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Economic Condition Reporting: Financial Projections
Minutes of Teleconference, November 29, 2011The Board reviewed the ballot draft and by a vote of 4-2 approved the issuance of the Preliminary Views, Economic Condition Reporting: Financial Projections.
Minutes of Meeting, November 8-10, 2011
The Board discussed the preballot draft of the Preliminary Views, Economic Condition Reporting: Financial Projections. The Board had previously reached a tentative agreement that projections of major individual cash outflows should be presented by program or function. However, after consideration of a Board member proposal, the Board tentatively agreed that the Preliminary Views should include a proposal that would allow projections of major individual cash outflows to be presented by object (for example, personnel, contracts, and utility costs) as an alternative to the function or program format. The Board also had previously tentatively agreed that financial projections and related narrative discussions should be reported for the primary government, including both governmental activities and business-type activities with net subtotals (inflows less outflows) for governmental activities and business-type activities and a net total for the entire primary government. Again, after consideration of a Board member proposal, the Board tentatively agreed that the Preliminary Views should include a proposal that net subtotals also should be provided for the general fund and other governmental activities.
The Board requested that the staff prepare a ballot draft of the Preliminary Views to be discussed at the November 2011 Board teleconference.
Minutes of Meeting, October 3-5, 2011
The Board discussed the preballot draft of the Preliminary Views, Economic Condition Reporting: Financial Projections. The Board offered suggestions to improve the document.
Minutes of Meeting, August 17-19, 2011
The Board reached a tentative agreement on the title of the Preliminary Views—Economic Condition Reporting: Financial Projections. The Board also reached a tentative agreement to propose requiring specific disclaimers cautioning readers that actual future financial results may differ from the financial projections that are reported.
The Board reviewed a draft of the Preliminary Views, Economic Condition Reporting: Financial Projections. The Board offered various suggestions to improve the document and requested that the staff prepare a preballot draft of the Preliminary Views to be discussed at the October 2011 Board meeting. The Board also reviewed and discussed the alternative views provided by three Board members.
Minutes of Meeting, June 27-29, 2011
The Board discussed and reached a tentative agreement on the following as the working definition of an intergovernmental service interdependency for the purpose of reporting fiscal sustainability information:
An intergovernmental service interdependency exists when one governmental entity provides a service on behalf of another governmental entity or together with one or more governmental entities.
The Board also discussed and reached a tentative agreement that determining which intergovernmental service interdependencies are “major” when reporting Measure 5, Narrative discussion of the major intergovernmental service interdependencies that exist and the nature of those service interdependencies, is a matter of professional judgment and should not be subject to identification through specific criteria.
Finally, the Board was provided with the first partial preballot draft of the Preliminary Views. The preballot draft, including illustrations, will be discussed at the August 2011 meeting.
Minutes of Meeting, May 23-25, 2011
The Board discussed and confirmed most of the previous tentative decisions reached on the economic condition reporting: fiscal sustainability project. Amendments were made to previous tentative decisions on the following: the five specific measures of fiscal sustainability information and determining what is considered “major.”
First, the Board discussed and tentatively confirmed the previous decisions on the necessity and content of the five proposed measures of fiscal sustainability, conceptually, with a few clarifying amendments. Measure 1, Projections of the major individual cash inflows in dollars and as a percentage of total cash inflows along with explanations of the known causes of fluctuations in cash inflows (including nonrecurring cash inflows), was amended by removing the parenthetical clause “including nonrecurring cash inflows.” Measure 3, Projections of major individual financial obligations and total financial obligations including bonds, pensions, OPEB, and long-term contracts, was amended to include the clause “along with explanations of the known causes of fluctuations in financial obligations.” Finally, the Board noted that from a practical standpoint, the project would propose only four new specific measures of fiscal sustainability information because projections of annual debt service payments are already required to be disclosed in the notes to financial statements.
Next, the Board discussed and reached a tentative agreement to amend the proposal for the determination of “major” in relation to the measures of fiscal sustainability. The Board tentatively agreed that in order for an individual inflow, outflow, and financial obligation of a governmental or business-type activity to be considered major, it needs to represent at least 10 percent of total inflows, outflows, and financial obligations for all activities of that type (that is, the total for governmental activities or business-type activities) in any of the projection periods reported. Further, all cash outflows for capital outlays and capital-related cash inflows from bond proceeds, capital grants, or other cash inflows restricted or committed to capital outlays would be considered major.
