GAO. Government Accountability Office. New Mexico Office of the State Auditor. Transparency Report County and Municipality Fund Balances

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Transparency Report County and Municipality Fund Balances Fund Balance Data Provides Valuable Insight As the Governmental Accounting Standards Board (GASB) has observed, Public accountability is based
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Transparency Report County and Municipality Fund Balances Fund Balance Data Provides Valuable Insight As the Governmental Accounting Standards Board (GASB) has observed, Public accountability is based on the belief that the taxpayer has a right to know, a right to receive openly declared facts that may lead to public debate by the citizens and their elected representatives. Key to the public s understanding of government financial reporting is fund accounting, which is the use of accounts segregated based on the sources and uses of the money within them. Fund balance data is useful for identifying the resources available to fund public programs and repay public debt, for reevaluating the sources of government revenue including tax policy, for assessing the wisdom of government spending and for planning to ensure future generations are not saddled with the costs of current policies. Unfortunately, until now, fund balance data has been buried in over one hundred audits of New Mexico s counties and municipalities. The Office of the State Auditor (OSA) has compiled the fund balance data from county and municipal audits, and that data is now available on the OSA website in a spreadsheet that citizens, policy makers, academics and others can use as they wish. This Transparency Report summarizes three major trends that the OSA observed while compiling this data. Fund Balance in a nutshell Funds are accounting devices used to account for and report specific aspects of a government's financial activities, such as a particular revenue source or function. The fund balance is the difference between assets and liabilities in a particular fund. Fund balance is one of the most critical indicators of financial health in a governmental financial statement. Explanations of fund types appear at the end of this report. High fund balances at the county and municipal level can be a measure of economic security. From this perspective, many local governments are doing a good job of preserving their resources. Negative fund balances are common at the county and municipal levels, with a total of 216 negative fund balances reported in the audits the OSA evaluated, representing approximately 10 percent of all funds. A relatively large number of deficit fund balances, while merely reflective of cash flow timing in some cases, may reflect the fact that some of New Mexico s communities are facing economic challenges. In other instances, negative fund balances may reflect weaknesses in accounting practices or internal controls. The OSA noted areas where counties and municipalities may need to pay special attention in their fund reporting. For example, only general funds should classify positive balances as unassigned. Also, special revenue funds, capital projects funds and debt service funds report should not report negative balances as restricted or committed. Finally, the portion of the general fund balance necessary to meet the General Fund Reserve Requirement should be reported as restricted. The OSA will continue to work with counties, municipalities, their respective associations and independent public accountants to address the issues identified in this Transparency Report. All of the county and municipal fund balance data that the OSA evaluated in connection with this Transparency Report is available online at Financial reporting plays a major role in fulfilling government s duty to be publicly accountable in a democratic society. Governmental Accounting Standards Board, Concept Statement No. 1. County and Municipality Fund Balances page 2 High Fund Balances Can Be a Measure of Economic Security Unlike state agencies, which get money from and revert money back to the State General Fund, the county- and municipal-level general funds are the reserves for those governments. Having enough money in general funds and other types of funds can be a sign of preparedness for future uncertainty. Reflecting the need for a healthy general fund balance, the Department of Finance and Administration (DFA) imposes a General Fund Reserve Requirement for municipalities of 1/12th (8.3%) of total budgeted expenditures and for counties of 3/12th (25%) of total budgeted expenditures. DFA also imposes a County Road Fund Reserve Requirement for counties of 1/12 th (8.3%) of total Road Fund budgeted expenditures. Negative Fund Balances are Common Ten Highest County and Municipality General Fund Balances Fiscal Year 2014 Total Fund Balance for All Entity General Funds Bernalillo County $139,202,445 City of Hobbs $ 72,008,743 City of Albuquerque $ 63,443,775 City of Las Cruces $ 35,993,686 City of Carlsbad $ 26,530,639 City of Artesia $ 22,523,998 Chaves County $ 13,897,414 Cibola County $ 8,557,874 Catron County $ 6,525,294 Colfax County $ 4,284,919 A negative fund balance results when the liabilities in a fund are more than the assets. Municipalities reported 216 funds with negative balances (about 20% of all funds), and counties reported 82 funds with negative balances (about 8% of all funds). Not all negative fund balances have the same cause, but generally speaking, negative fund balances are not desirable. Five Highest Negative Governmental Fund Balances Entity Name Fund Type Fund Name Balance Los Alamos County Special Revenue Emergency Declarations Fund ($2,733,870) Village of Angel Fire Debt Service Debt Service Fund ($2,210,456) Town of Bernalillo Special Revenue Gas Tax Fund ($2,114,064) Grant County Special Revenue Corre Caminos Fund ($1,220,542) City of Grants Capital Projects General Government Improvements Fund ($827,260) Counties and municipalities most frequently show a negative balance in special revenue funds, with 166 of all negative fund balances occurring in special revenue funds. Often a county or municipality must expend money from a special revenue fund before seeking reimbursement. This may suggest an accounting question as to whether the agency should have recognized the revenue as a receivable when the expenditure occurred. For example, Los Alamos County s Emergency Declarations Fund accounts for revenues and expenditures associated with the response to and recovery from the Las Conchas Fire of 2011 and flooding events within the community in The fund reports a