Specialized Governmental Accounting Topics and Policies

1. GFOAz May 17, 2012 Quarterly Training Tom Duensing Specialized Governmental Accounting Topics and Policies

2. City of maricopa

3. Incorporated in 2003 (88th Municipality) • 2010 Population = 43,482 (4,081% growth) • Average Household Income = $75,000 • 61% Residents – Degree • 214 FTS • General Fund Budget = $29.8 million • Explosive Growth = Explosive Construction City of maricopa

4. What a ride

5. Capital Asset Accounting Long-Term Debt Accounting Pension Accounting (OPEB) Grant Accounting Financial Policies Overview

6. Describes the Events Reported in the Operating Statement • Governmental Funds – Transactions Affect the Current Financial Resources – What are the transactions that affect the resources available for spending? • GW Statements & Propriety Funds – Transactions Affect the Economic Resources Measurement Focus

7. Governmental Funds vs. GW/Proprietary Funds – Affect on Fund Balance vs. Net Assets Measurement Focus

8. Governmental Funds vs. Proprietary Funds – Affect on Fund Balance vs. Net Assets Basis of Accounting

9. Acquiring Capital Assets • Capital Projects Funds • Acquisition or Construction of Major of Major Capital Facilities • Non-Capital Projects Governmental Funds • Proprietary Funds Capital Asset Accounting

10. Assets Benefitting More Than a Single Period • Classes - Land, Buildings, Improvements, Equipment, Infrastructure, Construction in Progress • Typically Ownership is Evidenced by Title • Sometimes Ownership is Unclear • Who manages or maintains the asset may determine ownership What are capital assets?

11. Governmental (Current Financial Resources) Dr. Expenditure – Capital Outlay$XXX Cr. Cash $XXX • GW/Proprietary (Economic Resource) Dr. Asset $XXX Cr. Cash $XXX Dr. Depreciation Expense $XXX Cr. Accumulated Depreciation $XXX Capital asset accounting

12. Reported at Historical Cost • Estimated Historical Cost May be Used • Even if Moved from One Fund to Another • Donations - Fair Value on the Date Donated • Historical Cost Should Include • Ancillary Charges to Place in the Intended Location (e.g. freight) • Ancillary Charges to Place in the Intended Condition (e.g. installation, site prep) • Subsequent Additions or Improvements (extend life or enhance functionality) Capital Asset Valuation

13. Based on a Dollar Value GFOA Recommends Thresholds be > $5,000 (Federal = $5,000) Thresholds are Not Related to Control Over Assets Governments Should Strive for an appropriate balance between ensuring all material assets are capitalized & the cost of recordkeeping. Capitalization Thresholds

14. How are most governmental capital assets depreciated? Why? • Composite Depreciation Methods • Similar or dissimilar assets in the same asset class (infrastructure, buildings, etc.) • Weighted average or unweighted average Capital Asset depreciation

15. Unweighted-average Composite depreciation

16. Weighted Average Composite depreciation

17. Fully Depreciated Assets • Normally, not appropriate to report • Reduce depreciation expense when useful life is longer than expected • Composite Depreciation • Can report fully depreciated assets • Should not be material Capital Asset depreciation

18. Which items should be capitalized? • Expenditures over $5,000 & greater than 1 Yr. • Donations • What asset classifications should be used? • Which items should be depreciated/amortized and how? • Individual or classes of assets • Depreciation methods • Tagging, Disposal, Physical Inventories Capital asset – policy considerations

19. Examples • Bonds/Notes Payable • Other Postemployment Benefits (typically Retiree Healthcare) • Compensated Absences • Capital Leases • Claims & Judgments Long term debt

20. Governmental Funds • Inflow of Resources • Proprietary Funds • No Affect • Liability is Offset by an Asset Long term debt accounting

21. Debt Issuance – Governmental Fund (Increases Fund Balance) Dr. Cash $XXX Cr. Other Financing Source $XXX • Debt Issuance – Proprietary Fund (No Impact on Net Assets) Dr. Cash $XXX Cr. Bonds Payable $XXX Long term debt accounting

