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I am rather intrigued that there is no mention of the BASIS OF ACCOUNTING and the BASIS OF BUDGETING in this discussion. This is one of the most basic constructs used in FUND ACCOUNTING. I. BACKGROUND - All government finance people is based on FUND ACCOUNTING. The statement that "...the applicability for government of what is often referred to as private sector accounting methodology" shows a lack of understanding of FUND ACCOUNTING. The statement that "One of the challenges with accounting and reporting in the public sector is that often the budget framework is not clearly defined, or at least not defined in a way that accounting for budget transactions is straight forward" is incorrect, and such a lack of understanding by finance people working for a United States Federal Government, or State Government, or Municipal Government agency would not be permitted without a reminder to them of the basic constructs of FUND ACCOUNTING to get them on the right track. II. GOVERNMENTAL ACCOUNTING AND BUDGET IN THE UNITED STATES - For state and municipal governments in the United States operating under Governmental Accounting Standards Board (GASB) pronouncements, there are three basic categories of differences between the "basis of accounting" and the "basis of budgeting that follows governmental generally accepted accounting principles (GAAP) for state and local government: (1) Basis of Accounting--"Cash plus encumbrances" (or "obligations")and "modified accrual" are two of the different ways to define revenue and expenditures; (2) Perspective-- The budget and accounting reports may have different fund reporting structures, e.g., a budget may account for debt services in the Local Funds, while GAAP principles require that debt service be recorded in a separate fund; 3) Reporting Component-- the State or Municipal government's Comprehensive Annual Financial Report (CAFR) [most are posted on their websites) typically present "reporting components" and funds in different ways than the budget document. III. WHAT IS A FUND? This is because a State or Municipality's accounting system is organized and operated on a FUND BASIS. A FUND is a group of functions combined into a separate accounting entity (corresponding to a corporation in the private sector) having its own assets, liabilities, equity, revenue and expenditures/expenses. IV. FUND TYPES - The types of FUNDS used are determined by governmental generally accepted accounting principles. The number of FUNDS established within each type is determined by sound financial administration (e.g. the State's or Municipality's Financial Policies). Specialized accounting and reporting principles and practices apply to GOVERNMENTAL FUNDS and EXPENDABLE TRUST FUNDS. PROPRIETARY FUNDS and PENSION TRUST FUNDS are accounted for in the same manner as similar business enterprises or nonbusiness organizations. V. IMPORTANCE OF UNDERSTANDING THE "BASIS OF BUDGETING" USED BY A GOVERNMENT - The BASIS OF BUDGETING refers to the conversions for recognition of costs and revenue in budget development and in establishing and reporting appropriations, that are the legal authority to spend or collect revenues. The State or Municipality in the United States uses a MODIFIED ACCRUAL BASIS for budgeting GOVERNMENTAL FUNDS. PROPRIETARY FUNDS are budgeted using ACCRUAL concepts. All OPERATING and CAPITAL expenditures and revenue are identified in the budgeting process because of the need for appropriation authority. VI. GOVERNMENT BUDGETS MUST BE RECONCILED TO GOVERNMENT ACCOUNTING - The budget is fully reconciled to the accounting system at the beginning of the fiscal year, and in preparing the CAFR at the end of the fiscal year. A number of GOVERNMENT GAAP adjustments are made to reflect BALANCE SHEET requirements and their effect on the budget. These include changes in designations and recognition, via studies and analysis, of accrued liabilities. Amounts needed for such long-term liabilities as future payoff of accumulated employee vacation is budgeted as they budgeted as projections and once recognized are adjusted for actual amounts. VII. THE NEED FOR BUDGETARY CONTROLS - States and Municipalities maintain budgetary controls designed to monitor compliance with expenditure limitations contained in the annual appropriated budget approved by their designated legislative body who has "the power of the purse". A project-length financial plan is adopted for the Capital Projects in a CAPITAL IMPROVEMENT PLAN (CIP). The level of BUDGETARY CONTROL (that is, the level at which expenditures cannot legally exceed the appropriated amount) is established by function within the GENERAL FUND. VII. HOW SPENDING OCCURS. A. BUDGET (amount appropriated and allocated and apportioned to the Government Org by OBJECT CLASS. B. COMMITMENT (when requisition to acquire a product or service is "requested".the Budget person reviews the request and affirms that the request is authorized and that the budget of the ORG has sufficient funds in the OBJECT CLASS - this is called "FUND CERTIFICATION" ) C. ENCUMBRANCE or OBLIGATION (In Federal, State and Municipal Governments there are segregation of duties between those who can request, those who can commit, and those who can encumber or obligate funds. Encumbering or obligating is typically done through a CONTRACT, AGREEMENT, PURCHASE ORDER, or MEMORANDUM OF UNDERSTANDING by a Contract Specialist or Purchasing Agent who is "Warranted" -- has delegated authority to obligate the government for certain dollar amounts) D. OUTLAY (when an INVOICE with the number of the Purchase Order is presented by a Vendor or Contractor, then: 1) the invoice is reviewed to insure that it is "proper" (has the information specified in the Purchase Order); 2) its listing is compared to the product or service ordered, so an inspection is undertaken; 3) it is recommended that Accounts Payable either 3.1) Pay, as it is deemed "acceptable", or 3.2) Do Not Pay, as it is deemed as being "not acceptable" along with the reasons. States and Municipalities also maintain this encumbrance or obligation recording system as one technique of accomplishing budgetary control. VIII. EXPIRED OR LAPSED FUNDS - Generally, encumbered or obligated amounts lapse at fiscal year-end in the GENERAL FUND but not in the CAPITAL PROJECTS FUND. IX. IMPORTANT DISTINCTIONS BETWEEN FUND TYPES - The budgetary GENERAL FUND differs from GOVERNMENT GAAP by including the SPECIAL REVENUE FUNDS that are discretely authorized to be utilized by designated governmental component units. This authority, typically in the "Appropriations Language", recognizes budgetary expenditures when orders and contracts are issued rather than when goods and services are received.