Finally, the Board discussed and reached a tentative agreement to propose that determining which intergovernmental service interdependencies are major is a matter of professional judgment, subject to principles-based guidance. The Board requested that the staff develop proposed principles-based guidance for preparers to utilize when asserting their professional judgment in determining if an intergovernmental service interdependency is major. This proposed guidance will be deliberated by the Board at its June 2011 meeting.
Minutes of Meeting, April 12-14, 2011
The Board discussed which basis or bases of accounting to use when projecting fiscal sustainability information and whether to include governmental activities, business-type activities, and component units when projecting fiscal sustainability information. The Board also discussed how to determine what is a “major” inflow of resources, outflow of resources, and financial obligation in relation to the specific measures of fiscal sustainability.
The Board reached a tentative agreement that the cash basis of accounting should be used when projecting cash inflows and cash outflows. The Board also reached a tentative agreement that the accrual basis of accounting should be used when projecting financial obligations. Further, the Board reached a tentative agreement that the reported fiscal sustainability information should include notes to explain those instances when the reported inflows and outflows on the cash basis does not reflect the full extent of the impacts on a governmental entity’s fiscal sustainability.
The Board reached a tentative agreement that fiscal sustainability information should be reported for the primary government, including both governmental activities and business-type activities with net subtotals (cash inflows less cash outflows) for governmental activities and business-type activities and a net total for the entire primary government. The Board also reached a tentative agreement that note disclosures within required supplementary information are necessary in instances when one or more activities are determined to significantly affect (positively or negatively) the fiscal sustainability of the primary government.
The Board reached a tentative agreement that governmental entities should not be required to report fiscal sustainability information about their discretely presented component units. Finally, the Board reached a tentative agreement that in order for an individual cash inflow, cash outflow, and financial obligation to be considered “major,” it needs to represent at least 10 percent of total cash inflows, cash outflows and financial obligations, respectively. The Board also reached a tentative agreement that any other cash inflow, cash outflow, and financial obligation that government officials believe is particularly important to users when making an assessment of a governmental entity’s fiscal sustainability should be reported as major.
Minutes of Meeting, March 1-3, 2011
The Board discussed the appropriate bases, methodologies, assumptions, and period(s) for projecting fiscal sustainability information.
The Board reached a tentative agreement that the most appropriate basis to use when projecting fiscal sustainability information is current policy with known changes that are effective in future periods. These known changes represent policy changes that have been formally adopted at the end of the reporting period but will not be effective until future periods.
The Board reached a tentative agreement that the most appropriate methodology for making projections of fiscal sustainability information is projections informed by historical information and known future events or conditions.
The Board reached a tentative agreement that a principles-based approach for providing guidance on how to identify and develop assumptions would be most appropriate. This principles-based approach would not specifically identify the assumptions necessary for projecting fiscal sustainability information. Further, the Board reached a tentative agreement that the proposed principles would require that assumptions be (1) consistent with each other and the information used as the basis for the assumptions, (2) informed by relevant historical information and known events and conditions, and (3) comprehensive by including significant trends, events, and conditions. The Board also reached a tentative agreement to propose that the assumptions used by the government in making projections be disclosed.
Finally, the Board reached a tentative agreement that annual projections for a minimum period of five years is most appropriate for projecting all types of fiscal sustainability information for the purpose of external reporting.
The Board next discussed where to communicate the specific measures of fiscal sustainability information and whether differential reporting of fiscal sustainability information for small governmental entities should be considered at this time.
The Board reached a tentative agreement that all of the specific measures of fiscal sustainability information and related disclosures are essential for placing the basic financial statements and notes to the basic financial statements in an operational or economic context. Therefore, the Board will propose that this information be communicated in the required supplementary information section of an annual financial report or comprehensive annual financial report. A few Board members expressed an alternate view that some specific measures of fiscal sustainability information and related disclosures are useful, rather than essential, for placing the basic financial statements and notes to basic financial statements in an operational or economic context. Some of these Board members believe that such fiscal sustainability information should be communicated in the supplementary information section of the comprehensive annual financial report.