deficit fund balance because expenditures under state and federal grant awards were not reimbursed within the County s period of availability (60 days). Based on discussions with the granting agencies, the County reported that these amounts would be reimbursed in fiscal year The Grant County Corre Caminos Fund reported the same cause of a negative fund balance. To view all data that the OSA compiled for this Transparency Report, visit: County and Municipality Fund Balances page 3 In other instances, a negative fund balance is due to accounting practices or internal controls. For example, in the case of the Town of Bernalillo s Gas Tax Fund, the entire deficit was attributable to a cash overdraw. The Town expected these problems to be eliminated in fiscal year 2015 when the Town investigated and corrected the accumulation of prior year errors in the general ledger. As another example, the City of Grants Capital Projects Fund for General Government Improvements reported a negative balance as a result of amounts due to other governmental funds. The audit contained two findings that were potentially related to this negative fund balance. The first finding was a significant deficiency in project documentation that may result in incorrect capitalization of projects. The second finding was a significant deficiency in legal compliance with budget, reflected in over-budget spending in a number of areas including general government improvements. The Governmental Accounting Standards Board (GASB) has underscored the importance of making sure that future taxpayers are not stuck paying the bill for current taxpayers decisions. As a result, monitoring negative fund balances is a critical part of ensuring fairness to future generations, a concept known as interperiod equity. Deficit balances may also suggest that governments are having difficulty living within their means, and may indicate that an entity cannot meet the burden of its current government expenditures. For example, in the Village of Angel Fire, the notes to the financial statements recognize: The Village continues to experience shortage of cash inflow due to the deteriorating economic conditions and its impact on the revenue generated from the recreation activities. Management of the Village is aware of the issues and has taken actions to keep the operation of the Village running in the normal manner. In contrast, with respect to proprietary funds, GASB observes, It is not uncommon, particularly in the governmental activities column, to see an unrestricted net assets deficit. The existence of such a deficit does not necessarily mean that a government is on the brink of fiscal disaster additional information is needed to place it in context. [A situation in which] a government issues debt to build capital assets for another government may be one explanation for such a deficit. Unrestricted net asset deficits also are created because many governments have long-term liabilities that they fund on a pay-as-you-go basis, appropriating resources each year as payments come due, rather than accumulating assets in advance. Common examples include judgments and claims and termination pay for departing employees. Five Highest Negative Proprietary Fund Balances Entity Name Fund Type Fund Name Fund Balance Classification Balance City of Albuquerque Proprietary Internal Service Risk Management Unrestricted ($33,785,479) Otero County Proprietary Otero County Processing Center Net Investment in capital assets ($10,530,983) Otero County Proprietary Otero County Detention Center Net Investment in capital assets ($9,986,339) Village of Ruidoso Proprietary Regional Wastewater Treatment Plant Unrestricted ($7,858,182) Village of Angel Fire (FY 2013) Proprietary Waste Water Unrestricted ($5,968,039) To view all data that the OSA compiled for this Transparency Report, visit: County and Municipality Fund Balances page 4 Fund Accounting Issues for Counties and Municipalities In compiling the data for this Transparency Report, the OSA observed areas where counties and municipalities may be vulnerable to accounting inconsistencies. The OSA will continue to work with counties, municipalities, their respective associations and independent public accountants to ensure that fund balance reporting is accurate and consistent. Only general funds should classify positive balances as unassigned. According to GASB 54: The general fund should be the only fund that reports a positive unassigned fund balance amount. In other governmental funds, if expenditures incurred for specific purposes exceeded the amounts restricted, committed or assigned to those purposes, it may be necessary to report an unassigned fund balance. Special revenue funds, capital projects funds and debt service funds should not report negative balances as restricted or committed. Under GASB 54, In a governmental fund other than the general fund, expenditures incurred for a specific purpose might exceed the amounts in the fund that are restricted, committed, and assigned to that purpose and a negative residual balance for that purpose may result. If that occurs, amounts assigned to other purposes in that fund should be reduced to eliminate the deficit. If the remaining deficit eliminates all other assigned amounts in the fund, or if there are no other amounts assigned to other purposes, the negative residual amount should be classified as unassigned fund balance. The portion of the general fund balance necessary to meet the General Fund Reserve Requirement should be reported as restricted. Restricted is the appropriate classification for that portion of a fund balance that third parties have limited for a purpose more specific than the fund as a whole. Because the Department of Finance and Administration (DFA) limits certain portions of county and municipal fund balances through the General Fund Reserve Requirement, that portion of the general fund should be classified as restricted. Similarly, the portion of a County Road Fund necessary to meet DFA s reserve requirement should also be classified as restricted. The OSA is considering giving further guidance on this requirement to ensure that all entities classify DFA-required reserves in the same manner. To view all data that the OSA compiled for this Transparency Report, visit: Fund Balance Basics: Why do Funds Matter? Governments account for their money in different funds. Funds are accounting devices used to account for and report specific aspects of a government's financial activities. Fund balance data is useful for: Identifying resources available to fund public programs and repay public debt. Fund balance is the difference between assets