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AGA Combined Chapters of West Virginia

AGA Combined Chapters of West Virginia. Intergovernmental Financial Dependency ******** And the Risks it Creates for State and Local Governments Presented by Edward J. Mazur Senior Advisor for Governmental Financial Management Cherry, Bekaert & Holland, L.L.P. September 3, 2009.

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AGA Combined Chapters of West Virginia

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  1. AGA Combined ChaptersofWest Virginia Intergovernmental Financial Dependency ******** And the Risks it Creates for State and Local Governments Presented by Edward J. Mazur Senior Advisor for Governmental Financial Management Cherry, Bekaert & Holland, L.L.P. September 3, 2009

  2. Introduction to Topics Presented • Perspective • Federal Financial Condition • What are the Risks and What is at Stake for State and Local Governments • Illustrations of State Intergovernmental Financial Dependency • Illustration of Local Government Financial Dependency • Improving Reporting by State and Local Governments • Concluding Thoughts

  3. Perspective • We are experiencing a “Paul Revere Moment” in our Nation’s history • Warnings in published Federal Financial Reports are clearly stated: The present course of the Federal Government is financially unsustainable! (Source: MD&A, p. 9) • Why do we not see more corrective action? Because: • The Federal Government is not required to maintain a balanced budget. • Our 3 levels of government “appear” to be distinct and separable—We do not see the linkages!

  4. What Have Key Federal Officials Said About the Federal Financial Condition? Comptroller General Walker: “Our Nation is on an imprudent and unsustainable long-term fiscal path that is getting worse with the passage of time” Source: 2007 Annual Report of U.S. Government Secretary of the Treasury Paulson “We must now look ahead to the future claims on spending for Social Security and Medicare and squarely face the challenge of fundamental reform to ensure the sustainability of these programs.” Source: 2007 Annual Report of U.S. Government Fed Chairman Bernanke ”If early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost.'‘ Source: Bloomberg 1/18/07

  5. Negative Indicators of the Financial Condition of the Federal Government • Almost 40 years of running negative annual cash flows • 40 years of a negative bottom line on an accrual basis • Not funding Federal pension obligations • 40 years of borrowing cash from Social Security, Medicare, and other “Trust Funds” • 40 years of not linking borrowing to the creation of long-term assets • 40 years of borrowing to meet current cash needs—from Americans and foreign governments • Not recognizing as debt and not funding long-term obligations under Social Security and Medicare

  6. What does this all look like in the 2008 Financial Report of the United States Government?

  7. Key Indicators of Federal Financial Stress Insufficient Annual Revenues (in billions): 2008 Revenue: $2,661 Budget Deficit: $ 455 Accrual-Based Operating Deficit: $ 1,009 (Projected FY 09 Budget Deficit: $1.5+ Trillion) Excessive Reported Liabilities (in billions): Publicly-held Debt: $5,836 Owed to Social Security, Medicare and other “Trust Funds”: $4,249 Federal Employee & VA Benefits Owed: $5,319 Source: 2008 Financial Report of U.S. Government

  8. Key Indicators of Federal Financial Stress (cont’d) Unsupportable Federal “Stewardship” Obligations* (in billions) Social Security $17,188 Medicare Part A: $13,590 Medicare Part B: $12,615 Medicare Part D (Drug Benefit): $5,605 Other $137 Memorandum Total: $49,135 * Present Value 75 Year Projections of Expenditures Net of Contributions & Earmarked Taxes—for closed group, i.e. current participants Source: 2008 Financial Report of U.S. Government, Table 3, Management’s Discussion and Analysis, p. 10,

  9. Potential Fiscal Outcomes: Revenues and Composition of Spending as Shares of GDP Notes: Discretionary spending grows with GDP after 2008. The AMT exemption amount is retained at the 2007 level through 2018 and expiring tax provisions are extended. After 2018, revenue as a share of GDP is brought to its historical level of 18.3 percent plus expected revenues from deferred taxes (i.e., taxes on withdrawals from retirement accounts). Medicare spending is based on the Trustees’ 2008 projections adjusted for CMS’s alternative assumption that physician payments are not reduced as specified under current law.

  10. The Financial Condition of the U.S. Government Puts State and Local Governments at Tremendous Risk From: • Significant and unplanned disruptions to current intergovernmental revenue flows • Potential disruptions to investment income and asset values as foreign governments and other parties assess, renew, and/or modify their holdings of U.S. Treasury Securities. • A too limited opportunity for the senior leadership of state and local governments to propose initiatives and exert shared leadership

  11. What is at Stake? Direct Intergovernmental revenues received from other governments, including: $100’s of billions in Federal grants and contributions to the states $10’s of billions in Federal and State grants and contributions to local governments Investment income from: $100’s of billions in Federal Treasury obligations held by states and local governments

  12. What is at Stake? (cont’d) Indirect contributions to economic activities and tax revenues within state and local government jurisdictions, through: $100 of billions of Federal and state procured goods and services $100 of billions of Federal social security, and Federal and state government retirement and health care benefits, paid to individual citizens $10’s of billions in Federal and state leased or owned buildings and facilities and housed operations $100’s of billions in military bases, facilities, and operations

  13. Illustrations of Intergovernmental Financial Dependency Experienced by Five States Note: Numbers are unaudited and, except for Nevada, are unofficial and unapproved