Toggle Commented Jul 1, 2012 on Accounting and the Budget Framework at PFM blog
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Just wondering why the Secretariat did not use the International Cities and Counties Association's (ICMA) Financial Trend Monitoring System (FTMS)? I would like to provide an "overview" so that you can determine its applicability to the PFM Performance Measurement Framework. The Financial Trend Monitoring System (FTMS) was developed by the International City/County Management Association (ICMA) as a method for monitoring the financial condition of local governments. This system identifies factors that effect financial condition and sets the framework for their analysis. The indicators described in the ICMA publication, Evaluating Financial Condition, A Handbook for Local Government, are designed to give local governments a method of monitoring financial condition using data that is easily accessible. Using this model local government’s can provide a report to policy makers, citizens, employees, bond rating agencies, and anyone else who may be interested in the their financial wellbeing. The FTMS is intended to be used as a management tool that can help to shape long term policy priorities. The measures include: Financial condition, as defined by the FTMS, is the ability of a locality to maintain existing service levels, withstand local and regional economic disruptions, and meet the demands of natural growth decline, and change. These conditions are examined by looking at four areas of a localities fiscal condition as follows: 1. Cash Solvency – the ability to pay the bills over the next 30 or 60 days 2. Budgetary Solvency – the ability to cover expenditures with revenues and other resources over the normal budget period 3. Long-Run Solvency – the ability to meet expenditures as they come due in the future 4. Service Level Solvency – the ability to provide services at the level and quality that are required for the health, safety, and welfare of the community and that the citizens desire and expect. The ICMA provides a list of over 40 indicators that can serve as a litmus test for the financial condition of a locality. These indicators are broken down into specific categories for further analysis. Adjusting for inflation converts current dollars into constant dollars. The conversion from actual dollars to constant dollars allows for analysts to take into account the appearance of growth that may be due to inflation. Adjusting for inflation involves three steps. The first step is selecting a price index. For this report the Consumer Price Index (CPI) was used. The CPI tracks the prices of good and services used by average wage earners. The goods and services include items such as food, housing, clothing, transportation, health, and recreation. The second step is selecting a base year as the starting point for comparison. The data for this report dates back to 1996 so it was used as the base year. The third step is the actual conversion from actual to constant dollars by multiplying the actual dollar amount by the conversion factor. The conversion factor is equal to the 1996 CPI divided by the CPI of following years. The table below depicts the CPI, conversation factors used for this report, and the percentage change from the previous year. There are significant variations in the way that local governments manage their finances. These variations make it difficult to develop standards that apply from organization to organization. Therefore, there are no defined benchmarks for many of the indicators. Benchmarks for these indicators should be set by the individual municipality. A few of the indicators do have benchmarks that are generally set by bond rating agencies or organizations such as the Government Finance Officers Association (GFOA). The FTMS focuses on trends rather than defined benchmarks. For each indicator a warning trend has been defined. City staff has evaluated each indicator and assigned ratings according to the following rating scheme: + Green – the trend is favorable. The indicator meets any policy or performance measure set by the City. + Yellow – the trend is uncertain. The indicator should be watched carefully because it may move in a direction that could have a negative impact on the City’s financial health. + Red – the warning trend has been observed. The indicator does not meet the policy or performance measure set by the City. More information should be gathered and corrective action should be taken. Just a thought. Anthony H. Rainey
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This sounds like an exciting project. Could you comment on the following: (1) What were the "costs" put into the FDIC"s, Federal Reserve's and the Office of the Controller of the Currency's OMB Exhibit 300 for their Central Data Repository (CDR) Modernization project? (2) What was put into Section D. Performance Information for the anticipated results of this project, particularly within the following columns within the Performance Information Table: (2.1) Fiscal Year? (2.2) Strategic Goal(s) Supported? (2.3) Measurement Area? (2.4) Measurement Grouping? (2.5) Measurement Indicator? (2.6) Baseline? (2.7) Target? (2.8) Actual Results? (3) How much did the project cost? (4) How much costs have been avoided since the utilization of this project? While many are impressed about the ability to use technology to manage lots of information, in the end Too Big To Fail comes down to this - did the quantitative benefits of this project outweigh the costs of the project?