22. Debt Payments- Governmental Fund (Decreases Fund Balance) Dr. Principal Exp $XXX Dr. Interest Exp $XXX Cr. Cash $XXX • Debt Payments – Proprietary Fund (No Impact on Net Assets for Principal Portion) Dr. Bonds Payable $XXX Dr. Interest Exp $XXX Cr. Cash $XXX Long term debt accounting

23. Required Footnote Disclosure • Separate by class • Separate by Governmental Activities vs. Business-Type Activities • Reports Changes in Long-Term Liabilities Long term debt accounting

24. Changes in Long Term Liabilities Long term debt footnote

25. State Administered Pension System • ASRS & PSPRS • State Holds the Asset • Actuarially Determined Rates • Contributions are Expensed as Paid • City Administered Pension System • COPERS & TSRS • Phoenix & Tucson Retirement Trust Funds • Employer Reports Pension Trust Fund Only if it Holds Resources in a Trust for that Purpose Pension accounting

26. Currently, do most Arizona governments have a pension liability? • That may change…… • Postemployment Benefit Accounting and Financial Reporting • Currently being deliberated • Unfunded liability • Is this a good thing? Pension accounting

27. Similar to Pensions • What is it? • Recorded as a Long Term Liability • Assets • Administered By Cities • Fiduciary Fund – If assets are set aside in a trust • Is this a good thing? OPEB

28. Federal Requirements • OMB Circulars • Financial Reporting • Federal Agencies • Governmental Financial Statements • GASB 33 – Non-Exchange Transaction Grant accounting

29. Revenue Recognition • Expenditure Driven Grants - Revenues are Recognized When the Expenditure Occurs • TYPICALLY, When Amounts Are Expended • When is revenue deferred? • Grant award is received in advance of expenditure • When is revenue accrued? • Amount is measurable (expenditure has been incurred) • Amount is available – Typically can be considered available beyond 60 days but no more than one year Grant accounting

30. GFOA Encourages Establishment of Financial Policies* • Why do we need financial policies? • Helps frame the resource allocation decision • What does that mean? • Guides the creation, maintenance and use of resources for financial stabilization purposes • e.g. guides decision making * GFOA Best Practice “Adoption of Financial Policies Financial policies

31. NACSLB – Recommended Budget Practices • Document Provides a Framework for State & Local Budgeting • What is one of the most important things governments do? Allocate Resources for Programs and Services • The Budget is the Plan • The guidance recommends governments, at a minimum, “adopt financial policies” Financial policies

32. Areas of Financial Policy Development • Financial Planning Policies • Revenue Policies • Expenditure Policies • Policies Should be Continually Reviewed Financial policies

33. Balanced Budget • Should define “balanced budget” & encourage adherence • Long-Range Planning Process • Impact of proposed operating & capital budgets • Forecast • Asset Inventory • Inventory & assess all major capital assets. A. Financial planning policies

35. Revenue Diversification • Handle fluctuations in individual revenues • Fees & Charges • Addresses how fees & charges are they set • To what extent do they cover costs • Use of One-Time Revenues • Discourage use for ongoing expenditures • Use of Unpredictable Revenues (Constr. Sales Tax) • How will these revenues be used? b. revenue policies

36. Debt Capacity, Issuance & Management • Appropriate Use of Debt (Capital Only) • Maximum Amount of Debt/Debt Service • Reserve/Stabilization Accounts • Protects against revenue/expenditure fluctuations • Operating/Capital Expenditure Accountability • Periodic (e.g. quarterly) B to A comparisons to make decisions early on c. Expenditure policies

37. Mandatory for Governments Applying for GFOA Distinguished Budget Presentation Award • One Size Does not Fit All • Property Tax Policies • Financial Reporting Policies (GFOA Awards) Financial policies

38. The City shall maintain a General Fund Unreserved Fund Balance of at least 10% of current year revenues. • 50% of one-time revenues will be used to fund capital expenditures. • Use life of capital projects will exceed the life of the financing bonds. • Current year revenue will be sufficient to support current year operating expenditures. • Capital assets will be maintained to minimize future operating costs. Policy examples

39. tom.duensing@maricopa-az.gov Questions?