, the SEC obtained an emergency court order
to prevent the city of Harvey, Illinois, from selling bonds in
the municipal market amid allegations the city engaged in
fraudulent market transactions.
– In August 2014, the SEC announced a settled action against
the state of Kansas. The SEC alleged the state failed to
disclose a significant unfunded liability in its pension system
in any of eight series of bonds offered over an 11-month
period.
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Liquidity Coverage Ratio
• Final Rule issued by OCC (Treasury),
Federal Reserve and FDIC on
September 3, 2014
– Implements a quantitative liquidity
requirement designed to meet a defined
level of liquidity stress
– Effective date is January 1, 2015
– http://www.federalreserve.gov/newsevent
s/press/bcreg/bcreg20140903a1.pdf
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Liquidity Coverage Ratio
• Concerns:
– Excludes municipal securities from the
definition of “High Quality Liquid Assets”
(HQLAs)
• Will increase borrowing costs for municipal
issuers
• Reduce market liquidity, increase volatility
• Disadvantage U.S. municipal securities
relative to foreign governments
• Impact collateralization of public funds
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Liquid Coverage Ratio
• Although the final rule failed to classify
municipal securities as HQLAs, the
regulators in approving the final rule have
indicated that they would consider rule
modifications that would classify certain
municipal securities as HQLAs.
• Congressional members have also
expressed concern regarding the slow
response to a rule modification.
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OMB Grant Reform
• Uniform Administrative Requirements, Cost
Principles, and Audit Requirements for Federal
Awards (“Uniform Guidance”)
– Final Rule issued on December 26, 2013
• Contained in 2 CFR Part 200
• Effective dates:
– Federal agencies on December 13, 2014
– Subpart F audit requirements are applicable to fiscal
years beginning on or after December 26, 2014
– Interim Rule (for agencies) issued on December 19,
2014
– Resources:
• http://www.whitehouse.gov/omb/grants_docs/
• https://cfo.gov/cofar/
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OMB Grant Reform
• Goals of the new guidance:
– Strengthen oversight of federal funds to
reduce the risk of fraud, waste and abuse
– Streamline guidance for federal awards to
ease administrative burden
– More effectively focus federal resources on
improving performance and outcomes while
ensuring financial integrity
– Deliver on the promise of more efficient,
effective and transparent government
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OMB Grant Reform
• Consolidates 8 existing circulars
• Reforms are in three primary areas:
1. Audit requirements (Circulars A-133,
A-50)
2. Cost principles (Circulars A-21, A-87,
A-122)
3. Administrative requirements (the
government-wide Common Rule
implementing Circulars A-89, A-102,
A-110)
34
OMB Grant Reform
• Audit Threshold (200.501)
– Raises threshold from $500,000 to $750,000
• Reduces audit burden on approximately 6,200
smaller entities while maintaining audit coverage
of more than 99.7% of federal awards
• Increase of $250,000 is in line with the previous
increase in 2003
• Reduction is consistent with OMB’s objective to
concentrate audit resolution and oversight
resources on higher dollar and higher risk awards
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Audit Requirements – Single Audits
• Percentage of Coverage Rule
(200.518(f))
– Reduce the minimum coverage required
from 50% for a regular auditee and 25%
for a low-risk auditee to:
• 40% for a regular auditee and
• 20% for a low-risk auditee
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Audit Requirements – Single Audits
• Report Submission (200.512)
– Requires publication of reports online with
safeguards for PPII (exception for tribes)
• All auditees must submit the reporting package
and data collection form electronically to the FAC
• FAC submissions must be in text-based PDF and
unlocked for improved accessibility
• Auditors & auditees must ensure no PPII in report.
• Auditee must sign statement that:
– Reports do not include PPII
– FAC is authorized to make reports publicly
available
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Administrative Requirements
(Common Rule)
• Internal Control Requirement
(200.303)
– Entity must have internal controls
which should be in compliance with
COSO and GAO Green Book
• However, FAQ clarified this requirement
38
Grant Reform Implementation
• OMB continues to work on a series of
FAQ’s to clarify the guidance
• OMB is holding ongoing meetings with
stakeholders
• OMB has developed metrics to identify
if the reforms have achieved the
stated purpose of increasing
efficiencies and reducing burden
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Relevant FAQs
• “Should” vs. “Must” in general (.303-2)
– Does the word “should” really mean
“must”?
• No. The word “must” means
requirements. “Should” is used to
indicated best practices or recommended
approaches that COFAR wants nonFederal entities to be aware of, but not
necessarily be required to comply with.
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Relevant FAQs
• “Should” vs. “Must” and the Green
Book (.303-3)
– What is the expectation about a nonFederal entities compliance with the
Green Book?
