Cherry, Bekaert & Holland is pleased to present a new and far-reaching model for reporting intergovernmental financial dependency within the Comprehensive Annual Financial Reports (CAFRs) of state and local governments.

Titled “Intergovernmental Financial Dependency and Related Risks with Proposed Reporting by State and Local Governments,” this three-volume report provides a comprehensive examination of the financial reporting implications associated with the significant degree of financial dependency now existing between our nation’s three levels of government:  Federal, State, and Local.

It is provided in the public interest by Cherry, Bekaert & Holland at a time when all three levels of government are under significant financial stress—and when flows of intergovernmental funds are more critical than ever, but at risk of change.

The Executive Summary, appearing at the beginning of each volume, addresses how the adoption of the reporting practices recommended within the Report will support the information and decision-making needs of:

• state comptrollers and local government finance directors who prepare and issue annual financial reports and decide on what information to include
• governors, legislators, and elected local government officials who must regularly assess risks to the governments they serve, develop responsive initiatives, and exert leadership necessary in supporting programs and services required by citizens within their jurisdictions
• all users of the published annual financial reports of state and local governments who, together with elected and appointed government officials, wish to weigh and understand essential information about intergovernmental financial dependency, including:
  • the government’s reliance upon direct and indirect intergovernmental flows;
  • the government’s exposure to changes in intergovernmental flows, and in the investment income and asset values associated with holding the debt of other governments; and
  • trends in key national and state-level economic indicators relevant to the sustainability of intergovernmental financial flows.

We hope that you will find this Report of value whatever your role and interest in the financial condition and stability of our nation’s state and local governments.

Proposed Reporting by State and Local Governments with Recommended Modifications to Reporting Standards

This three-volume Report is designed for use by a variety of interested readers and is structured to facilitate their efficient access to the included information. Click on the links below to download the appropriate pdf file.

• Volume 1 – Proposed Reporting by State Governments will be of most interest to state comptrollers, other state officials, and users of a state’s comprehensive annual financial report.
• Volume 2 – Proposed Reporting by Local Governments will be of most interest to local government finance directors, other local government officials, and users of a local government’s comprehensive annual financial report.
• Volume 3 – Supplemental Appendices will be of most interest to those wishing to study and understand the related research carried out by the Governmental Accounting Standards Board, the related initiatives and concerns of the U.S. Government Accountability Office and the U.S. Comptroller General, and other studies, initiatives, and concerns relating to intergovernmental financial dependency.

It will be useful for readers to note that Volume One and Two differ only with respect to Appendix B: “Illustrations Applying the Recommended Report Requirements,” and Appendix C: “Preparation Guidance,” which are tailored to state governments and local governments, respectively. Both Volumes One and Two are referenced to Volume Three, which contains additional background information used in the preparation of the Report.

Proposed Reporting is Consistent with Current Practices for Reporting Under GAAP

In preparing this Report, every effort has been made to conform to the high professional standards associated with past learned studies concerning financial reporting by state and local governments. In particular this Report reflects, in summary, the following:

1. A conscious effort to build upon the substantial body of related research, analysis, staff commentary and recommendations, and considerations carried out by the Governmental Accounting Standards Board (GASB) in 2005 through 2007.
2. The incorporation of a body of additional thought and suggestions provided by leading experts in governmental financial management and in the collection and reporting of financial and statistical information.
3. A consistent approach to ensure that every specific recommended reporting requirement can be clearly associated with currently established GASB standards and concept statements, or further supported by an association to standards established by the FASB or the FASAB, or to recommended practices of the AICPA.
4. A conscious effort to ensure that any voluntary reporting by state and local governments under the recommended reporting requirements, pending the possible future issuance of related guidance by the GASB, would be consistent with current practice.  By this we mean that, under current GASB guidance, a preparer may include additional information in their financial statements so long as it is consistent with, while perhaps extending beyond, the specific stipulations or examples incorporated in current standards.
5. Ensuring, where appropriate, the presence in the Report of rigorously developed explanations and justifications, and background information.
6. A process to seek, receive, consider, and respond to the views of a number of highly knowledgeable “external reviewers” who, with great generosity of their time, read and commented upon the Report in draft form.
7. Received feedback through a limited field testing of the recommended reporting requirements by the Nevada State Controller’s Office and by the State Comptroller of the Commonwealth of Massachusetts—beyond the inclusion of specific illustrations within Volume One of the report based on the 2006 CAFR of the Commonwealth of Virginia, and developed with support of Virginia’s State Comptroller.