The Board also reached a tentative agreement that all governmental entities should be required to report fiscal sustainability information and that small governmental entities should not be exempt from reporting fiscal sustainability information. However, the Board will request feedback from respondents in the Preliminary Views on whether a phased-in implementation approach should be considered.
Finally, the Board reached a tentative agreement that sensitivity analysis should not be encouraged as a method for making projections of fiscal sustainability information.
Minutes of Meeting, January 18-20, 2011
Previously, the Board had discussed and reached tentative agreement on the individual specific measures that are necessary from a conceptual standpoint for users to make an assessment of a governmental entity’s fiscal sustainability. At this meeting, the Board further developed its views and reached a tentative agreement on the specific measures identified that collectively are necessary for users to make an assessment of a governmental entity’s fiscal sustainability.
These specific measures include:
- Projections of the major individual inflows of resources in dollars and as a percentage of total inflows of resources along with explanations of the known causes of resource fluctuations (including nonrecurring resources)
- Projections of the major individual outflows of resources by program or function in dollars and as a percentage of total outflows of resources along with explanations of the known causes of resource fluctuations
- Projections of major individual financial obligations and total financial obligations including bonds, pensions, OPEB, and long-term contracts
- Projections of annual debt service payments (principal and interest)
- Narrative discussion of the major intergovernmental service interdependencies that exist and the nature of those service interdependencies.
The Board also discussed feedback from the task force on how to define and measure the concept of “mandates.” The Board reached a tentative agreement that the percentage of major outflows of resources that are mandated versus discretionary is not an essential measure of the effects of fiscal interdependencies between governmental entities because of the difficulty, from a practical standpoint, in defining and measuring mandates. The Board tentatively agreed that a narrative discussion of how mandates may cause fluctuations in future major individual outflows of resources would be more appropriate and is already encompassed within the specific measure projections of the major individual outflows of resources by program or function in dollars and as a percentage of total outflows of resources along with explanations of the known causes of resource fluctuations.
Finally, the Board discussed how to define what is meant by “major” in relation to inflows of resources, outflows of resources, financial obligations, and intergovernmental service interdependencies. The Board requested that the staff conduct additional research, by reviewing comprehensive annual financial reports, to determine what governmental entities would report as major under different scenarios.
Minutes of Meeting, December 7-9, 2010
The Board continued deliberations on what specific measures are necessary from a conceptual standpoint for users to assess the types of forward-looking information generally associated with the last three broad categories (effects of fiscal interdependencies between governmental entities, potential effects of the underlying environment within which a governmental entity operates, and ability and willingness of a governmental entity to make decisions that will keep it fiscally sound) of information tentatively agreed upon by the Board at a previous meeting. The specific measures were identified by research participants and confirmed by task force member feedback.
The Board reached a tentative agreement from a conceptual standpoint that only a narrative discussion of the major intergovernmental service interdependencies that exist and the nature of those service interdependencies is a specific measure necessary for users to make an assessment of the effects of fiscal interdependencies between governmental entities. Board members supported exploring further the specific measure of the percentage of major outflows of resources that are mandated versus discretionary. The Board requested feedback from the task force on how to define and measure the concept of government “mandates.” The staff will bring the issue before the task force, and the feedback obtained will be discussed at the next Board meeting.
The Board reached a tentative agreement from a conceptual standpoint that the specific measures recommended by the staff for users to assess the potential effects of the underlying environment within which a governmental entity operates will not be further considered in this project as a type of information necessary for users to make an assessment of a governmental entity’s fiscal sustainability due to the difficulty in developing, measuring, analyzing, and reporting this information.
The Board also reached a tentative agreement from a conceptual standpoint that the specific measures recommended by the staff for users to assess the ability and willingness of a governmental entity to make decisions that will keep it fiscally sound will not be further considered in this project as a type of information necessary for users to make an assessment of a governmental entity’s fiscal sustainability because this information is already included within the other specific measures identified and tentatively agreed upon by the Board.