I believe that any and all discussions on the "impact" should start with a "null hypothesis" - had we not implemented ARRA, we would have expected unemployment to have been X, foreclosures to have been Y, and jobs "preserved" (without ARRA money they would have been eliminated) to be Z. A lot of state and county revenue sources for transportation, human services, economic development, health, and education projects were not easily replaced by ARRA funding. There is an apparent weakness in intergovernmental communications which was an opportunity sorely missed with the roll-out of the ARRA. Though a great idea to quickly "pass" the ARRA, the intergovernmental planning neglected the the capacity of smaller governments to apply, administer and report on the use of these funds. Many feel that the federal government could have considered funding some enhancements to existing "intergovernmental financial reporting systems" and "payroll systems" and "asset management systems". Perhaps if OMB could have provided a framework of financial reporting (cross-walk between the federal and state an local government chart of accounts) and worked with the existing financial software publishers on technical enhancements to accommodate the ARRA recordation on reporting. Without such technical guidance, from say the IT experts within OMB, the opportunity to automate the "cost allocation studies" and update existing fund accounting software to generate these ARRA reports could have been done for ARRA, and served as a model for future grant reporting. Employment is a big issue for localities. Many of us awaited the utilization of the Office of Management and Budget (OMB) 2010 Standard Occupational Classification System (SOC) - and automate the reporting through State Employment Security Departments. We also expected to see the NAICS codes used as a means of reporting what sectors of our local economies were being helped by ARRA moneys. Though the site is impressive, it is not useful to a locality that would like to see those employment numbers to be portrayed by SOC code and the organization receiving the ARRA funds by NAICS code within a county and city boundary. Oversight and accountability is important however, the federal, state and local government financial cycles could have been examined before hand. That is to say, the financial models for federal agencies (purchase request to obligation to outlay to close out), state and local governments and agencies purchase request to encumbrance to expenditure to close out)could have been modeled to prepare appropriate management control reviews. Such an "intergovernmental dialogue" could have added clarity and value in preventing and resolving problems. RECOVERY.GOV - FINANCIAL AND ACTIVITY REPORTS are not decomposed by county or city. This is the world that the majority of government operates in. RECOVERY.GOV - FINANCIAL STATUS REPORTS are not decomposed by county or city. With the advent of Geo-Coding and mapping, one would expect to see "results" at the county and city level. The state level is still too large for a citizen to see "results". RECOVERY.GOV - STATE RECOVERY SITES. Going to "Where is the Money Going", typing in 92507 in the "View the Recovery Information in Your Area" yields a nice result. From the top of the map under the "St" of "E Washington St" there is a single blue dot straight down from "St" before the San Bernadino County line. Clicking the blue dot showed 1 recipient, no jobs created, for a cost of $72,289. The "Sub Recipient Name" is the DEPARTMENT OF EDUCATION ARIZONA. I agree with Maitner that some type of review of "...a return on their investment" needs to occur and that "...the funds are being spent appropriately and are subject to a full accounting for each dollar". Finding a State of Arizona Educational Institution in southern California using $72,289 and not creating a job raises questions. Perhaps I just do not understand the reason why a State of Arizona institution can be an ARRA sub recipient in southern California. Transparency without explanation causes trouble for federal, state and local government.
Very informative and there are a few clarifications that would be helpful. First, WHAT IS BUSINESS ACTIVITY MONITORING (BAM)? This is the first that I have heard of it. How is BAM distinguished from Activity Based Management (ABM) and Activity Based Costing (ABC)? Has BAM reconfigured the Chart of Accounts into "activity codes" that can record and report all activities in the enterprise on a monthly basis? Second, HOW DO YOU DISTINGUISH COST SAVINGS FROM COST AVOIDANCE"? I see a $600 "savings" figure quoted from "potential improper payments" however this sounds more like "cost avoidance. At the end of the Fiscal Year what was the amount of cost savings that were reflected in the Ending Fund Balance as a result of this effort? Third, WHERE ARE THESE "REAL-TIME PROGRAM ASSESSMENTS" POSTED ON A DOD WEBSITE? Can the public get the hyperlink to this source (transparency). In FY 2008 and FY 2009 what decisions was DoD management able to make as a direct result of these real time program assessments? Fourth, WHAT CYCLE-TIME STANDARDS (PURCHASE REQUEST TO OBLIGATION TO PAYMENT TO CLOSE-OUT) ARE USED TO ASSESS "CONTINUOUS TRANSACTION MONITORING"? In other words, if there is a repository of such data than can one see "cycle-time" improvements for transactions? Fifth, IF CONTINUOUS TRANSACTION MONITORING, REAL-TIME ASSESSMENT, AND BAM WORK SO WELL, THEN HOW WILL IT BE USED TO ENABLE DOD TO PRODUCE AN AUDITED FINANCIAL STATEMENT? Can these tools result in the production of an audited financial statement for all of DoD or its component units?
