NACo POLICY RESEARCH PAPER SERIES • ISSUE 4 • FEBRUARY 2016
Counties provide essential services to 308 million residents across the country to keep communities prosperous, safe and secure. Creatures of the states, county governments operate in a constrained financial environment, conforming to state and federal mandates and limited by state caps on their ability to raise revenue. Understanding the diversity of county financial reporting and data is a first step towards examining national trends in county financial health. An analysis of 3,053 county financial reports reveals that:
1.The majority of states require county governments to observe GASB standards for their annual financial reports.
Most state and local governments follow generally accepted accounting principles (GAAP), standards of accounting and financial reporting developed by the Governmental Accounting Standards Board (GASB), an independent, private organization. Thirty-two (32) states require counties to follow GAAP and 295 counties in another 13 states and the District of Columbia choose to file their financial reports according to GASB standards, as of November 2015. As a result, almost three-quarters (71 percent) of counties report their annual financial information following GASB standards in the format of basic financial statements and on an accrual basis of accounting.
2.State specific rules for financial reporting are the standard for about a fifth of county governments.
Almost a fifth (19 percent) of counties use a financial reporting format decided by their state and other comprehensive basis of accounting (OCBOA) different from GASB standards. Nine states (Ark., Ind., Kan., Ky., Mo., N.J., Okla., Vt. and Wash.) ask counties to follow an alternative method of financial reporting and accounting to GAAP. The state determines the framework, including measurement, recognition, presentation and disclosure requirements of the county financial reports. Another ten percent of county governments use basic financial statements approved by GAAP, but they do not use accrual accounting. Most of these county governments are on the smaller side; 94 percent of them have less than 50,000 residents.
3.About a quarter of counties following GASB standards produce Comprehensive Annual Financial Reports (CAFR).
CAFRs are financial reports that follow the GASB standards and have more information, intended to provide a more robust financial and historical context of the county government. A CAFR’s additional discussions and analyses of county trends and statistical data add to the picture of a county’s financial standing. Bond rating agencies and bondholders use the additional information from a CAFR to assess the investment risk of the county government. Eighty-one percent of large counties — with more than 500,000 people — report using a CAFR. CAFRs are not exclusive to large county governments, but counties more likely to issue municipal bonds on a regular basis.
Understanding county financial reporting helps comprehend how counties function and deliver services to their constituents. Counties constantly balance serving residents while meeting the demands of state and federal mandates. The variation in financial reporting among counties nationwide shows the diversity of state regulatory requirements, county needs and the staffing and administrative capacity of county governments.
Counties provide essential services to 308 million residents across the country to keep communities prosperous, safe and secure. Creatures of the states, county governments operate in a constrained financial environment, conforming to state and federal mandates and limited by state caps on their ability to raise revenue. Understanding the diversity of county financial reporting and data is a first step towards examining national trends in county financial health. It also lays the foundation for future research about the impact of changes in state financial reporting standards for county governments. This study provides a comprehensive, national view of the variations among county governments in terms of financial reporting, as well as state and other standards with which counties have to comply for financial reports. This analysis intends to educate a policy audience evaluating the parameters of fiscal transparency placed on counties.
Understanding the diversity of county financial reporting and data is a first step towards examining national trends in county financial health.
Most state and local governments follow generally accepted accounting principles (GAAP), standards of accounting and financial reporting developed by the Governmental Accounting Standards Board (GASB), an independent, private organization. The accounting and capital markets recognize GASB as the official source of GAAP for state and local governments. State auditors or independent public accountants audit county financial statements through the lens of GASB standards. If a county’s financial report is fairly and appropriately presented in accordance with GAAP, the county receives an unqualified opinion. An adverse opinion from auditors can negatively affect a county’s borrowing costs.
GASB periodically issues new accounting standards that state and local governments observing GAAP have to implement. For example, GASB Statement No. 68 reporting standard issued in June 2012 set new requirements for government employers with defined benefit pension plans to include a net pension liability in their financial report balance sheet for fiscal years after June 15, 2014.
The accounting and capital markets recognize GASB as the official source of GAAP for state and local governments.
County financial reporting, however, extends beyond GAAP. Depending on state requirements, county governments may use alternative methods of financial reporting and accounting to GASB standards, ultimately affecting how and what financial activities counties report to stakeholders and the public. As a result, financial reporting may differ substantially among counties across the country. This study examines state requirements for county financial reporting, as well as the types of financial statements and accounting methods county governments employ. The immediate goal is to provide an understanding of the diversity of financial reporting among counties, how financial data differs among county governments and the extent of observance of GASB standards. This report intends to create a foundation for future policy research on county finance and transparency.