and liabilities in a fund. In New Mexico, at the state level, most agency funds are returned to the State s General Fund at the end of each fiscal year. At the local level, each governmental entity has at least one general fund and many other types of funds as well. By looking at the balances in each of these funds, we can get a sense of how much money the government has on hand to fund programs and repay debt. Reevaluating the sources of government revenue, including tax policy. Government accounting rules also require revenue coming in from different sources to be kept in different funds. By looking at an agency s funds, we may be able to tell what special grants the government is receiving, what restricted appropriations the governing body is giving to the agency and how government enterprises like utilities are doing financially. We also have part of the critical information necessary to reevaluate tax policy. Assessing the wisdom of government spending. Government accounting rules require public money that is spent for different purposes to be kept in different funds. By looking at an agency s funds, we may gain information about an agency s spending on programs, capital projects and debt repayment. Planning to ensure that future generations are not saddled with the costs of current policies. Interperiod equity (sometimes called intergenerational equity) is the concept that the current generation of citizens should not be able to shift the burden of paying for current-year services to future-year taxpayers. By evaluating the adequacy of fund balances, we get insight into whether governmental entities are achieving interperiod equity. Fund Balance Basics Fund Balance Basics: Understanding Fund Types Governmental Fund Types are used to account for most typical governmental functions. The acquisition, use, and balances of the state's expendable financial resources and the related current liabilities (except those accounted for in proprietary funds), are accounted for through governmental funds. There are five types of governmental funds: General Funds are used to account for an report all financial resources not accounted for and reported in another fund. The general fund is the operating fund of the agency. Special Revenue Funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects. Examples of special revenue funds include the irrigation works construction fund, 911 enhancement fund, job training incentive program fund (JTIP), lottery tuition fund, Office of Natural Resources trustee fund, highway improvement bond fund, federal grant funds and the oil reclamation fund. Capital Projects Funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays, including the acquisition or construction of capital facilities and other capital assets. Examples of capital projects funds include the public school capital outlay fund and the severance tax bond appropriations fund. Debt Service Funds are used to account for and report financial resources that are restricted, committed or assigned to expenditure for principal and interest. Examples include severance tax and general obligation bond funds, mortgage housing bond funds and the GRIP road bonds. Permanent Funds should be used to account for and report resources that are restricted to the extent that only earnings, and not principal may be sued for purposes that support the reporting government s programs, that is, for the benefit of the government or its citizenry. Two New Mexico examples at the state level are the children s trust fund and children s trust fund next generation within the Children, Youth and Families Department. Fund Balance Basics: Understanding Fund Types Proprietary Fund Types are business-like funds for transactions. These funds are considered self-supporting in that the services rendered by them are generally financed through user charges or on a cost reimbursement basis. There are two types of proprietary funds: Enterprise Funds are used to account for any activity for which a fee is charged to external users for goods or services. InternalServiceFundsareusedtoaccount for the provision of goods or services by one department or agency to other departments or agencies of the state, or to other governmental units, on a cost-reimbursement basis. Internal service funds should only be used if the state is the predominant participant in the activity. Fiduciary Funds account for assets placed under the government s control when a governmental unit acts in a fiduciary capacity such as a trustee or agent. Fiduciary funds include the public employees retirement fund, educational retirement fund, retiree health care fund, judicial and magistrate retirement funds, volunteer firefighters retirement fund, and deferred compensation fund. New Mexico has eight of these funds identified in the independent audits. Fund Balance Basics: Understanding Fund Balance Classifications Governmental Funds Non- Spendable: This portion of the fund is not in spendable form (for example, inventories) or is legally required to remain intact. Restricted: The constitution, statute or third parties have limited this portion of the fund to a use for a purpose more specific than the fund as a whole. Committed: The agency s highest level of decision-making authority has set aside this portion of the fund for a purpose more specific than the fund as a whole. Assigned: This portion of the fund may be used for any purpose permitted for the fund as a whole. Unassigned: In General Funds ONLY, this is the residual classification and funds can be used for any purpose within the agency s purview. In other governmental funds, any deficit is classified as unassigned. Example: City of Santa Fe General Fund, FY 2014 Non- Spendable: $84,269 Restricted: $6,136,549 Committed: $1,256,819 Assigned: None Unassigned: $8,292,215 Fund Balance Basics: Understanding Net Position Classifications Proprietary Funds Net investment in capital assets: The net amount invested in capital assets (original cost, net of accumulated depreciation and net of capitalrelated debt). Restricted: The amount of net position for which limitations have been placed by creditors, grantors, contributors, laws, and regulations. Internal actions through enabling legislation (which is legally enforceable) and constitutional provisions may also lead to restricted net position. Unrestricted: The amount of net position that is not restricted or invested in capital assets, net of related debt. Example: Rio Arriba County Housing Authority Proprietary Fund, FY 2014 Net investment in capital assets: $1,460,524 Restricted: $16,365 Unrestricted: 291,038
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