Q1. WHAT DO YOU THINK? A1. I do not think the accountants have "recorded, summarized and succinctly reported" on past events in an understandable way. Some examples: * PAYROLL VERSUS PERSONAL SERVICES(PS) - The General Ledger and Budget uses 8.33% reporting (1/12th or monthly reporting) while the Payroll uses 3.86% reporting (1/26th or Pay Period Ending date reporting). A lot of Personal Services Object Classes for the remaining balance uses estimates to derive how much Salary and Benefits there is at the end of the month. Performance would dictate that each of your position's budget performance could be reported by position on the budgeted versus actual amount of each position's PS resources it used - down to the penny. In fact, one would expect the Payroll Accountants and Budget Analysts to collaborate to provide a Program Manager with a "Sources and Uses of Salary Savings" report - but how many federal, state, or municipal governments have such "PS Performance Reports". If Human Capital is so vital, then why do our HR, Finance, Budget, Payroll and Accounting systems not reconcile a monthly PS financial report with a payroll report by the exact time periods (the first work day of the calendar month to the last work day of the calendar month)? * OMB EXHIBIT 300 BUSINESS CASES. Section 300 of OMB Circular A-11 establishes policy for planning, budgeting, acquisition and management of Federal capital assets, and provides guidance for budget justification and reporting requirements for major information technology (IT) investments and for major non IT capital assets. The SUMMARY OF SPENDING FOR PROJECT PHASES is (REPORTED IN MILLIONS) on this form. Federal agencies are required to predict and justify anticipated "performance" by PHASE - Planning Phase, Acquisition Phase, Operations & Maintenance Phase, Mixed Life Cycle Phase, and Multi-Agency Collaboration Phase. The Exhibit calls for the use of "cost avoidance" and "cost savings" analysis. OMB even has a new web-site "IT Dashboard" ( that has some nice graphs, but for as any accountant and budget analyst would tell you when viewing this site - there are no budget versus actual or phase budget plan versus actual dollar figures. Instead, this "IT Dashboard" has an "Investments by Agency Rated" which does not measure any dollars encumbered (obligated) or outlayed (paid). Numbers people manage by numbers - either accounting numbers or budget numbers. There are no accounting or budget or Project Phase numbers on the "IT Dashboard". The examples above are provided as a "wake up call" for government finance to use performance measures for payroll, personal services, and for the federal government to report on the "budget versus actual" by Phase for their funded IT projects. Note, that I am sticking to financial and not efficiency or effectiveness measures. What would the Chief Performance Officer would have done for the two examples above? Q2. DID YOUR LOCAL GOVERNMENT CUT PERFORMANCE ACTIVITIES IN ITS MOST RECENT BUDGET? A2. Yes we did, within our fixed amount of time and resources. As localities derive the bulk of their General Fund from Property Taxes, the real estate environment has taken its toll. We are attempting to get our State Tax Assessment and County Tax Collection efforts to map the delinquencies on a Geographical Information System (GIS) to enable we small localities to quickly view patterns. We also need the State Employment Security Department and the U.S. Department of Labor and the U.S. Census Bureau to share their employment data with we small localities. That is a performance activity that the Federal Government, with its vast IT resources and architecure, ought to be taking the lead on. Note, this is a different question other than "does your government have performance measures"? It is a question of adding value. The question that has been asked since Minnesota Milestones, Oregon Benchmarks, and CitiStat performance activities is what value does the Program staff, elected official, citizen, ratepayer, taxpayer or bond holder garner as a result of undertaking performance activities? I believe that performance activities must first "show cause" that it will add value in decision-making, assessment and evaluation. Until these expectations are solicited, defined, and met, then the budget will not be performance based. Once again, it is too bad that in financial systems there are not many "Financial Dashboards" that come standard. Why does not the U.S. Office of Management and Budget focus on these GIS, employment, and revenue collection data sharing requirements rather that building "Investments Rated By Agency" dashboards as states and municipalities deplete their limited resources? Q3. DOES YOUR ORGANIZATION HAVE A PREFERRED STRUCTURE FOR THE PERFORMANCE LEADERS? A3. Yes. Clarity, feasibility, and automation. Be clear as to what it is "performance" is intended to do so that expectations are managed and people buy in to something tangible. Make sure that performance is feasible. I think that government finance, especially payroll, accounting, budgeting, accounts receivables, accounts payable, fixed and controllable assets - needs to manage with metrics and dashboards. As federal, state, and municipal governments all perform these activities, why aren't these metrics collected and a financial performance metrics consortium constructed so that the results can be uploaded on a monthly basis to see "best in class" and for other government finance offices to share their "best practices" that make them best in class? The key is starting with data that we all have, establishing some standards (RED, YELLOW, GREEN) and automating the collection, reporting and evaluation. Should this be the leadership role of the CFO? Should professional organizations provide some trying for this effort? Q4. DO YOU THINK THAT YOUR GOVERNMENT SHOULD HAVE A CHIEF PERFORMANCE OFFICER (CPO) THAT REPORTS DIRECTLY TO THE TOP EXECUTIVE? A4. No. Keep It Simple Stupido. Position Classifications have to add this component as part of every manager's performance review. That would get Human Capital Management involved with Agency Management, and require collaboration. the innovative governments would figure out the solution quickly, let us get someone in. The horse is getting performance as part of the evaluation so that management becomes a stakeholder. Q5. HOW DO YOU PLAN TO CONNECT OR IMPLEMENT OR REJECT THE LARGE NUMBER OF MANAGEMENT INITIATIVES PROMOTED BY CONSULTANTS AND ACADEMIC EXPERTS? A5. I do not know about others, but I do not have the luxury of hiring consultants or conferring with academic experts on management initiatives. I must rely on my colleagues, peers, and professional organizations. Success breeds success. The first one to market or the first one with the concept is not always the winner, rather it is the first one who can make their concept work within the political and fiscal environment that succeeds. We need more stories from these winners. Q6. DO YOU HAVE ENOUGH RESOURCES (TIME, MONEY, COMPETENT STAFF, COMPUTER/IT SUPPORT, ETC) TO IMPLEMENT YOUR DESIRED APPROACH? A6. In management, we get paid to get things done. Today's tools are social networks, collaboration and professional organizational involvement. Find out new ideas, concepts from others, and implement them the best way that you can. Q7. WHAT LESSONS CAN WE LEARN FROM THE FEDERAL GOVERNMENT AND ITS USE OF CHIEF PERFORMANCE OFFICERS? A7. In State and Municipal government, we do not have the luxury of haring another "Chief". In fact, in municipalities, we are the CFO, CIO, CAO and CPO.