1. THE MAJORITY OF STATES REQUIRE COUNTY GOVERNMENTS TO OBSERVE GASB STANDARDS FOR THEIR ANNUAL FINANCIAL REPORTS.
Thirty-two (32) states require counties to follow GAAP through statute and 295 counties in another 13 states and the District of Columbia choose to file their financial reports according to GASB standards.
County governments apply GASB standards either because the state requires them to do so or to receive a favorable audit. Thirty-two (32) states require counties to follow GAAP through statute and 295 counties in another 13 states and the District of Columbia choose to file their financial reports according to GASB standards (See Map 1). Western states are the most likely to require counties to follow GASB standards. All but two Western states – Washington and Nebraska – require counties to report according to GAAP issued by GASB. In contrast, about half of Midwest states require their counties to use GAAP when filing annual financial reports. In these 32 states, county governments follow the GAAP approved format of the report (basic financial statements) and the accounting method (accrual basis) (See Appendix for more explanation of basic financial statement and accrual basis of accounting).
The Majority of States Require Counties to Observe GASB Standards
As of November 2015
Notes: Conn., R.I., and parts of Mass. have counties or county-equivalents with no county governments (marked in grey on the map).
Many states specify whether counties must report annual financial statements in accordance with Generally Accepted Accounting Principles (GAAP) set by the Governmental Accounting Standards Board (GASB) or, alternatively, meet state regulatory requirements that do not comply with GAAP (Regulatory Basis). Other states have minimal reporting requirements placed on counties (Minimum Requirements).
States require counties to produce an annual financial report audited by a third party. Most states specify the accounting methods and financial reporting standards for counties either by statute or by giving authority to state comptrollers (or similar positions) to choose the financial reporting standards. In some instances, the state acts as the independent third party auditor for the county governments. For example, the Alabama Examiner of Public Accounts audits the accounts, books and records of all county offices. In North Dakota, the Office of the State Auditor performs the audits for all 53 counties in the state. Other states, like Texas, are more nuanced. The Texas Local Government Code determines the audit procedure based on the county population size. Counties with more than 350,000 residents must have an independent audit conducted by a third party every year. County governments in counties with populations between 40,000 to 100,000 residents must appoint a county auditor. The smaller county governments, in counties with less than 25,000 residents, can pool their resources with other county governments to hire a public accountant to conduct these audits.
Nine states ask counties to follow an alternative method of financial reporting and accounting to GAAP. These nine states (Ark., Ind., Kan., Ky., Mo., N.J., Okla., Vt. and Wash.) use a regulatory basis of accounting, in which the state determines the framework, including measurement, recognition, presentation and disclosure requirements of the county financial reports. They also use other comprehensive basis of accounting (OCBOA), such as cash basis of accounting and different from the GASB accrual bases of accounting (See Key Terms for definitions).
Most regulatory states allow counties to choose between the state requirements and GASB standards.
Most regulatory states allow counties to choose between the state requirements and GASB standards. About 8 percent of counties in these states elect to follow GASB standards (both the format of the financial report and method of accounting), to increase their chances of receiving a favorable audit. While states may allow counties to choose GAAP over the state regulatory basis, in some cases counties need additional measures to adopt their preferred accounting standards. For example, counties in Oklahoma and Washington choose between GASB and the statutory alternative without any additional preliminary approval from the state. Alternatively, Kansas counties adopt the state regulatory basis of accounting by county board resolution. As of November 2015, 96 out of 105 Kansas counties have adopted state reporting standards by board resolution. Large counties in regulatory states are more likely to follow GASB standards. Ten of the 20 large counties in regulatory states — with more than 500,000 residents — report according to GAAP, while a quarter of mid-sized counties — with 50,000 to 500,000 residents — and 1 percent of small counties do so. Most of the large counties that do not follow GASB are in New Jersey, a state with strict requirements for counties to follow the state reporting standards.
The remaining seven states with county governments (Ala., Del., Ill., Neb., N.Y., S.C. and S.D.) have minimum requirements on county financial reporting. Adherence to GAAP in these counties is more of a tradition than a state requirement. The majority of the counties in these seven states elect to organize their financial statements according to GASB standards, including all large counties. For example, Delaware and Nebraska do not have a state statute or policy instructing counties how to report their annual financials. Instead, counties choose to report according to GAAP to increase their chances for favorable reviews by bond rating agencies.
