The User's Perspective

December 2009

GASB Adds Project Addressing Fiscal Sustainability to Current Technical Agenda

            In December 2009, after consultation with fellow Board members and the Governmental Accounting Standards Advisory Council, GASB Chairman Robert Attmore moved the Economic Condition Reporting: Fiscal Sustainability project from the GASB’s Research Agenda to its Current Agenda. Projects on the Current Agenda are those for which active deliberation by the Board is expected to take place during the coming year.

            The objective of this project is to consider whether guidance or guidelines should ultimately be provided for including additional information about economic condition, particularly fiscal sustainability, as part of general purpose external financial reporting (GPEFR). This article focuses on the research the GASB and others have done on this topic, the important information that the research yielded, and how it led to the project moving onto the Current Agenda.

Growing Interest in Fiscal Sustainability

            The notion of fiscal sustainability considers whether a government is on a fiscal policy path that can be sustained into the future. While the GASB has been examining this issue for some time now, the interest in this concept has been gaining momentum of late. The United States Treasury Department has published reports concluding that the federal government’s current fiscal policy is not sustainable; and that, without changes in federal fiscal policy, all federal revenues will be consumed by Medicare, Medicaid, and interest on the accumulated public debt in the not-too-distant future. GASB Chairman Robert Attmore has said that the more information that is provided on this issue at all levels of government and the more awareness is raised before the situation worsens, the better the position policymakers will be in to take action and the more options they will have at their disposal to address changes in fiscal policy.

            A number of other standards setters—including the Federal Accounting Standards Advisory Board (FASAB) and the International Public Sector Accounting Standards Board (IPSASB)—national governments, and other organizations are working to develop reporting guidance and guidelines focusing on fiscal sustainability or are currently examining a similar set of issues to those the GASB is looking at. In fact, in 2009, the FASAB issued final standards providing guidance on long term fiscal projections of the federal government.

            The GASB ultimately decided to move the Economic Condition Reporting: Fiscal Sustainability project to its Current Agenda for two primary reasons. First, GASB staff research and the findings of other standards setters indicates that financial report users consider it important to understand a government’s past and current economic condition, including how the government arrived at its current status, with an eye toward assessing a government’s future financial viability or fiscal sustainability. In other words, based on existing information, financial report users seek to assess a government’s ongoing ability to raise future revenues, to continue to deliver services, to issue debt, and to meet obligations as they become due—the capacity to sustain or improve its financial status.

            Second, there have been increasing calls from citizens and their elected representatives for greater transparency and accountability from all levels of government. Considering the current economic downturn, which has created a growing national concern with fiscal sustainability issues at the federal as well as the state and local government levels, this appears to be an especially appropriate time to consider the issue of economic condition and fiscal sustainability.

            It is important to note that in this and in every project that the GASB undertakes, b efore any final guidance or guidelines are issued, the provisions are subjected to extensive public due process. The input received from the GASB constituents is carefully analyzed by the GASB’s staff and deliberated by the Board.

GASB Research on Fiscal Sustainability

            The research on fiscal sustainability actually is the third phase of the GASB’s research on economic condition reporting. Phase one of this program involved the background research, including a thorough literature review, on how the financial health of governments is defined and assessed. Confronted with a number of terms meant to describe fiscal health—financial position, financial condition, fiscal condition, and so on—the GASB settled on a term that it believed conveyed a comprehensive notion of financial health—economic condition. The Board tentatively defined economic condition as follows:

Economic condition is a composite of a government’s financial position and its ability and willingness to meet its financial obligations and service commitments on an ongoing basis. Economic condition includes three components: financial position, fiscal capacity, and service capacity.

    • Financial position is the status of a government’s assets, liabilities, and net assets, as displayed in the basic financial statements.
    • Fiscal capacity is the government’s ability and willingness to meet its financial obligations as they come due on an ongoing basis.
    • Service capacity is the government’s ability and willingness to meet its commitments to provide services on an ongoing basis.

            The second phase of the project resulted in the issuance of GASB Statement No. 44, Economic Condition Reporting: The Statistical Section in May 2004. Statement 44 focused on improving and updating the information already being reported about economic condition and its components in the comprehensive annual financial report (CAFR).

            The third and current phase of the project is examining the usefulness of indicators of economic condition and its components that speak specifically to fiscal sustainability. The project has three objectives:

  • To identify the information that users of governmental financial information need to assess a governmental entity’s fiscal sustainability
  • To compare those needs with the information that users receive under both current accounting and financial reporting standards and from other sources
  • To consider reporting alternatives for additional information needed by users.

            The Board directed the staff to conduct research to answer the following questions:

  • How important is the provision of information needed to assess economic condition (specifically, fiscal sustainability) to potential users?
  • What information do potential users need to assess fiscal sustainability?
  • Is this information presently available and understandable to potential users?