I think that Rainy Day or Reserve Funds are a really good idea. They are established and maintained to ensure the continued delivery of a government's services to address emergencies, address a temporary revenue shortfall or provide stability during economic cycles. Sufficient reserve funds are typically determined by policy with the "basis" of the amount, its use, and replenishment determined by the executive and legislative branches. One should examine the "Financial Policies" of the particular government. Rainy Day and reserve Funds are managed to provide adequate cash flow, stabilize the government's interest rates and provide continuity in service delivery. Typically this fund has an "emergency plan" that the administrator or manager or mayor or commissioner or superintendent or executive proposes to the legislative branch of the government for permission to tap into it and use it. Prior to the use of the Rainy Day or Reserve Fund or resources for either emergency or countercyclical purposes, the Financial Staff of the government prepares and distributes a report to the legislative branch addressing the requirements for use of the reserve and the amount of funds requested. The report is typically presented to the legislature prior to the meeting at which the they make a decision on use of these resources. Those are the checks and balances along with the published Financial Policy. There are some governments who have even developed a "countercyclical reserve" that is designated for use as "bridge funding" necessary to offset slower revenue growth during a recession. Slower revenue growth or revenue decline triggers the Legislture's assessment of use of this "countercyclical reserve" when basic revenue growth falls to below a certain percentage for a sepcified time period (e.g. two consecutive quarters) or when the financial forecast estimates that basic revenue growth will be below a certain percentage for the remainder of the next fiscal year. Basic revenue in these cases are the sum of General Fund taxes, licenses, fees and interest income. I think that every government is in a different economic environment that may uniquely affect their respective revenues. That is why I am an advocate of municipal governments to use the ICMA's Financial Trends Monitoring System (FTMS) to portray the demographic relationships of the community and their influence revenues and expenditures. I think that the best solution is to present to the legislature your "basis" of determining the funding level of the rainy day or reserve fund calculation and use, put it into a policy, fully disclose its use and when it will be replenished. These are all key decisions that will address many issues and assumptions. Your statement that "[d]ue to the peculiarities of governmental fund accounting, a town could have a seemingly appropriate balance of 10 percent in the general fund, while excessive cash balances are hidden away in less-noticed funds" may require an examination of the policy and practices utilized by the particular Town during its budget hearings. I would expect that the legislature in this Town would discuss this in open session with their executive regarding their "basis" of determining these balances by fund and their uses. These balances should be examined in the monthly financial status reports to answer any questions or gain clarifications on underlying issues. I think that the most commonly asked question would be about the "fund balance" and how large it should be during the budget process. Perhaps the best answer would be an amount sufficient that short term borrowing for cash flow could be avoided and would also allow the government to set aside sufficient assets to realize its longer range goals. This may not always be practical or politically possible. The executive and legislature must make a policy decision as to the extent they will borrow for cash flow rather maintaining a working cash balance.
I think that there are seven items that you can add to your list: First, we must implement common data-sharing protocols that link existing government (federal, state, local, agency, department, bureau, office, region) financial systems and provide government wide financial reporting and management information. Can one perform a query of American Recovery and Reinvestment Act transportation projects whose desired outcome is to reduce transit time? If we used a common data-sharing protocol then it could be done. Second, we (elected and appointed officials and the FASAB and GASB) have to really identify and define government financial reporting requirements, particularly for elected officials, appointed officials, strategic management, program management, financial management, citizens, customers, clients, suppliers, contractors, and auditors. When was the last time you picked up a PAR or a CAFR in a waiting room at an office? I hope that you had a double shot latte before you tried to read it. If we do not really know the point of financial and performance reporting in a way that people will understand it, then it adds no value. Third, we must provide access to all financial transactions and reporting via Web-based applications. Put everything on dashboards that are updated nightly. That will drive the reporting requirements of these systems. Fourth, we must provide flexible tools for financial analysis and reporting, at both the field level and the central level. It is only when users can “get” what they want with a ‘flexible tool’ on a financial and performance dashboard, then we will continue to receive requests like “can you run me a report with …” or “give me everything you have about ..”. As Robert N. Anthony of Harvard aligned Strategic Planning with Financial Accounting, Management Control with Management Accounting, and Operational Control with Cost Accounting (and that was in 1963), we need flexible tools to link the ‘finance side” with the “performance side”. Fifth, we must guarantee a secure environment for the sharing of financial information within the government and with external partners. There must be more practices that are standardized in both physical and virtual security for financial information. Sixth, we must provide Web-based training in the use of financial systems tools. Our financial system users should be experiencing more individualized, self-paced classes in their offices or home. These internet-, intranet- or video-based (YouTube) training allows them to learn at their own pace when they need to master new skills. Training in the use and interpretation of financial dashboards must be a part of management training and employee development programs. Our users should be able to watch these videos over, and over, and over again – even on their Blackberry. Seventh, we must provide feedback mechanisms to staff on the design and functionality of the integrated financial system. This is particularly important in the design of “work-flows” and what Apple calls the ‘Prioritization of Design Decisions’. Apple's design approach should be utilized in the design and functionality of these new integrated financial systems that are built or under construction: “... an application that merely meets the minimum requirements may be acceptable, but probably does not deliver the features most users expect and is unlikely to inspire admiration and loyalty in its users. Because user satisfaction ultimately determines the success or failure of your application, it should be at the heart of your design decisions.” Financial system screen and module and navigation training needs to be enhanced. As we push more and more non-finance people onto the financial information system train track, we have to make a greater effort on design decisions for what I call "infrequent users".
