ACCT 403 Week 1 Group Discussion Board Forum 1 Example

Group Discussion Board Forum 1: Fund Statements and Government-Wide Statements

ACCT 403 Fund Accounting for Government and Not for Profits, Group Discussion Board Forum 1

Thread by [Student Name]

The city, its figures and the classmate are composites; the textbook and the peer-reviewed research cited are real.

The case asks us to explain an apparent contradiction in the City of Millbrook's annual report. The general fund's balance sheet shows a fund balance of $18.4 million, up $2.1 million from last year, and the mayor describes the city as financially sound. Yet the statement of net position reports governmental activities with an unrestricted net position of negative $77.2 million. Both figures are correct, and the difference comes from what each statement is designed to measure. The case asks which figure describes the city's financial condition and why a reader might reach different conclusions from the same annual report.

Hoyle et al. (2018) explain that governmental funds, the general fund among them, measure only near-term spendable resources and recognize them on a modified accrual basis. They report resources available to spend in the near term and the claims against those resources. A revenue enters the fund once it can be measured and will be collected soon enough to pay this period's bills, and obligations due in later years, such as bonds and pensions, stay out of the fund because current resources will not settle them. The government-wide statements instead track all economic resources on a full accrual basis, much as a business does. They report capital assets, long-term debt, net pension liability and other obligations, so they show whether the government's total resources cover its total commitments. The general fund's $18.4 million is part of $31.2 million of fund balance across all governmental funds, and that larger total is the starting point for the reconciliation the annual report must present.

Of that total net position of negative $1.0 million, $64.6 million is the net investment in capital assets, since all of the bonds financed capital assets, and $11.6 million is restricted, which leaves unrestricted net position at negative $77.2 million. The general fund can grow every year while the city's unfunded promises grow faster.

That makes the government-wide view important for anyone judging the city's long-term condition. Novy-Marx and Rauh (2011) estimated the present value of state employee pension liabilities with discount rates matched to how risky the promised payments are for taxpayers and found promised liabilities of $3.20 trillion nationally if benefits are as safe as state general obligation debt, and $4.43 trillion using Treasury yields, far more than reported under the expected-return discount rates governments commonly used. A city with a net pension liability five times its general fund balance is not in crisis, but its sound fund balance answers a different question than whether it can keep its long-term promises. A council member reviewing the budget should read the fund statements; a bondholder or a citizen planning to live in Millbrook for decades should read both. The two views also answer to different time horizons: the fund statements ask whether the year's inflows paid for the year's outlays, and the government-wide statements ask whether past and present taxpayers have paid for the services they received.

Reply to Lauren

Lauren, you argued that the fund statements matter most because Millbrook's council adopts its budget on the modified accrual basis, and you are right that the budgetary comparison schedule is what officials manage to day to day. Hoyle et al. (2018) note that budgetary accountability is one of the central purposes of governmental reporting, and a balanced general fund budget is a legal requirement in most jurisdictions. My concern is that the fund basis lets a city balance its budget while pushing costs into the future. If Millbrook contributes less than the actuarially determined amount to its pension plan, its general fund expenditures fall and the fund balance improves, but the net pension liability in the government-wide statements grows. Novy-Marx and Rauh (2011) showed how large those promises can become when they are valued at discount rates that match the security of the benefits. Deferring maintenance on capital assets has the same effect: the fund statements look better while the capital assets in the government-wide statements deteriorate. That is why GASB requires the reconciliation between the two sets of statements. The reconciliation makes the gap visible on the face of the report, so no reader has to discover it by comparing pages. I would suggest that the council adopt its budget on the fund basis but review the government-wide statement of activities each year alongside it, so that a balanced budget does not hide a growing long-term deficit. That practice would also prepare the council for questions from rating agencies, which look closely at pension funding when they assign the city's bond rating.

References

Hoyle, J. B., Schaefer, T. F., & Doupnik, T. S. (2018). Advanced accounting (13th ed.). McGraw-Hill Education.

Novy-Marx, R., & Rauh, J. (2011). Public pension promises: How big are they and what are they worth? The Journal of Finance, 66(4), 1211-1249. https://doi.org/10.1111/j.1540-6261.2011.01664.x