The Most FUNDerful Time of the Year
It’s that time of year again. Not the holidays. Audit season! Many state and local governments across the county are closing their books on the prior fiscal year, whether it ended June 30 or September 30. Independent auditors will review their financial statements to opine on whether they present fairly, in all material respects, the financial position of the government. If they do, the financial statements will receive an “unmodified opinion,” and everyone involved gets to bask in the joy of having received another annual gold star from the auditors.
Where can you find the audited annual financial statements? They are published in the government’s Annual Comprehensive Financial Report (the “ACFR”), a compendium that includes the basic financial statements and detailed supplemental and statistical information. The ACFR will tell you many things about the government’s financial condition, both from a long- and short-term perspective. While the budget is the plan for the fiscal year, the ACFR is its final report card. Here are four areas to help a newbie navigate it.
1. Statement of Net Position and Statement of Activities. These are the government’s version of a private sector balance sheet and income statement. Don’t confuse them with the annual budget. They are not the same. These statements include capital assets and long-term debt that will both last beyond the annual budget period. They provide an important long-term picture of the government’s financial condition. For example, many governments report a negative unrestricted net position here, owing to unfunded pension and retiree health care liabilities. Their ability to sustainably fund those liabilities over time is a key determinant of fiscal health.
2. Governmental Funds Balance Sheet and Statement of Revenue, Expenditures, and Changes in Fund Balances. These are balance sheet and income statement #2 and align more closely with the annual budget. They provide a short-term picture of revenues collected, expenses paid, and whether the government maintained a balanced budget as required by law. You will find major fund categories like the General Fund, the main operating fund with expenses for government services supported by general taxes and other revenues.
The fund balance reflects currently available financial resources and is broken down into various segments based on external restrictions and internal designations. A positive unassigned fund balance represents an accumulated budget surplus, which you may choose to spend or save. A negative unassigned fund balance is an accumulated budget deficit, which you should plan to resolve. You can compare these actual results to your budget to see how you performed. This can inform future budget assumptions and monitoring. By closely monitoring the budget year-round, you should not find any big surprises when the books close.
3. Proprietary Funds, Component Units, and Nonmajor Governmental Funds. While they may not all be the prime focus during budget season, the ACFR also includes detailed balance sheets and income statements for the government’s various other funds and component units. Proprietary funds function like a business. They provide goods or services to users in exchange for fees or other related revenues, such as public utilities, public transit, and internal service funds. Component units are the alphabet soup of legally separate entities for which the government is financially accountable, such as public authorities it has created. Nonmajor governmental funds include various state and federal grants and special revenue funds with restricted purposes. In total, these funds and units represent a substantial portion of the government’s finances. In some cases, they are supplemented with General Fund contributions. You should closely review and monitor their performance to ensure their ongoing fiscal stability too.
4. The Management’s Discussion and Analysis (MD&A) and the Notes. Last, but certainly not least, the MD&A and Notes appear before and after the basic financial statements, respectively. They provide a treasure trove of context and reference material explaining the government’s underlying financial structure and its financial position for the reported fiscal year. If you have a question when reviewing the ACFR, the answer may be in the MD&A or the Notes. You will find details on capital assets, long-term debt, retirement obligations, inter-fund transfers, legal liabilities, and more. If the rest of the ACFR wasn’t enough for you to “nerd out,” these will do the trick!
While there are many more details and nuances than I have covered here, these four areas can help a newbie navigate the annual tome that is the ACFR. Budgeteers often describe living in three fiscal years at once: the prior year we’re closing out, the current year we’re in now, and the budget year we’re planning for next. But before I start riffing on the Ghosts of Fiscal Past, Present, and Future, I’ll just wish you a Merry Audit Season. May you find a healthy budget surplus waiting under the ACFR Tree.