Q1. DOES THIS MEAN THAT THEIR COMPUTERS STARTED TO SMOKE? A1. No. Q2. AS TRILLION-DOLLAR DEFICITS ARE PREDICTED AS FAR AS THE EYE CAN SEE, WHAT WILL HAPPEN TO OUR GOVERNMENT WHEN OUR DEBT DOES GET TO A POINT THAT WE CANNOT SUSTAIN? A2. To answer this question, we must create a model of the 10-year revenue requirements (short and long term) and 10-year expenditure requirements (short and long term) for the federal government, state governments and local governments. If we were all using some type of strategic planning with goals, objectives, and strategies tied to expenditures and performance measures in a model, then “choices” could be made as to “what you get” for increases and decreases. For example, the state of California whom municipalities and other institutions also rely on for revenue would also have to show the anticipated “cause” and “effect” relationships on 10-year revenue and expenditure projections against their strategic plan (goals, objectives, and strategies ties to expenditures and performance measures). If there was any time to introduce financial and performance measurement IT collaboration, then it would be now. Such a model would disclose debt servicing requirements as a result of borrowing and would lead to discussions of repayment strategies (reducing budgets, enhancing revenues) as well as factoring in demographic changes occurring within state and local tax bases. Q3. DOES ANYONE KNOW WHAT OUR LIVES WILL LOOK LIKE WHEN THE FEDERAL GOVERNMENT CANNOT BE KEPT GOING? A3. Federal, state, and local governments are required to prepare a Continuity of Operations Plan (COOP) for disasters and/or emergencies. Why can’t we prepare a financial COOP so that priorities and choices can be made “now”? Q4. WHEN WILL WE REACH THIS UNSUSTAINABLE POINT? A4. As long as there are people and institutions who buy federal government issued debt and are in first position, then we will be able to sustain this. My suggestion is that we create the “model” above to guide us. When people or intuitions refuse to buy federal government issued debt, then that may be the unsustainable point. Q5. WILL ANYONE BAIL OUT THE U.S. GOVERNMENT? A5. Yes. As citizens are government, and government is us, we will bail ourselves out. One for all and all for one. There is no distinction between government and citizens. That is what America is all about. I suggest that we address these issues more specifically: I. REVENUE TRENDS - Revenues determine the capacity of the federal government to provide service. Important issues to consider in revenue analysis are growth, flexibility, dependability, diversity, administration, and elasticity (elastic revenue can be defined as one that directly responds to changes in inflation and the economic base; i.e., as inflation and the economic base increase, elastic revenues increase in roughly the same or greater proportion, whereas, if inflation declines or the economic base shrinks, then elastic revenues drop in proportion.) Under ideal conditions, revenues would grow at a rate equal to or greater than the combined effects of inflation and expenditures. They would be sufficiently flexible (free from spending restrictions) to allow adjustments to changing conditions. They would be balanced between elastic and inelastic in relation to inflation and the economic base; that is, some would grow with inflation and the economic base and others would remain relatively constant. Analyzing the federal revenue structure will help to identify the following types of problems: a)Deterioration of revenue base b)Practices or policies that may adversely affect revenue yields c) Poor revenue-estimating practices d) Inefficiency in the collections and administration of revenues e) Over dependence on obsolete or intergovernmental revenue sources f) User fees that are not covering the cost of services g)Changes in the tax burden on various segments of the population II. REVENUES PER CAPITA - Examining per capita revenues shows changes in revenues relative to changes in population size. This ought to be done at a state and local level by a collaboration effort of the federal, state and local government revenue officers (the technology being no-existent is no longer an excuse). As population increases, it might be expected that revenues (and the need for services) would increase proportionately and therefore that the level of per capita revenues would remain constant in real terms. If per capita revenues are decreasing, then the government may be unable to maintain existing service levels unless it finds new revenue sources or ways to save money. This reasoning assumes that the cost of services is directly related to population size. A key part of this indicator is that it adjusts for inflation (i.e., current dollars are converted to “constant dollars”) and then calculates the revenues per capita. This indicator also introduces the concept of “net operating revenues,” a combination of revenues from several different funds to determine which revenues are available for general government operations. If a bad trend is observed, then we ought to try to identify the causes (Why is it happening?), assess the significance (Is it important?), and devise action strategies (What can be done?). I suggest that this be a part of the American Recovery and Reinvestment Act reporting requirements. The following are starting points for this analysis. If revenues are decreasing, then the following issues should be considered: • Is the community within a state or locality experiencing general economic decline? • Is the decline a temporary or continuing trend? • Is the decline related to changes in population, such as a decrease in population groups that historically generated the largest portions of revenue? • Is the decline due to problems inherent in the revenue structure, such as over-dependence on elastic revenues during a period of inflation? • Is the current tax structure preventing the utilization of more appropriate taxes, fees, or charges? • Can revenues be increased by any of the following measures? 