Annual and Biennial Audits of County Financial Reports. The time of the release of a county financial statement varies depending on the period of the fiscal year in the county and other factors. In some states, such as Arizona, the county fiscal year runs from July 1 of the preceding calendar year to June 30 of the current calendar year. For example, Maricopa County, Arizona’s 2007 Comprehensive Annual Financial Report (CAFR) reflects the county financial activity occurring between July 1, 2006 and June 30, 2007. In other states, like Minnesota, the fiscal year for financial reporting matches the calendar year, meaning that a county financial report reflects fiscal activity from January 1 to December 31 of the given calendar year. Further, the audits of some of the county financial reports are not released annually. In 17 states, a state auditing agency conducts all or some of the audits of county financial statements. In the rest of the counties in these states and around the country, a county auditor or an independent auditor perform the audit of the county financials. In some states, such as Missouri and North Dakota, the state auditor conducts the majority of county financial statement audits and release biennial audits. In South Dakota, the State Auditor releases biennial audits mostly for smaller counties.
In total, 16 states either ask counties to report using alternative methods to GAAP or allow county financial reporting to develop by tradition.
Under the jurisdiction of their respective states, county governments file annual financial reports in accordance with state regulations. While the vast majority of states require adherence to GAAP for county financial reporting, GASB standards are not the only paradigm for conveying county financials. In total, 16 states either ask counties to report using alternative methods to GAAP or allow county financial reporting to develop by tradition. The variation of state requirements lends to the diversity of county financial reporting.
2. STATE SPECIFIC RULES FOR FINANCIAL REPORTING ARE THE STANDARD FOR ABOUT A FIFTH OF COUNTY GOVERNMENTS.
GASB standards are predominant among county governments, with almost three-quarters (71 percent) of counties reporting their annual financial information in the format of basic financial statements and on an accrual basis of accounting, as of November 2015 (See Appendix for more information of GASB standards on the format of the financial report and method of accounting). Large counties — with more than 500,000 residents — are the most likely to follow GAAP for annual financial reporting (92 percent of large counties). The majority of counties of smaller sizes — 87 percent of medium sized counties, with populations between 50,000 and 500,000 and 64 percent of small counties, with less than 50,000 residents — also apply GASB standards.
Not all counties, however, follow GAAP. Almost a fifth (19 percent) of counties use a financial reporting format decided by their state (henceforth, “regulatory basis statements”) and other comprehensive basis of accounting (OCBOA) and ten percent of county governments use basic financial statements, but not accrual accounting (they use OCBOA).
Almost a fifth of counties follow state specific financial reporting standards
As of November 2015
Notes: This study identified the type of financial report and method of accounting for 3,053 of the 3,069 county governments. Conn., R.I. and parts of Alaska, Mass. and Va. have counties or county-equivalents with no county governments (marked in grey). County governments from which NACo could not retrieve financial statements by November 2015 are also marked in grey.
County financial statements classified as “State Financial Reporting & OCBOA” represent county financial reports that use state regulated statement format and alternative methods of accounting to GAAP. “Basic Financial Statements & OCBOA” indicate counties that use GASB approved financial statement format, but use alternative methods of accounting to GAAP. Reports classified as “Basic Financial Statement & Accrual” use GASB approved financial statement format and method of accounting.
The state determines the funds and methodology to be used primarily for compliance with legal provisions and budgetary restrictions.
State-specific regulatory financial reporting requirements and OCBOA are the standard for 19 percent of county governments. The overwhelming majority are in all nine of the regulatory states (Ark., Ind., Kan., Ky., Mo., N.J., Okla., Vt. and Wash.), mostly in the Midwest and South. All the counties in Ark., N.J. and Vt. file reports in accordance with state regulatory requirements. They do not employ either the GAAP format of financial statements (basic financial statements) or the method of accounting (accrual). Instead, they use the format decided by their state and accounting bases other than accrual. The state determines the funds and methodology to be used primarily for compliance with legal provisions and budgetary restrictions. Most of these county governments are on the smaller side; 83 percent of them have less than 50,000 residents. However, nine large counties (all large counties in N.J.) also implement this type of financial reporting. Bergen County, N.J. is the largest county filing a regulatory basis statement, with more than 933,000 residents in 2014.
