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01 Attachment 6 - Public Comment Received between 1101 am January 9 2020 and 1100 am January 10 2020From: Phil Koen Sent: Thursday, January 09, 2020 7:55 PM To: Marcia Jensen ; BSpector; Marico Sayoc; Rob Rennie Cc: Laurel Prevetti; Arn Andrews ; Jak Van Nada Subject: Background Information for Priorities Setting Dear Honorable Mayor and Council Members, Attached please find a summary schedule of the 2019 Statement of Activities which has been prepared from the recently approved 2019 CAFR and a “users perspective” published by GASB which discusses the Statement of Activities financial statement. At the December 2019 meeting when the Council approved the 2019 CAFR, there was no discussion of the Statement of Activities. As the GASB “user perspective” states, the government-wide statement of activities brings the financial activity together in one place and reports accrual-based economic resources information. This is an extremely important financial statement and I would encourage the Council to read the user perspective so each of you are fully informed. The summary schedule I have attached shows the trend from 2015 through 2019 for “net total governmental expenditures”. As the schedule shows, the Town has experienced a 72% increase in such expenditures since 2015. This has been driven by materially increases in pension and OPEB expenses as well as salary increases. As a result, the Town is now faced with the reality that at the current levels of government-wide expenditure and general tax revenues, there is no longer a surplus of tax revenues over expenditures. In 2015 the Town had a $7.6m surplus. As of 2019 this surplus was only $118,000. The only reason the Town recognized an increase in “net change of assets” in 2019 was due to “non-cash” mark to market investment income and $1.9m in one time cash proceeds from the sale of Town property. I am bringing this to your attention so you are fully aware of the current financial condition of the Town and the erosion of financial flexibility over the past 4 years. As the Town Manager correctly states in her cover memo to the Council, the “Council’s identification of strategic priorities is a critical step in the budget process for the fiscal year and ensures that Town resources are directed to these priorities”. However, without sufficient financial flexibility the Town maybe severely limited in its ability to finance incremental expenditures arising from the adoption of incremental priorities. I would suggest that you have the Staff address the Statement of Activities and make sure the Council fully understands the results as reported and the recent trend in net total government expenditures. I would also suggest that as part of the priority setting discussion the Council discuss with the Staff how any priorities that require incremental expense will be funded. Thank you. Phil Koen ATTACHMENT 6 Financial Statement Users The User's Perspective›› THE USER'S PERSPECTIVE MAY 2007 Touring the Financial Report, Part II: The Statement of Activities The preceding article in this issue examined the statement of net assets, one of two accrual- based financial statements introduced by GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments. These statements are significant because they bring together information that previously had been spread among various funds and reported on different accounting bases. This article explores the statement of activities, its unique design, and the information it contains. Overview As described in the article on the statement of net assets, the government-wide financial statements overcome many of the comparability problems encountered by users of the fund financial statements. ( See that article for a more detailed discussion of what is covered in this overview.) These problems resulted from the fund financial information being spread among multiple financial statements and reported using different bases of accounting. For example, the proprietary and fiduciary funds report information use an accrual basis and economic resources measurement focus, including all economic transactions and presenting both long- and short-term consequences. But the governmental funds report information use the modified accrual basis and current financial resources measurement focus and generally do not include assets lasting more than one year (such as infrastructure) or liabilities that are not due and payable (such as bonds). The government-wide statements bring the financial activity together in one place and report accrual-based economic resources information. The government-wide statements organize information by whether it relates to governmental activities or business-type activities. The fiduciary funds (such as pension trusts and agency funds) are not included in the government-wide statements, because the resources they account for do not belong to the government. The governmental and business-type activities combine to represent the total primary government. Additionally, discretely presented component units—legally separate entities for which the primary government is financially accountable —are shown on the face of the government-wide statements but are not included in the total for the primary government. The Statement of Activities A traditional income or change statement is a fairly straightforward affair. It lists revenues and expenses or expenditures, and often calculates the difference between them. It may then show other changes that are not revenues, expenses, or expenditures (such as capital contributions or other financing sources and uses), before presenting a total change in net assets, fund balance, or some other measure of financial position. All of this is typically done on a single page, running from top to bottom. As you shall see, the government-wide statement of activities is anything but a traditional income statement. (If you check management’s discussion and analysis, the narrative section preceding the financial statements, you will find summarized information from the statement of activities presented in a more traditional format.) The Design of the Statement The statement of activities runs from left to right along the top and the proceeds downward on the right-hand side. (See Figure 1.) It begins with expenses in the upper left-hand corner and presents program revenues to the immediate right. The upper right-hand corner calculates net expenses or net revenues—the difference between expenses and program revenues. The lower section then presents taxes and other general revenues, as well as other changes in net assets. The statement of activities accomplishes the tasks of more recognizable income statements— revenues, expenses, and other changes in net assets are presented, allowing the reader to see how net assets changed during the year. But the arrangement of the statement of activities also provides previously unavailable detail that focuses on how a government finances its services. As this article will describe, the statement compares the costs (expenses) of a government’s functions and programs with the resources those functions or programs generate themselves (program revenues). To the degree that functions or programs cost more than they raise, the statement shows how the government chose to finance the difference (principally general revenues). Expenses The financial statements of state and local governments include several measures of the outflows of resources, including cash (in the proprietary funds statement of cash flows) and current financial resources (in the governmental funds statement of revenues, expenditures, and changes in fund balances). Accrual-basis expenses more comprehensively measure the cost of providing services and operating a government. Expenses