1. Revising revenue collection procedures, 2. Reducing collection delinquencies, 3. Instituting or increasing service charges, fines and penalties, license and permit fees, 4. Instituting or increasing charges for use of facilities, equipment or personnel, 5. Selling surplus property or equipment II. WHEN THE ECONOMY CHANGES AND WE BEGIN TO SEE REVENUES PER CAPITA INCREASE (e.g. the 1990s), THEN WE NEED TO ANSWER THE FOLLOWING QUESTIONS BEFORE PRESUMING WE ARE OUT OF THE WOODS: A. Is it reasonable to assume that the increased level of revenues will continue? B. If these revenues are being used for new programs that will require continued funding, then what plans does the federal government have for the time when these revenues are no longer available? States and localities operate under the rule that “one time revenues” only fund “one time expenditures”. Why can’t the federal government operate under the same rule? C. Is the increase in revenues per capita a sign that costs will increase in future years-as would be the case, for example, if the new revenues were derived from an increase in building construction from an American Recovery and Reinvestment Act (ARRA) expenditure, and then will the additional revenues cover the additional costs? If not, then is there a plan for the federal or state or local government funding these costs? D. Is the increase in revenues per capita due to a decline in population rather than to an increase in revenues? If so, will the decline in population eventually create a decline in revenues? Is the decline in population accompanied by an increase in the number of smaller households, which can result in higher service costs to the state, county or city? Again, the U.S. Department of Commerce and U.S. Department of Labor and the U.S. Department of the Treasury must make a greater effort in working with states and localities regarding workforce trends. Again, payrolls are reported to federal, state and some local government agencies. Are we utilizing technology to examine trends and conditions? Are populations increasing or decreasing? What is the effect on revenue per capita? E. Do the increased revenues per capita represent an increase in the tax burden measured by comparing changes in revenues per capita to changes in personal income, business income, or other measures of state’s or locality’s wealth? If the tax burden is increasing, then will state and local residents and business owners be less able to pay? Might they be tempted to relocate to a jurisdiction that has a lower tax burden? We have these numbers, but are the U.S. Department of Commerce and U.S. Department of Labor and the U.S. Department of the Treasury working with the states and localities to use them as a predictive model? III. THESE ARE THE QUESTIONS THAT COULD INFLUENCE POLICY? We can continue to dodge these questions and the issues and avoid decisions they require, but within this window of opportunity that we have now, why don’t we pose this in a way that addresses the issues that I have presented above? I don't think this has anything to do with panic, but rather dveloping "tangible" plans with specific recommendations that re based on emprical data. The low-hanging fruit of course being the federal, state and local government IT collaboration infrastructure needed to share financial and demographic information. That is the question that remains unanswered and unaddressed. As State and Local governments are required to have balanced budgets, the choice to "issue debt" requires a direct dialogue with citizens as to the purpose of the debt and more importantly "when are we going to pay it back". And, unlike the federal government, state and local governments are rated by Moody's, Fitch, and Standard and Poor's when going into the debt market. And of course, state and local governments (operating under the Governmental Accounting Standards Board) has been required to provide an audited consolidated financial statement for years. State and local budgets also include comprehensive long-term fiscal projections. I agree with Ms. Weinberg's assessment of "not addressing" these financial issues, however, I think that people will come to the table if they are provided with some type of contextual framework from which to discuss this.
Q1. IS COST ACCOUNTING AN AREA THAT IS REALLY ALL THAT IMPORTANT? Yes. In management accounting, cost accounting establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting to support decision-making to control a government entity's costs and improve the cost reimbursement basis of the products or services provided. Cost accounting does not particularly need not follow standards such as Government GAAP (FASAB for federal, GASB for state and local), because its primary use is for internal managers for internal service funded programs and for external state and/or federal entities providing grants or other type of funding. Cost accounting at the state and local level is important for determining: The “EFFECTIVENESS” of programs (the comparison of the cost of a service to the benefits or results derived from that service typically calculated by dividing units of outcome to units of input); and The “EFFICIENCY” of programs (the relationship between inputs and outputs typically calculated by dividing units of output to units of input). Cost accounting is important in COST REIMBURSABLE activities within government for DIRECT COSTS and INDIRECT COSTS of government programs. For federal monies, state and local governments have to prove and assure that these COSTS are ALLOWABLE. State and local governments expend much time and effort developing their respective COST ALLOCATION PLANS to meet the U.S. Office of Management and Budget’s (OMB’s) “Circulars". These Circulars establish principles and standards for determining costs for Federal awards carried out through grants, cost reimbursement contracts and other agreements. State and local governments must extend this requirement with grant participants who must also comply with the Federal Cost Principles as set forth in OMB Circulars such as: • A-21, Cost Principles for Educational Institutions • A-87, Cost Principles for State, Local and Indian Tribal Governments • A-110, Uniform Administrative Requirements for Grants and Other Agreements with Institutions of Higher Education, Hospitals and Other Non-Profit Organizations • A-122, Cost Principles for Non-Profit Organizations and • A-133, Audits of States, Local Governments, and Non-Profit Organizations) applicable to their type of organization. Five basic steps are typically used to allocate "costs" include: 1. Identifying services and cost to be allocated; 2. Determining an allocation method; 3. Allocating and maintaining documentation; 4. Reporting costs determined by plan; and 5. Making sure it is auditable and in compliance. Unfortunately, most public sector financial accounting systems have unsynchronized tools to automate this (function codes, activity codes, time and labor, etc.) for government functions that provide services as it require a tremendous level of effort to implement, and a lot of explanation to management as to what it reveals. However, for government functions that are providers of products, cost accounting is typically much easier to implement and understand. Consequently it gives cost accounting a mixed