While state requirements for accounting methods and formats for county financial reports vary widely, the one commonality is the requirement that counties report by fund type. Unlike government-wide statements that disaggregate financial information by fund and present primary government financial activities as a whole, the state regulatory requirements examine county government funds as separate, distinct accounts that cannot be added together. The funds that counties report differ according to state regulations. For example, Oklahoma counties must produce financial statements that present only the funds representing 10 percent or more of the county’s total revenue. Indiana and Missouri counties must report all county funds as separate line items. Meanwhile, Kentucky counties must report their funds in statements as budgeted and demonstrate that fund expenditures did not exceed the appropriated amounts in accordance with state budgeting and financial reporting laws.
Differences with GASB Basic Financial Statements. The state regulatory basis statements differ from basic financial statements done on an accrual basis of accounting in a number of ways. While the state regulatory statements present the primary government financials by fund type, the GASB-approved statement of activities aggregates the financial activity of the county by major function/program. The regulatory basis statements blend the enterprise revenues within funds and do not delineate business-type activities as in government-wide financial statements. Another distinct difference is the absence of the financials of county component units from the regulatory basis county financial statements. The component units of New Jersey counties, such as vocational school districts, economic development authorities and utilities authorities, produce separate financial reports from the county financial statement. The regulatory basis statements do not include management’s discussion and analysis, as the basic financial statements do.
These county governments also use other comprehensive bases of accounting (OCBOA) that are different from GAAP standards. These include a cash basis of accounting, which recognizes revenues when transaction occurs and expenses when paid for, and a modified cash basis accounting, which combines cash basis and accrual basis of accounting. Modified cash basis of accounting uses accrual accounting for expenditures and cash basis for revenues (See Key Terms for definitions). These methods are different from the accrual basis of accounting. In the case of the accrual method of accounting, when a county receives an invoice from an outside party, for example, the county records the full expense of the invoice before any payment is made by the county to the outside party. With the cash basis of accounting, however, the county would record the invoice as an expense only when the county paid the invoice in cash. The accounting literature is still debating the benefits and costs of using different methods of accounting. Counties may use OCBOA for several reasons. Small county governments may view GAAP reporting as less useful for budgetary and administrative decision-making. Preparing financial statements on an accrual basis of accounting may be labor intensive for counties that track their annual financial activities on a cash basis. Some voices in the accounting literature consider cash and modified cash basis of accounting easier to understand, verify and execute.
A small percentage of counties report their financials in the form of basic financial statements, but use OCBOA for accounting.
A small percentage of counties (10 percent) report their financials in the form of basic financial statements, but use OCBOA for accounting. The overwhelming majority of these counties (94%) have less than 50,000 residents. The vast majority of them are in the seven states with minimum financial reporting standards (Ala., Del., Ill., Neb., N.Y., S.C. and S.D.). Further, 44 counties in regulatory states elect to report according to GASB standards in the form of basic financial statements, but do not use the accrual method of accounting that is required by GAAP. Forty-three of these counties are in Kentucky and Missouri. Marion County, Ind. — with a population of 934,243 — is the other county in a regulatory state that uses OCBOA for its financial reports. Compliance with GAAP is optional for counties in all these states. Even though these counties use basic financial statements — and have a statement of net position and statement of activities — their financials are not comparable with those counties that use basic financial statements and accrual basis of accounting. Because they use OCBOA (mainly cash basis accounting), the amounts shown for primary government functions in the statement of activities and net position do not include the costs and revenues incurred during the fiscal year that have outstanding payments or receivables. For example, their statement of net position would not include any depreciation of county-owned properties or investments earned for post-employment benefits but not yet paid.
About a third of county governments do not use accrual basis of accounting, relying on OCBOA instead. Midwestern counties are most likely to use other methods of accounting than any other region (See Figure 1). Forty-three (43) percent of Midwestern counties report using other methods of accounting than accrual; these are mostly counties on the smaller side (less than 50,000 residents). While 21 percent of Northeastern counties report with alternative methods of accounting to GAAP, more than a third of large counties in this region use OCBOA because of New Jersey State’s strict requirements for counties. In contrast, all the Western and Southern large county governments use accrual basis of accounting, as approved by GASB.
About a Third of County Governments Use Other Comprehensive Basis of Accounting (OCBOA), as November 2015
Percentage of County Governments by Region that Use OCBOA