It can also be noted that copies of this Report have been provided to the Governmental Accounting Standards Board in the hope that it will inform work on the GASB Research Project entitled, “Economic Condition Reporting:  Fiscal Sustainability,” which, as noted in the GASB’s Technical Plan for the Second Third of 2009, “includes consideration of the information necessary for users to assess the risks associated with a government’s intergovernmental financial dependencies.”

Organization of Each Volume

Each Volume has been structured so as to enable readers to quickly access the information most useful to their interests. For example:

1.) State comptrollers and local government finance directors may wish to focus on sections concerning the:

• Recommended Reporting Requirements,
• Provided Illustrations for either a state or local government, and
• On the Preparation Guidance for state or local government illustrations

2.) Governors, mayors, county administrators, and budget officers may be primarily interested in the:

• Executive Summary, and
• Illustrations applying the recommended reporting requirements

3.) Those involved with, or observant of, the development of governmental accounting standards may be most interested in the sections concerning the:

• Recommended Reporting Requirements and Modifications to Reporting Standards,
• Basis for the Recommended Reporting Requirements, and
• Background

4.) Users of the general purpose financial statements of state and local governments may wish to focus on the following sections:

• Executive Summary
• Basis for Recommended Reporting Requirements
• Illustrations Applying the Recommended Reporting Requirements, and
• Various Supplemental Appendices appearing in Volume Three

Hyperlinks Within the Report

It will be of significant benefit to those wishing to experiment with, or conduct pilot tests of, the recommended reporting that the various Illustrations contain hyperlinks to the original sources of information used in preparing the Illustrations. In like manner, the Preparation Guidance also contains hyperlinks that will be extremely useful to staff involved with drafting the recommended reporting elements and disclosures for their respective state or local governments.

Ease of Application

In preparing this Report, particular attention was given to presenting the Illustrations in a very complete manner, with, as noted above, hyperlinks to sources and with notes and other aids to potential preparers. Similarly, the Preparation Guidance contains very precise and detailed information on how to prepare the individual recommended illustrations—including an estimate of the time that it will likely take to prepare each individual reporting element or disclosure. Each of the 29 separate illustrated reporting elements and disclosures have been tested utilizing actual data—in the case of Volume One, from the Commonwealth of Virginia as a state entity, and—in the case of Volume Two, from actual local government related records maintained by the Commonwealth of Virginia. In similar manner, any reported information originating from the U.S. Census Bureau, the Department of Defense, the General Services Administration, and other sources was drawn from actual files and records. Based on the effort applied while developing the Illustrations included in the Report, it is projected that state and local governments will be able to utilize junior staff or interns in the preparation of the recommended reporting requirements, where the estimated preparation times, as reported within the Preparation Guidance Section, would range as follows:

CAFR Section	Number of Illustrations	Low Estimate (Hours)	High Estimate (Hours)
MD&A	13	108	180
Notes to the Financial Statements	5	33	57
Req. Supplemental Information	1	10	16
Statistical Section	10	53	88
Totals	29	204	341

Available Assistance

As noted within the Report and in the above comments, the extensive Illustrations and Preparation Guidance are intended to permit a state or local government to readily report on intergovernmental financial dependency and related risks without additional assistance. Further, this Report has been published by Cherry, Bekaert & Holland, L.L.P. solely in the public interest.

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