MAJOR GAAP IN UNDERSTANDING BOWIE COUNTY LOAN In June of 2014, Bowie County had to obtain a Tax Anticipation Loan of $5,000,000 because the County ran out of cash. Fortunately, after 24 lenders turned the County down, a lender was found and the County received $4,933,050 ($5,000,000 less $66,950 in fees and selling concessions for the bond company). The taxpayers will be taxed for $5,114,694 per the BCAD worksheet in late 2014 for the entire amount including the above market interest and costs of the loan. If the loan had not been received in late June the County would have defaulted on payroll and vendor payments. This loan was crucial for the County to remain in operation. Believe it or not there is still debate whether the County needed the loan or not. The County Judge voted against it and even threatened to drive to Austin, TX and meet with the Attorney General to stop the loan. As of September 8, 2014, the entire $5,000,000 has been drawn down. With that background established, there is some confusion about how the $5,000,000 tax anticipation loan will be classified on Bowie County’s books, as revenue or a liability. Stay with me, it is a liability that will be show up on the Statement of Net Position in the Government-wide financials because it has to be paid back. It is a budgetary resource for the budgetary financials. It will show up on the Statement of Revenue, Expenditures and Changes in Fund Balance as a liability as well. Since the Government-wide or GAAP financials are the “real” statements that determine the financial condition of the County, those financials are the most accurate in determining the long-term viability and financial condition of the County. The loan proceeds must also show up on the Fund Financials because the loan was an available resource and the proceeds were spent. However, since Bowie County overspent the “real “revenue and the loan proceeds represent “other financial resources” and not new revenue, the loan proceeds will not impact the fund balance in the Government-wide financials. Money that has to be repaid is not “real” revenue, only a spendable resource. The fact that that the County had to borrow $5,000,000 in the first place and that the loan has been fully drawn down virtually ensures that the 09/30/14 Government-wide unrestricted fund balance will dip into negative territory. That will represent four years of consecutive declines in the fund balance since 2010. Bottom line is, for the fourth consecutive year, Bowie County’s financial position deteriorated. Here is an example that may clarify what “real” revenue is: Lets assume in 2013 your salary was $100,000. You get your W-2 and pay tax on $100,000. You also decide to put back $25,000 of your 2013 revenue in a savings account because your bills were less than expected. 2014 rolls around and your salary is cut to $75,000. However, you have obligated yourself to spend $100,000 in 2014. So, you spend that $25,000 you put in a savings account the year before. Did moving that cash from the savings account the year before and spending it the next year create “new” revenue? Would you put the $25,000 from the 2013 savings account on your tax return and pay tax on it? NO!! Why? Because its not new revenue and it was recognized as revenue the year it was received. The same is true in fund accounting. Moving cash around the funds or borrowing money does not create new revenue. For the cash to be in the fund indicates the revenue that created the cash has already been recognized. You cant recognize the same revenue twice just as you would not pay tax again on revenue that tax has already been paid on. Since it is not “new” revenue, your financial condition does not improve and what’s worse, when it is borrowed money, is now you have to come up with new money to pay back the loan. A double whammy! Technical Stuff Unlike most business entities, governmental entities like Bowie County must be responsive to elected officials, other units of government, bond rating companies, creditors, and citizens that are focused on monitoring their activities. All forms of monitoring include collecting and interpreting data, and this oversight function is often performed through information provided in governmental reports. The most important communication is the annual financial report or audit, which presents the financial position, operating results, and cash flows for a particular fiscal year. Bowie County presents financial information in its annual audit in three ways: Government-wide financials, Fund Financial Statements and Budgetary Financial Statements. To compare each, the Government-wide financials are about the financial condition of the County as a whole, the Fund Financials are about the balances in the funds and the Budgetary Financials are about the budget. Government-wide financial statements Government-wide Financial Statements are prepared on a GAAP basis of accounting and are designed to provide users with a broad overview of County finances, in a manner similar to a private-sector business. The purpose of GAAP (generally accepted accounting principles) is so entities cannot be free to decide for themselves what financial information to report and how to report it, which would make things quite difficult for users of the financial statements. The Statement of Net Position presents information on all County assets and liabilities, with the difference between the two representing net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the County is improving or deteriorating. The Statement of Activities presents information that indicates how net position changed during the fiscal year. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of the related cash flows. Thus, revenues and expenses are reported in this statement for some items that will result in cash flows in future fiscal periods. Both of these government-wide financial statements distinguish functions of the County that are principally supported by taxes and intergovernmental revenues (governmental activities) from other functions that are intended to recover all or in part a portion of their costs through user fees and charges (business-type activities). The governmental activities of the County include general government, public safety, public works and welfare. Fund Financial Statements The fundamental purpose of fund accounting is to properly account for all resources received and used. Fund accounting classifies all resources into funds according to specific limitations placed on their use by the resource providers. Each fund has its own revenues, expenditures, transfers, assets, liabilities, and a fund balance. A change in fund balance represents the difference between fund additions (revenues and transfers in) and deductions (expenditures and transfers out). A fund balance is identified as the net difference between a fund’s assets and liabilities. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating the County’s near-term financing requirements. Because the focus of governmental funds is narrower than of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, users may better understand the long-term impact of the County’s near-term financing decisions. Both the governmental funds balance sheet and the governmental funds statement of revenues, expenditures, and changes in fund balance provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. Budgetary Financial Statements Budgetary financials permit comparisons to be made between actual revenues and expenditures recorded during the fiscal year and revenues and expenditures included in County budgets, as promulgated through the appropriation process. Budgetary and related accounting systems can also be further adapted to appropriate managerial accounting systems useful for decision making and control processes in County government.
Posted on: Wed, 10 Sep 2014 17:05:42 +0000
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