At its January 2011 meeting, the Board will discuss the specific measures identified collectively as conceptually necessary for a user to make an assessment of a governmental entity’s fiscal sustainability to focus on identifying those specific measures that are most essential and cost-beneficial. The Board also will discuss whether forward-looking information needs to be reported by state and local governmental entities, and if it is determined that forward-looking information does need to be reported, whether the reporting of this information needs to be required or voluntary.
Minutes of Meeting, October 25, 26, and 28, 2010
The Board began deliberations on: (1) whether or not forward-looking information is necessary for users to make an assessment of a governmental entity’s fiscal sustainability, (2) whether or not the qualitative characteristics identified and described in Concepts Statement No. 1, Objectives of Financial Reporting, apply to forward-looking information, and (3) what specific measures are necessary for users to assess the types of forward-looking information generally associated with the first three broad categories (ability to generate inflows of resources, ability to honor current service commitments, and ability to meet financial obligations and commitments) of information tentatively agreed upon by the Board at a previous meeting. The specific measures were identified by research participants and confirmed by task force member feedback.
The Board reached a tentative agreement that forward-looking information is necessary for users to make an assessment of a governmental entity’s fiscal sustainability. The Board also reached a tentative agreement that the six qualitative characteristics of relevance, reliability, comparability, consistency, timeliness, and understandability, identified and described in Concepts Statement 1 apply to forward-looking information and need to be applied without a hierarchy.
In addition, the Board reached a tentative agreement that the following individual specific measures are necessary from a conceptual standpoint for users to make an assessment of a governmental entity’s fiscal sustainability:
To measure a governmental entity’s ability to generate inflows of resources:
- Projections of the bases for major own-source inflows of resources,
- Projections of individual major inflows of resources and total inflows of resources along with explanations of the known causes of resource fluctuations (including nonrecurring resources), and
- Projections of the percentage of total inflows of resources represented by each major individual inflow of resources.
To measure a governmental entity’s ability to honor current service commitments:
- Projections of current types and levels of major programs and functions,
- Projections of individual major outflows of resources and total outflows of resources along with explanations of the known causes of resource fluctuations, and
- Projections of the percentage of total outflows of resources represented by each major individual outflow of resources.
To measure a governmental entity’s ability to meet financial obligations and commitments:
- Projections of future major individual financial obligations and total financial obligations including pensions, OPEB, and long-term contracts,
- Projections of annual debt service payments (principle and interest), and
- Projections of key debt measures and overlapping debt.
The Board will continue to deliberate the specific measures of forward-looking information generally associated with the final three broad categories (effects of interdependencies between governmental entities, potential effects of the underlying environment within which a governmental entity operates, and ability and willingness of a governmental entity to make decisions that will keep it fiscally sound) and related types of information tentatively agreed upon by the Board at previous meetings during its December 2010 meeting.
Minutes of Teleconference, October 5, 2010
The Board continued deliberations on the conceptual categories of information necessary for users to make an assessment of a governmental entity’s fiscal sustainability and the types of information necessary for users to assess these categories. The categories and types of information were identified by research participants and confirmed by task force member feedback.
The Board reached a tentative agreement from a conceptual standpoint that the ability to meet financial obligations and commitments, the effects of interdependencies between governmental entities, the potential effects of the underlying environment within which a governmental entity operates, and the ability and willingness of a governmental entity to make decisions that will keep it fiscally sound are categories of information necessary for users to make an assessment of a governmental entity’s fiscal sustainability. The Board reached a tentative agreement that information on interperiod/intergenerational equity was not a separate category of information necessary for users to make an assessment of a governmental entity’s fiscal sustainability but, rather, that information regarding interperiod/intergenerational equity was encompassed within many of the other categories identified.
The Board reached a tentative agreement from a conceptual standpoint that debt and debt service information, postemployment benefit information including pension and other postemployment benefits, capital asset and infrastructure information, and information on contractual obligations are types of information necessary for users to assess a governmental entity’s ability to meet financial obligations and commitments.
The Board reached a tentative agreement from a conceptual standpoint that information on revenue interdependency and service interdependency are types of information necessary for users to assess the effects of interdependencies between governmental entities. The Board reached a tentative agreement from a conceptual standpoint that employment information, demographic information, and information on growth and wealth-producing activities are types of information necessary for users to assess the potential effects of the underlying environment within which a governmental entity operates. The Board also reached a tentative agreement from a conceptual standpoint that information on legal and governmental structure and processes and governmental willingness are types of information necessary for users to assess the ability and willingness of a governmental entity to make decisions that will keep it fiscally sound.