• Non-Federal entity must establish and
maintain effective internal controls. However,
there is no requirement to prescriptively
follow Green Book (or COSO), nor is a
reconciliation required.
41
Relevant FAQs
• Effective Dates and Incremental Funding
(.110-7)
– How does the effective date apply to
incremental funding?
• Effective for first funding increment issued on or
after 12/16/14 for:
– new awards and for agencies that consider
incremental funding to be opportunities to change
award terms and conditions
• For incremental funding not subject, nonFederal entities are not obligated to separate
and track old funds and new funds, but may do
at their discretion.
42
Relevant FAQs
• How does the effective date impact
formula and entitlement programs?
(.110-8)
– The effective date applies to formula and
entitlement awards that are covered by
the Uniform Guidance as it does to other
awards.
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Practical Implementation Issue
• Audit findings follow-up (200.511)
– Auditee is responsible for follow-up and
corrective action on all audit findings.
– Corrective action plan and summary
schedule of prior audit findings must
include findings relating to the financial
statements which are reported under
GAGAS.
• Must now include non-federal funds in CAP
and schedule of prior audit findings.
44
Metrics
• OMB Memorandum M-14-17
– Issued September 30, 2014
• For Single Audits, the number of:
– Modified Opinions for Higher Risk Major Programs
– Audit Findings of Material Weaknesses in Internal
Controls for Higher Risk Major Programs
– Repeat Findings for Higher Risk Major Programs
(starting in FY 2015)
– Major Programs selected for audit; and
– Audit objectives in the Compliance Supplement
• https://www.whitehouse.gov/sites/default/files/o
mb/memoranda/2014/m-14-17.pdf
45
Public Pensions
A Look at Implementation of
GASB’s New Standards and Other
Interesting Developments
GASB’s New Pension Standards
• New Pension Standards (67 and 68)
– Statement 67 (pension plans)
• Effective for FYs beginning after June 15, 2013
– Statement 68 (employers)
• Effective for FYs beginning after June 15, 2014
– Multiple-employer plans
• Employers must now report their share of the
plan’s cumulative net pension liability in their own
financial statements
– AICPA white papers for a cost-sharing and
agent multiple-employer plans
47
GASB Pension Changes Can Result
in Confusion
• GASB and other stakeholders working
on an education and resource project
• Three different numbers
– Books—computing an annual position regarding
pensions for financial statements (GASB)
– Bonds—calculating how pension obligations
affect a government’s creditworthiness (Ratings
Agencies)
– Budgets—determining the appropriate annual
contribution to the retirement system for sound
funding (Funding Policies)
48
Pension Standards Implementation –
Some Interesting Observations
• New Math – Why Some Pension
Plans Could Soon Look a Whole Lot
Worse – Governing, April 15, 2014
– Examined various pension metrics from
the implementation of GASB 67 of 80
pension plans
49
Pension Standards Implementation –
Some Interesting Observations
• Discount Rate (a key force)
– About one-third adjusted their rate down
• Only nine plans in four states lowered the
rate by more than a half-percentage point
– KY Teachers reduced its rate 2% to 5.23%
• Plans had an average return of 14.6%
50
Pension Standards Implementation –
Some Interesting Observations
• Total Liability
– Overall, total liability increased an
average of only 9%
– But, some plans saw a much more
dramatic increase
• NJ state employee plan saw an increase of
55%
51
Pension Standards Implementation –
Some Interesting Observations
• Funding levels
– Overall, funding levels increased from
70% in FY 2013 to 74% in FY 2014
– However, many states fared much worse
• NJ’s Public Employee plan’s funded status
fell to 28% - a 20% decline
• NJ Teachers plan fell to 34% - a 23% decline
52
Pension Standards Implementation –
Some Interesting Observations
• Unfunded liabilities also increased
dramatically for some states
53
Pension Standards Implementation –
Some Interesting Observations
• Reliability Matters
– Governments that regularly contribute to
their pensions have significantly healthier
pensions overall.
54
Transparency Issues
FFATA, DATA Act
Increased Transparency in Reporting
of Federal Awards
• ARRA – is history!
• FFATA
– Monthly reporting of federal awards and
contracts at prime/first-tier sub levels
– Ongoing
• DATA
– Passed into law on May 9, 2014
• Quarterly expenditures for all grants and
contracts
• Most reporting requirements would be on
grantor agencies, not recipients
56
DATA Act: Increased Transparency in
Reporting of Federal Awards
• Requires that government-wide
financial data standards be
established for all federal funds and
be used by both federal agencies and
recipients
– Goal is to improve the usability,
transparency and accountability of
financial and performance information
– http://fedspendingtransparency.github.io/
dataelements/
57
DATA Act: Financial Data Standards
• Overall 57 data elements
– Many from FFATA
• e.g., legal business name and address,
CFDA number, award ID, current value of the
award, primary place of performance, etc.
