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When Stephen Goldsmith was elected mayor of Indianapolis in 1992, the city had a great credit rating and slick, four-color glossy financial reports rivaling those of Fortune 500 companies. But when the new mayor tried to find out how much it cost to fill a pothole, plant a tree, or clean out the sewers, no one could tell him. Without this information, it was impossible to know whether city services were being delivered efficiently. There was no way to accurately compare the costs of public-sector services with those in the private sector.
All of that will change for Indianapolis and America's 83,000 other state and local units of government when tougher new requirements for government financial reporting begin to take effect in 2001. The requirements were drawn and approved by the Governmental Accounting Standards Board (GASB), the independent private sector organization, formed in 1984, that establishes and improves financial accounting and reporting standards for state and local governments. The new standards will offer citizens a more accurate picture of what their tax dollars buyor do not buy, and may even provide officials with the information necessary to accelerate cost-cutting privatization of more state and local government assets and services.
Indianapolis is only one of many cities suffering from accounting problems. "We used standard government accounting principles that prevented our managers from stealing money but did nothing to stop them from wasting it," says Goldsmith.
These problems are common to government accounting and financial-management systems all over the world and consist of seven major deficiencies:
accountability is unclear;
goals and performance requirements of government departments are poorly specified;
incentives often encourage dysfunctional behavior (for example, year-end spending) and asset levels to be poorly maintained;
changes in value or depreciation are not required to be recorded, masking losses and long-term liabilities;
future revenues are obscured by modified cash-based accounting systems; and
responsiveness to changing circumstances is slow.
On June 30, 1999, the GASB sought to correct these deficiencies by approving "Statement 34," a 200-page set of rules that will affect virtually every unit of government in America. The new rules' standards are commonly referred to as "accrual" or "total cost" accounting.
Accrual accounting recognizes events and transactions when they occur, such as a delivery of supplies, regardless of when cash changes hands. By recording accounts payable and receivable, and thus the change in value of the assets and liabilities, accrual accounting keeps a running tally of what an organization owns and owes in economic terms. For example, if a government promises pension benefits in the current period and must pay retirement claims in future periods, the liability and expense is recorded when the event occurs. When the cash is actually paid, the liability is removed.
Statement 34 will
require officials to assign values to assets under their control, such as bridges, hospitals, and fire trucks;
eliminate the ability of governments to shift expenses from one year to the next by delaying payments;
mandate that governments prepare one financial statement as opposed to a series of fund statements as most do now;
require managers of a government unit to explain in writing why they made a particular decision (to sell a golf course, for instance), its impact on the govern-ment's financial picture, and (if applicable) why the unit needed to spend more than originally budgeted; and
make costs that are now hidden more transparent.
Statement 34 will take effect for larger governments ($100 million plus in revenues) in fiscal years beginning after June 15, 2001. Medium-sized governments (between $10 and $100 million in revenue) must begin compliance in fiscal years beginning after June 15, 2002, and smaller governments (under $10 million in revenue) must follow suit in 2003.
It would be difficult to overestimate the importance of these rule changes. If the cost of goods or services cannot be accurately measured, it is difficult to know how to improve on them. When no one knows exactly what government products and services cost, government officials cannot responsibly determine whether, what, and how to privatize.
Ultimately, Michigan needs citizens who make good political decisions. One way to foster good citizenship is to provide accurate information. The quality of any decision is directly linked to the quality of the information on which the decision is based. One reason people often make poor political decisions is that they lack information about the costs of various government activities.
Statement 34 will go a long way toward facilitating privatization, and it should be welcomed by public officials. Once citizens fully appreciate what it costs to maintain their respective level of government, they will be better qualified to participate in the privatization debate as fully informed voters and consumers of government services.
Editor's Note: Portions of this article were excerpted with permission from the Reason Foundation study, Reforming Financial Management in the Public Sector.
