U.S. accounting regulators want state and local governments to put financial projections in their annual reports, a shift they say would give investors a more accurate picture of the fiscal pressure facing municipalities.
The Governmental Accounting Standards Board, which sets the rules followed by companies that audit reports, said today that municipalities should be forced to disclose five-year projections of revenue, expenses and other obligations, including debt service and pension costs.
“Users of financial reports are looking for additional information,” Robert Attmore, chairman of the Norwalk, Connecticut-based board, said in an interview. “They need this to be able to determine the financial health or the financial viability of the government.”
The recession and the 2008 credit crisis exposed the vulnerability of municipalities as tax revenue faltered, pensions lost money and financial turmoil hit them with spiraling interest bills. The pressure has since left public officials struggling with budget deficits and raised concern about the ability of governments to pay their bills.
GASB joins other regulators scrutinizing state and local governments’ disclosures. The Securities and Exchange Commission is examining whether to overhaul the rules covering local governments that raise money by selling bonds. The Dodd-Frank law passed by Congress in 2010 requires the U.S. Government Accountability Office to report on whether changes are needed.
The announcement by GASB marks the first step toward changing U.S. accounting rules, a process that may not be completed for two years should the board move forward, Attmore said.
GASB plans to hold hearings and solicit comments before deciding whether to draft a proposed change. While GASB rules aren’t federally enforced, they are followed by auditors who determine whether annual reports comply with generally accepted accounting principles.
The proposal released today would show whether governments are poised to face rising pension costs by failing to make their annual payments into retirement funds.
“The current economic downturn has emphasized what has been known for a long time: Information is not always publicly available regarding the financial challenges facing governments,’” Attmore said.
The proposal would also force officials to disclose how dependent they are on funds from other governments.
Struggling with their own shortfalls, some states have withheld funding for localities. According to a survey by the National League of Cities this year, 60 percent of city officials said their governments were affected by decreased state aid. Looming federal budget cuts may threaten military- dominated economies or programs that states and cities rely upon.
The federal government’s plight has underscored the need for more disclosure, Attmore said.
“That creates some increased anxiety among users of state and local government reports,” Attmore said. “At the current time, you don’t get to see those dependencies between those different levels of government.”
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