Legislative Testimony for LB581: Require the use of generally accepted accounting principles in preparing budgets under the Nebraska Budget Act

Members of the Government, Military and Veterans Affairs Committee, I am here today to testify as a proponent to LB581.

A few years ago, I asked one of my interns to look up how much inheritance tax revenue was collected by counties. This proved to be a very tedious task, taking this young intern most of the summer, working 40 hour weeks, to collect the information. This sparked my interest in how local government accounting data could be easier to gather and read.

Over the last year I have researched local accounting practices in states, reviewed academic literature on the issue, and also met with citizens and officials across Nebraska about their use of local financial documents.  What I have found is that Nebraska is somewhat of an outlier in government accounting standards.  Most states require local governments to comply with Generally Accepted Accounting Principles (GAAP), whereas Nebraska mostly does not.

Right now, most Nebraska local governments are operating under a cash or modified accrual basis of accounting.  While these formats have value, they do not tell the entire financial story.

The arguments for using these methods is that they are easier for less-qualified accounting staff to prepare and require less staff.  These are justifiable concerns, but I believe the consequences of these methods are more detrimental than their benefits.

Accounting methods not compliant with GAAP do not recognize the capital assets owned by a government, nor does it measure true program costs or future obligations.  For example, cash basis documents do not include promises to pay in the future, like salaries and benefits.  Using an accrual basis like GAAP will uncover non-cash obligations, and is beneficial in decision-making and helping to control spending, such as avoiding payments that have been deferred that could affect the budget the following year. 

Overall, cash and modified accrual methods focus on the short-term and do not properly account for debt.  A 2007 Government Accounting Standards Board (GASB) study found that municipal debt costs were 14 to 25 basis points lower in states that require GAAP, because bond market users are more accustomed to using GAAP financial information.

Another benefit of compliance with GAAP is that it establishes trust between taxpayers and the local government.  In a time where local governments face scrutiny for high property taxes, GAAP compliance will improve accountability, while also offering locally-elected officials the tools they need to be good stewards of tax dollars.

I believe the value of the benefits that result from following GAAP justify the associated costs.  Our local governments cannot appropriately manage what they do not measure.

I have had meetings on this subject with Auditor Janssen and his staff, Lt. Governor Foley, Nebraska NACO, the League of Nebraska Municipalities, and I have also reached out to GASB as well as numerous accountants about this issue. I am grateful that some of them are present today to testify and provide their perspectives.

In addition to GAAP-compliant accounting being a worthy goal to work towards statewide, several local governments in Nebraska deserve acknowledgement for already going above and beyond the minimum requirements by complying with GAAP accounting.  Natural Resource Districts use GAAP accounting as well as the cities of Beatrice, Lincoln, Norfolk, Omaha, Papillion, South Sioux City, Douglas County, the University of Nebraska and the State of Nebraska, to name those I’ve been able to document. These entities show GAAP compliance is an achievable task that can be asked of other local governments of similar sizes.

I have included a map with my written testimony that is from a National NACO research report. It shows the accounting standards used by all U.S. counties. According to the map, Nebraska and South Dakota are the only states left where a majority of their counties follow only the very basic financial reporting standards.  States in blue comply with GASB standards, while light orange states use a statement format regulated by their state.

I have also included three charts provided by GASB on the status of counties, municipalities, and school districts in all 50 states and how many comply with GAAP accounting.
 

Thank you for your time and I am happy to take any questions.

Additional resources:

NACO Policy Research Report – “Counting Money: State & GASB Standards for County Financial Reporting”

February 2016; authored by Dr. Emilia Istrate, Cecilia Mills and Daniel Brookmyer

Map 2 – Almost a fifth of counties follow state specific financial reporting standards as of November 2015

Notes: This study identified the type of financial report and method of accounting for 3,053 of the 3,069 county governments. Conn., R.I. and parts of Alaska, Mass. and Va. have counties or county-equivalents with no county governments (marked in grey).  County governments from which NACo could not retrieve financial statements by November 2015 are also marked in grey.

County financial statements classified as “State Financial Reporting & OCBOA” represent county financial reports that use state regulated statement format and alternative methods of accounting to GAAP. “Basic Financial Statements & OCBOA” indicate counties that use GASB approved financial statement format, but use alternative methods of accounting to GAAP. Reports classified as “Basic Financial Statement & Accrual” use GASB approved financial statement format and method of accounting.