The Board will begin its deliberations on the specific measures necessary for users to make an assessment of a governmental entity’s fiscal sustainability at its October 2010 meeting.
Minutes of Meeting, September 14-16, 2010
The Board began deliberations on the conceptual categories of information necessary for users to make an assessment of a governmental entity's fiscal sustainability and the types of information necessary for users to assess these categories. The categories and types of information were identified by research participants and confirmed by task force member feedback. The Board reached a tentative agreement that the ability to generate inflows of resources and the ability to honor current service commitments are categories of information necessary for users to make an assessment of a governmental entity's fiscal sustainability. The Board reached a tentative agreement that the source and mix of resources, nonrecurring resources, and resource volatility, are types of information necessary for users to assess a governmental entity's ability to generate inflows of resources. The Board also reached a tentative agreement that information on the types and levels of public services and the cost of services (inputs) related to service commitments are necessary for users to make an assessment of a governmental entity's ability to honor current service commitments. Finally, the Board reached a tentative agreement that SEA performance information will not be further considered in this project as a type of information necessary for users to make an assessment of a governmental entity's ability to honor current service commitments and therefore fiscal sustainability.
Minutes of Teleconference, August 27, 2010
The Board deliberated and reached a tentative agreement on the definition of fiscal sustainability as follows: "Fiscal sustainability is a government's ability and willingness to generate inflows of resources necessary to honor current service commitments and to meet financial obligations as they come due, without transferring financial obligations to future periods that do not result in commensurate benefits."
Minutes of Meeting, August 3-5, 2010
The Board deliberated and reached tentative agreements on the definitions of economic condition and its related components, and the fact that there is a relationship that exists between fiscal sustainability and economic condition. The Board also addressed the individual issues previously raised by the Board and the Governmental Accounting Standards Advisory Council (GASAC) within the proposed definition of fiscal sustainability; however, the Board did not reach a tentative agreement on the definition of fiscal sustainability. The Board will continue discussing that definition at the August teleconference.
Minutes of Meeting, June 22-24, 2010
The Board discussed the tentative working definitions of economic condition and its related components, how fiscal sustainability might be defined, and the relationship of fiscal sustainability to economic condition. No tentative conclusions were reached at this meeting. After receiving feedback from the GASAC members at their meeting in July, the Board will deliberate these issues at the August meeting.
Minutes of Meeting, January 24-26, 2006
The Board continued discussions regarding the definition of economic condition and its components with a review of key points tentatively agreed on at the December 2005 meeting. The following additional tentative conclusions were reached on issues related to definitions:
- Economic condition should be defined as including a government’s current financial position and its fiscal capacity and service capacity. Information about historical changes in financial position is not included as part of the definition of economic condition but nevertheless is understood to be useful for assessing economic condition.
- The definitions of the fiscal capacity and service capacity components of economic condition should include a government’s willingness, as well as its ability, to meet financial obligations and service commitments on an ongoing basis. Willingness is expressed in the choices a government makes with regard to raising resources and providing services and, thus, is reflected in its historical record. For that reason, general purpose external financial reporting potentially can provide significant relevant information to assist users in assessing the element of a government’s willingness within the framework of reporting of objective, historical information.
The Board also discussed proposed definitions and tentatively agreed on the following definitions, incorporating wording revisions tentatively agreed on at the meeting:
- A government’s economic condition is a composite of its 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.
- A government’s financial position is the status of its assets, liabilities, and net assets, as displayed in its basic financial statements.
- A government’s fiscal capacity is its ability and willingness to meet its financial obligations as they come due on an ongoing basis.
- A government’s service capacity is its ability and willingness to meet its commitments to provide services on an ongoing basis.