include costs that have been incurred during the year regardless of whether cash actually changed hands. (Likewise, accrual-basis revenues will be reported even if a government has not yet received cash.) For example, expenses include (a) retirement benefits that were earned during the year but will not be received by the employees until the future and (b) the depreciation of capital assets. (See the companion article for a more complete description of depreciation.) The expenses in the upper left of the statement are presented by major function or program, beginning with the governmental activities, then the business-type activities and the total for the primary government. The expenses of discretely presented component units—legally separate entities for which the government is financially accountable—are shown below the primary government total. These are direct expenses that are clearly attributable to each function or program. Governments are not required to allocate indirect expenses to the functional or programmatic categories, but if they do, they will present an additional column, immediately to the right of the expenses, that shows how the indirect expenses were allocated among the categories. Program Revenues Like direct expenses, program revenues are directly linked to the functions or programs listed to the left. One type of program revenue is charges for services. Charges for services may include a variety of fees, such as garbage collection fees, museum admissions, ball field permits, and parking fines. Most grants and contributions, the other type of program revenue, are intergovernmental aid for specific functions and programs, like education aid, but also may include amounts provided by not-for-profit organizations and other nongovernmental entities. Grants and contributions for operating purposes and capital projects are shown separately. Together, program revenues represent resources that are generated in the process of providing a particular service or operating a particular part of a government. It should be noted that program revenues are generated by the associated function or programs; however, those revenues are not always restricted to use in those programs. Net Cost of Services Although some governmental functions are self-supporting, raising enough revenue on their own to cover their costs, most traditional services are not—they depend upon tax revenues to make up the difference. The upper right-hand portion of the statement of activities reveals the degree to which the functions and programs presented are self-financing. Figure 1. Sample Government-wide Statement of Activities A negative number (shown in parentheses in Figure 1) means that expenses exceed program revenues, and the function or program requires additional funding from taxes or other sources. It is called a net expense. For example, the public works function for this illustrative government had expenses of about $10.1 million, charges for services of $850,000, and over $2.2 million in capital grants and contributions. Public works expenses exceeded program revenues by $7,029,313, which can be seen in the governmental activities column under the “Net (Expense) Revenue and Changes in Net Assets” section. This type of result is not unusual in that most government activities by their nature are not intended to break even. On the other hand, it is not unusual for business-type activities to generate close to or more than enough program revenues to cover their expenses—in other words, to produce net revenues. The water and sewer functions in Figure 1 both were net contributors to the government’s resources, with program revenues that exceeded expenses by $1,675,944 and $2,746,658, respectively. General Revenues and Other Changes in Net Assets The net (expense) revenue section identifies the degree to which the various programs and functions rely on taxes and other general revenues for their funding. The section below on the right- hand side then explains how that need for funding is met. All taxes are presented in the general revenues section, usually by type. This includes taxes that are dedicated to particular purposes— although these revenues may be legally constrained to a specific program or function, they are not grants, contributions, or charges for service and therefore do not qualify as program revenues. General revenues also will include unrestricted aid from other governments—grants that are provided for general support and are not tied to a particular program. Investment earnings typically will be found here as well. The general revenues are followed by other items that also cause net assets to rise and fall. Transfers of resources between the governmental and business-type activities and the discretely presented component units will be shown on their own line. Other changes in net assets that are required to be shown separately are contributions to term and permanent endowments and permanent fund principal, special items, and extraordinary items. Extraordinary items are increases or decreases in net assets that are both (a) unusual in nature and (b) infrequent in occurrence. Extraordinary items, as their name implies, do not appear in the financial statements very often. Special items are either unusual or infrequent and are within the control of the government, whereas extraordinary items seldom are. A special item might be the gain or loss on the sale of a capital asset for a government that does not commonly sell capital assets. Special and extraordinary items are set apart because they are not a part of the usual inflows and outflows of the fiscal year. Showing them separately helps the reader to assess whether a government is covering its routine costs with routine resources, or if it is resorting to other means. Change in Net Assets The general revenues and other changes in net assets are totaled and added to the net (expense) revenue totals to produce the total change in net assets for the period covered by the statements. Governments will show the amount of net assets as of the beginning of the year, add or subtract the change in net assets for the year, and then present the ending net assets. The ending amount will agree with what is shown in the statement of net assets. Pertinent Note Disclosures The notes to the financial statements contain disclosures helpful in understanding information in the statement of activities, including: Further Reading These volumes, part of the GASB’s User Guide Series, are available individually and in a package from the GASB. Types of transactions included in program revenues Policy for allocating indirect expenses Interest expense included in the direct expenses of the functions and programs Property tax calendar Amounts of on-behalf payments made by other governments for salaries and fringe benefits. An Analyst’s Guide to Government Financial Statements What Else You Should Know about a Government’s Finances: A Guide to Notes to the Financial Statements and Supporting Information Learn more about the user guides See a slide presentation on the user guides Order a user guide Trend Analysis of Excess Tax Revenues 2019 change from 2015 Over Governmental Expenditures 2015 2016 2017 2018 2019 $% Total Governmental Expenditures 34,271 34,417 39,290 41,833 44,236 9,965 29.1% Less: Program Revenues and Grants 16,485 13,571 12,445 14,236 13,672 (2,813)-17.1% Net Total Governmental Expenditures 17,786 20,846 26,845 27,597 30,564 12,778 71.8% Less: All Tax Revenue 25,412 25,519 28,398 28,565 30,682 5,270 20.7% Excess Tax Revenue over Expenditures 7,626 4,673 1,553 968 118 (7,508)-98.5% Plus: Motor Vechicle in Lieu 0 12 14 16 14 14 Investment Earnings 428 698 192 333 1,809 1,381 Miscellaneous/Disposal of Assets 813 598 528 622 2,407 1,594 Net Position 8,867 5,981 2,287 1,939 4,348 (4,519)