  14. Local Government Illustration Sample City Virginia 2007 (From Actual Data) Sample City Virginia Financial Dependency • Total 07 Federal Revenues: $117 million or 8.6% • Major contributing Federal Depts: HHS—16% EdD—37% • Total 07 State Funds $498 million or 36.9% • $2.7 billion Federal payments to individuals: 14% Social Security, 48% military/civil salaries, 22% Federal Retirement • $797 million Federal purchases in locality: 90% DOD • Federal leased/owned buildings: 56,946 square ft. for the five largest buildings

  15. Sample City Financial Dependency (cont’d) • Military bases and facilities: • 5 bases • 759 buildings • $2 billion replacement value • 8,604 acres held • 9,524 military and civilian employees • Federal debt securities held by Sample City: $82 million

  16. 89,527 State and Local Governments—Nationally (2007) • Representing approximately 14 percent of total U.S. employment • Expending over $2 trillion for operating and capital needs • Representing approximately 12 percent of GDP • Collecting $1.3 trillion in tax receipts in 2007 • Relying upon Federal Grants for basic services, capital contributions, and research, amounting to: • More than $430 billion in 2007, • About $500 billion in 2009, and • $230 billion in additional stimulus funds in 2009 through 2011 • Source: GAO

  17. Percent of GDP Operating Surplus/Deficit Fall 2008 Operating Surplus/Deficit Jan 2009 Source: Historical data from National Income and Product Accounts. Historical data from 1980 – 2007, Sept. 2008 & January, 2009 GAO projections from 2008 – 2050 using many CBO projections and assumptions, particularly for next 10 years. Source: GAO State and Local Governments Face Increasing Fiscal Challenges—Independent of Federal Government’s Financial Condition

  18. Opportunities for Action State and Local Governments should: Anticipate and disclose the threats and risks associated with intergovernmental financial dependency Increase internal and public visibilityand understanding regarding such threats and risks—in part through formal reporting Create collaborative initiatives to address the threats and risks, and exert shared leadership with Federal elected officials

  19. Current State and Local Government Reportingis Deficient on this Subject • The published “comprehensive annual financial reports” (CAFRs) are not clear in noting that our state and local governments are deeply dependent on the Federal Government and each other. —This disadvantages public discussion!

  20. Recommendations for Reporting by State and Local Governments are Available A Major New Report on : Intergovernmental Financial Dependency and Related Risks—Proposed Reporting By State and Local Governments Published by: Cherry, Bekaert & Holland, L.L.P. -- in the Public Interest Principal Author – Edward J. Mazur, CPA -- Senior Advisor for Governmental Financial Management, and former GASB Member Available for downloading at no cost at-- www.cbh.com/intergovernmentalreport

  21. Topics Include: Importance of reporting intergovernmental financial dependency and related risks to: Governors, mayors, and other elected officials, and Bondholders, credit analysts, citizens, and other users of CAFRs Recommended modifications to reporting requirements for: MD&A (13 new disclosures) Notes to the Financial Statements (5 new disclosures) RSI (1 new disclosure) the Statistical Section (10 new schedules) Illustrations of recommended reporting Preparation guidance (with links to sources) Extensive background studies and material (see Appendix for more details)

  22. Anticipated Results From ReportingIntergovernmental Financial Dependency If applied and tested voluntarily by state and local government preparers, the reporting will: Ensure that their leaders and annual financial report users understand: the government’s reliance upon direct and indirect intergovernmental financial flows, the government’s exposure to changes in intergovernmental flows, investment income, and asset values, and trends in key national and state-level economic indicators relevant to the sustainability of intergovernmental financial flows.

  23. Concluding Thoughts *Unsustainable means: not able to be maintained or supported in the future, especially without causing damage or depletion of a resource. What happens when Stimulus funding from the American Recovery and Reinvestment Act (ARRA) ends? “They” and “We” are the same. We are one nation indivisible!

  24. Speaker Contact Information Edward J. Mazur, CPA Senior Advisor for Governmental Financial Management Cherry, Bekaert, & Holland, L.L.P. 1700 Bayberry Court, Suite 300 Richmond, VA 23226 804-673-5731 direct 804-240-8672 cell emazur@cbh.com

  25. Appendix An outline of materials presented in the three volume report—Intergovernmental Financial Dependency andRelated Risks

  26. Reporting Requirements are included in a 3 Volume Report • Contents of Volume One: • Preface and Acknowledgements • Executive Summary • Invitation to Comment and to Conduct a Pilot Test • Recommended Reporting Model • Summary • Introduction • Recommended Reporting Requirements and Modifications to GASB Standards • Background of Project • Basis Underlying the Recommended Requirements and Modifications • Illustrations of Reporting Requirements for a State Government • Preparation Guidance for State Governments Illustrations

  27. Report (cont’d) • Contents of Volume Two: • Identical to Volume One—except for: • illustrations, and • preparation guidance--which address local governments

  28. Report (cont’d) • Contents of Volume Three: • Supplemental Appendices A: Literature Research B: GASB-Sponsored Independent Research Project C: Fiscal Wake-up Call Tour D: GAO Study, “State and Local Governments: Persistent Fiscal Challenges Will Likely Emerge within the Next Decade” E: GASB Memorandum, April 2007, “Intergovernmental Financial Dependency Risk Project Perspective” F: Comments from October 2006 ABFM Forum G: Works Cited and Additional Readings H: Relevant Quotations

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