review. Q2. WHO “OWNS” THE COST ACCOUNTING FUNCTION IN YOUR ORGANIZATION....AND HOW’S THAT WORKING FOR YOU? Management should be the owner to attest to its accuracy. As management has not been taught "how" to use it as a management tool, they tend to use it as a "compliance" tool - Are we in compliance? If yes, then "thank-you"; if no, then Corrective Action Plan. I think we need to make it a part of the budget process to enable management to "see" and "assess" their current and projected costs, ask questions about the "cost drivers" and the streamlining of "processes". Management at the state and local level would like to know what the federal government does with all of this COST information that we must prepare and provide. We have yet to see a federal government report on trends and issues derived from COST ALLOCATION PLAN information by government type or grant or other federal assistance type. Will the ARRA funding require another COST ALLOCATION PLAN from state and local governments (along with their service providers)? Q3. CAN WE EVER GET TO THE POINT WHERE WE “MANAGE THE COSTS” RATHER THAN “MANAGE THE BUDGET” AS PROMOTED BY THE GAO REPORT? The referenced report stated “[m]ore than 16 years after the passage of the CFO Act, we found that few federal agencies have systems that can routinely provide managers with reliable cost information to inform decision making.” I believe that the solution is three fold. 1. First, at the federal level SFFAS Number 4, Managerial Cost Accounting Concepts and Standards for the Federal Government, required federal reporting entities to perform at least a certain minimum level of cost accounting and provide a basic amount of cost accounting information necessary to accomplish the many objectives associated with planning, decision making, and reporting. This minimum level included: • Collecting cost information by responsibility segments, • Measuring the full cost of outputs, • Providing information for performance measurement, • Integrating cost accounting and general financial accounting with both using the Standard General Ledger, • Providing the appropriate precision of information (it should be useful but not unnecessarily precise or refined), and • Accommodating any of management’s special cost information needs that may arise due to unusual or special situations or circumstances. Why not work to implement SFFAS Number 4 to define managerial cost accounting requirements in federal financial systems in compliance with the respective OMB Circulars? Why not develop a consortium with the Institute of Management Accountants (IMA), Government Finance Officers Association (GFOA), and Association of Government Accountants (AGA) to develop a CONCEPTUAL MODEL for federal and state and local financial systems to follow? 2. Second, after the above is done, partner with the IMA to develop a LOGICAL MODEL of processes, activities and costs that could serve as a model to implement within existing federal and local and state financial management systems regarding the design, utilization and auditing of cost management accounting reports. 3. Third, have all of the federal, state, and local financial system software publishers implement a PHYSICAL MODEL of cost management accounting within their respective charts of accounts, cost and/or activity elements, and other aspects of their software. All COST ALLOCATION REPORTS should be automated within accounting, budgeting, payroll, time and attendance, time and labor, assets, and purchasing modules. Q3. DO YOU THINK AGA SHOULD TAKE A MORE ACTIVE ROLE IN DESCRIBING THE TRAINING PIPELINE AND OUTLINING VARIOUS FUTURE ACTION STEPS? Yes but I believe that some type of dialogue with the Institute of Management Accountants should be the starting point. They have the expertise and the members that could define many of the requirements. The GAO, Inspector Generals and state and local auditors and auditor associations could provide some needed feedback. Q4. IS COST ACCOUNTING SIMILARLY UNDERUTILIZED IN STATE AND LOCAL GOVERNMENTS? Propriety funds utilized by state and local governments come in two flavors - enterprise and internal service. Enterprise funds are employed when user fees are the major means of “cost recovery”. The most common example are water and/or sewer (more properly called wastewater) funds. Internal service funds are used to account for central cost centers within a state or local governmental unit. A common example is a central fleet facility that might maintain police vehicles, garbage trucks and other government vehicles. Charges are made to the appropriate fund and department to recover costs through the use of cost accounting. Cost elements recovered under the full cost recovery are typically direct costs and Indirect costs. Direct costs typically include the actual cost of running the program (Personal Services, Operating Expenses and Equipment). Indirect costs typically include the state or city departments that own overhead (support services) in terms of IT, accounting, budget, HR, management, facilities, utilities, HVAC, etc. Some state or local government department’s General Fund contains a budget for these types of indirect costs which are charged back in the form of Internal Service funds. The real question that state and local governments have is how does the federal government use the “COST ALLOCATION PLAN” it requires from us as a “cost accounting management” planning mechanism? FINANCIAL ACCOUNTING must be able to be decomposed into MANAGERIAL ACCOUNTING which should be able to be decomposed into COST ACCOUNTING. Financial accounting is used primarily by those OUTSIDE of an agency or government. Financial reports are usually created for a set period of time, such as a fiscal year or period. Financial reports are historically factual and have predictive value to those who wish to make financial decisions or appropriations in an agency. Management Accounting is used primarily by those WITHIN an agency or government. Reports should be generated for any period of time such as daily, weekly or monthly. Management Accounting Reports are considered to be "future looking" and have forecasting value to those within the agency or government. The focus of Cost Accounting is essentially internal. It tends to provide information about costs and cost estimates to the parties within the agency or government for decision making. Cost Accounting is used to calculate the cost of components (materials, labor, overheads and cost of related jobs and contracts) in the provision of a service or product. Proprietary funds in the state and local government typically utilize this as a basis of "cost reimbursement" to cover the actual costs.