Minutes of Meetings, December 13-15, 2005
The Board initiated work on Phase III of the Economic Condition project with discussion of a staff paper regarding the definitions of economic condition and the components of economic condition. The Board reviewed definitions tentatively adopted at the January 2002 meeting, as well as two alternative approaches presented by staff to defining economic condition, its components, and the relationship of economic condition information to other information included in general purpose external financial reporting (GPEFR). Definitions adopted will be used as a frame of reference as staff continues researching users’ needs for information useful in assessing a government’s economic condition and as staff considers ways in which the information presented in the statistical section of a CAFR or elsewhere could be enhanced to better support that objective. The Board discussed a number of issues and made a number of tentative decisions, as follows:
- The Board discussed whether the definition of economic condition should include a government’s financial position as well as its fiscal and service capacities (generally, its ongoing ability to meet financial commitments and provide services), as in paragraph 34 of Concepts Statement 1 and the January 2002 tentative definition. Alternatives to that approach discussed by the Board were:
(1) Defining economic condition as a government’s fiscal and service capacities, based on the view that financial position (as well as other historical information in GPEFR) is decision-useful information for assessing a government’s capacity to meet its financial commitments and sustain service levels on an ongoing basis, rather than a separate objective of economic condition assessment
(2) Defining economic condition as broadly inclusive of everything reported in GPEFR.
The discussion focused in part on whether members view economic condition primarily as something that can be measured and reported (for example, a compendium of historical data and analytical indicators using historical data) or as an analytical process by users that involves assessments of future capabilities using reported historical information. After discussion, the Board tentatively decided that economic condition should continue to be defined as a government’s financial position and its fiscal and service capacities. Specific wording was not discussed.
- The Board discussed whether the fiscal capacity and service capacity components should be defined in terms of, or aligned with, specific categories of resources. (For example, the definition of service capacity tentatively adopted in January 2002 defined service capacity as a government’s “ongoing ability and willingness to supply the capital and human resources needed to meet its commitments to provide services.”) After discussion, the Board tentatively decided that fiscal capacity and service capacity should be defined in broader terms that reflect users’ analytical objectives without aligning either objective with specific categories of resources.
- The Board discussed whether information about service results would potentially be useful in assessing a government’s ongoing ability to provide services (and secondarily to meet its financial commitments). After discussion, the Board tentatively decided that information about service results potentially could be decision-useful information for assessing a government’s ongoing service capacity, because it would establish the service levels that a government has achieved at historical resource levels and, thereby, would provide a foundation for assessing a government’s ability to provide services on an ongoing basis. (Also, secondarily, information about service results potentially could be useful in assessing fiscal capacity, to the extent that service commitments impact assessment of a government’s fiscal capacity.)
- The Board discussed the limitations of GPEFR as a potential source of information that is useful for assessing a government’s economic condition. Board members generally agreed that GPEFR can provide much useful information needed to support users’ assessment of economic condition, including potentially raw data and analytical tools such as ratios, but that users also may employ relevant information and analytical tools in addition to what is presented in GPEFR. After discussion, the Board tentatively affirmed that relevant limitations on GPEFR as a potential source of useful information should include the characteristics of information in financial reporting (understandability, reliability, relevance, timeliness, consistency, and comparability), as discussed in Concepts Statement 1 and referred to in Concepts Statement 3, and the limitations of financial reporting, including consideration of the relative costs and benefits of providing information through GPEFR, as discussed in Concepts Statement 1. Board members also generally agreed that in considering whether a potential piece of information useful for assessment of economic condition should be included in GPEFR, consideration should be given to the relationship of that information to other information in GPEFR. Differing views were expressed as to whether that relationship should be to the objectives of financial reporting or to information in basic financial statements.
- The Board discussed potential ways in which the components of economic condition information could be classified, including, for example, by broad categories of relevant information, by one of a number of available systems of analytical factors, or by a system devised by the Board. No decision was made pending further project research and discussion.
At the conclusion of the discussion, the Board asked staff to prepare a follow-up paper for the January 2006 Board meeting regarding the definitional matters discussed at this meeting.
Minutes of Meetings, August 9–11, 2005
The Board reviewed a staff proposal to conduct additional research prior to beginning deliberations on the third phase of this project. The new research would build on the findings of the GASB’s user needs study and would seek to refine the Board’s understanding of the specific information and ratios that users require to assess the financial health of governments. The Board agreed to the staff proposal with the addition of a discussion of the definition of economic condition scheduled for the December meeting.