– New ones required by the DATA Act (8)
• e.g., object class, appropriations account,
budget authority appropriated, obligation,
unobligated amount, other budgetary
resources, program activity, and outlay.
– Current out for comment
58
DATA Act: Pilots and Reviews
• The Act requires that a pilot be
established to develop recommendations
for the use of common reporting
elements, the elimination of unnecessary
duplication in financial reporting, and the
reduction of compliance costs for
recipients.
• The law also requires a series of reviews
and audits by the GAO and agency
inspectors general.
59
DATA Act: Pilots and Reviews
• May 2015 pilot launch:
– Deploy a blog-type dialogue to initiate a discussion
among the grants community to discuss opportunities to
reduce burden and compliance costs for Federal award
recipients
– Launch a Common Data Element Repository Library (CDERLibrary) (a federal-wide, “authoritative source” to
facilitate consistency of federal financial and business
terms and definitions) inclusive of agreed-upon
standardized data elements
– Launch an expanded Grants.gov portal for public use to
promote greater transparency and easier access to
grants’ lifecycle information
• Report to Congress on results of pilot (Aug 2017)
60
Increased Transparency: Interim
Financial Reporting
• NASACT best practices document
– Issued August 2013
– Designed to provide interested parties more
timely financial information
•
•
•
•
•
Voluntary – aimed at state governments
Financial information, not financial statements
Unaudited, cash/budgetary basis
Quarterly postings in a central, web-based location
http://www.nasact.org/files/News_and_Publications/W
hite_Papers_Reports/2013_08_Best_Practices_Conti
nuing_Disclosure.pdf
– Vermont and Georgia have implemented
61
GAO’s New
Green Book
A Potential Internal Control Model for
State and Local Governments
Revised Green Book
•Consists of two sections:
•Overview
•Standards
•Establishes:
•Definition of internal control
•Categories of objectives
•Components and principles of
internal control
•Requirements for effectiveness
63
Revised Green Book: Principles
64
Green Book Adoption in State
Government
• A number of states, including
Minnesota and Ohio, have adopted (or
are in the process of adopting) the
Green Book on a statewide basis
– Minnesota
• Passed by the Legislature in the 2009
session (Minn. Statute Section 16A.057)
• Originally budgeted for up to 6 staff
65
Other Emerging
Issues
Things on the radar…
GASB’s Proposed Standard – Other
Postemployment Benefits (OPEB)
• Due process
– Exposure drafts issued in June 2014
– Public hearings in September 2014
• Release and effective dates
– Final statements expected in June 2015
– Effective dates
• Plans – June 2017
• Employers – June 2018
67
GASB’s Proposed Standard – Other
Postemployment Benefits (OPEB)
• Built on the new pension standards
– Designed to improve OPEB information
for:
• decision-making and accountability purposes
• comparability across governments
• transparency
– Establishes standards for:
• liabilities
• deferred inflows and outflows of resources
• expense/expenditures
68
Continued Interest in the Municipal
Market
• Securities and Exchange Commission
enforcement unit on Municipal Finance and
Public Pensions
• Speeches by SEC Commissioners Gallagher (R)
and Aguilar (D)
• Municipal Securities Rulemaking Board
expanded jurisdiction under Dodd-Frank Act
(protect Municipal Entities)
• Financial Stability Oversight Council (FSOC)
monitoring of markets and state/local economies
69
Tax Reform
• Tax Reform Act of 2014 introduced by Dave
Camp (R-MI), chair, House Ways and
Means Committee
• Several impacts on state and local gov’t
– Eliminates deduction of state & local taxes
– Limits municipal tax exemption to 25%
– Terminates exemption of interest on private activity
bonds
– Repeals tax exemption of advance refunding bonds
– Current Chairman Paul Ryan has be quoted as
using the Camp bill as a starting point for discussion
70
Affordable Care Act
• Final regulations issued:
– IRC 4980H, Shared Responsibility for
Employers (February 2014)
• http://www.gpo.gov/fdsys/pkg/FR-2014-0212/pdf/2014-03082.pdf
– IRC 6055, Information Reporting of Minimum
Essential Coverage (March 2014)
• www.gpo.gov/fdsys/pkg/FR-2014-03-10/pdf/201405051.pdf
– IRC 6056, Information Reporting by Applicable
Large Employers on Health Insurance Coverage
Offered Under Employer Sponsored Plans
(March 2014)
• www.gpo.gov/fdsys/pkg/FR-2014-03-10/pdf/201405050.pdf
71
These continue to
be interesting
times…
Questions or
Comments?
R. Kinney Poynter
NASACT
kpoynter@nasact.org
(859) 276-1147