            In addition to further reviewing relevant literature and the work of other organizations, the staff interviewed more than two dozen users of governmental financial information, ranging from municipal bond analysts to taxpayer associations and local elected representatives. The staff also conducted roundtables across the country, which brought together almost 30 users of various types to engage in a dialogue about the issues. The results of the research are discussed in the next four sections:

  • Defining fiscal sustainability
  • Types of fiscal sustainability information
  • Time period for projections
  • Fiscal sustainability assessments.

Defining Fiscal Sustainability

            While the FASAB, IPSASB, and the national government of the United Kingdom have each developed their own definitions of fiscal sustainability, there is no generally accepted definition of the term. The notion has been linked to the concept of inter-generational equity or fairness, which evaluates the extent to which future generations of taxpayers will have to deal with the fiscal consequences of current policies.

            Participants in the interviews and roundtables were asked: “What does fiscal sustainability mean to you?” The goal here was not to obtain an actual definition of fiscal sustainability, but to identify characteristics that could eventually comprise a definition. The following were common themes in the participants’ responses:

  • The ability and willingness to maintain or improve services
  • The ability and willingness to meet financial obligations
  • The ability and willingness to achieve and maintain intergenerational equity
  • The ability and willingness to balance revenues and expenses.

            Participants also were questioned about the importance of fiscal sustainability, and each of these common themes, to the decisions that they make and the analyses they perform.

Types of Fiscal Sustainability Information

            Standards setters, national governments, and others have done significant work examining what they believe to be the components of fiscal sustainability, but at this stage, while commonalities exist, there is no general consensus in this area. The GASB addressed this issue by asking participants in the research what they considered to be the components of fiscal sustainability and why. Eight components were identified:

  • Ability and willingness to generate sufficient future resources
  • Ability and willingness to maintain or improve the delivery of public services
  • Ability and willingness to meet financial obligations and commitments
  • Achievement of intergenerational equity
  • Effects of fiscal interdependencies between various governments
  • Potential effects of the underlying economy
  • Potential effects of changing demographics
  • Implications of political ability and willingness to make decisions that will keep a government fiscally sound.

Period for Projections

            While there is no current globally accepted time period for projections and assumptions provided within guidance already issued or soon to be issued by other standards setters, there is an obvious relationship between the extent to which assumptions are used in fiscal sustainability reports and the period used to project fiscal information in those reports.

            The longer the period, the more future events are captured, but the less precise and potentially less verifiable the assumptions become. Conversely, a shorter period generally improves the accuracy of the reported information, but increases the risk that future events or “due” dates, which might have a significant impact on the reported information, are outside of the period.

            Participants were asked what time period they believe is appropriate for projections and assumptions that are made. Many of them responded that five years is feasible and that anything longer is not as critical in making an assessment of the fiscal sustainability of a government. After five years, they noted, the information would become less reliable due to the presence of too many unknowns in the projections and assumptions.

            A few participants stated that 15–25 year projections would be better if the projections were presented on an annual basis and updated based on shorter-term information that becomes available. This period is appropriate, in their opinion, because it generally represents the demarcation of a generation. They also believe that because of the long-term issues facing a government, there must be longer-term views. Making projections over this longer period may focus attention on the long-term impact of decisions related to the fiscal situation of a government, they stated.

            A few participants stated that a period of something less than five years is more appropriate. These participants believe that because of the nature of politics, the turnover of political leaders, and the frequency with which estimates change, it is not beneficial to project out farther than two or three years. These participants also believe that there will be reduced confidence in reported information among users if the period increases beyond that two or three years.

            Finally, a few participants said that the period for projections and assumptions should equal the length of a government’s legal liabilities; in other words, the information should cover the period that their long-term liabilities are outstanding. For example, if the government has a 30-year bond outstanding, then the period should be 30 years.

Fiscal Sustainability Assessments

            Lastly, participants were asked: “What is the best way to make fiscal sustainability assessments, for example, based on current fiscal policy without change, based on reasonable assumptions about changes in tax rates or debt levels, and so on?” Answers were almost evenly divided.

            Those participants who believe that assessments should be made using current fiscal policy without change stated that basing the projections on currently known facts is better and that it is hard to project fiscal policy changes in the future given the potential unreliability of assumptions and the turnover of elected officials.

            Participants who believe that these assessments should be made using reasonable assumptions about future fiscal policy changes stated that all the facts that are available to the government should be utilized in making these assessments. If a government knows it is facing future issues, then decisions and disclosures should be based on a reasoned view of what the future years will bring. Finally, some participants said they believe that a government should make these assessments both ways. They said it is important to begin with current policy and then to prepare if-then scenarios.


            This project is expected to determine what, if any, additional information financial report users need to assess whether (1) a government will be able to meet its known obligations as they come due, and (2) the government will be able to continue in the future to provide services at the current levels.

More Information

            The Board is scheduled to begin project deliberations in August 2010. Additional information on this project is available on the GASB’s website project pages by clicking on the Economic Condition Reporting link.