1. National Association of State Auditors Comptrollers and Treasurers Joint Middle Management Conference 2011 Eric S. Berman, MSA, CPA Brown Armstrong Accountancy Corporation

2. Accounting and Financial Reporting for Service Concession Arrangements GASB Statement 60

3. Statement No. 60 Approved by the Board in November 2010 Released December 16, 2010 Effective for periods beginning after December 15, 2011

4. GASB 60- Service Concession Arrangements (SCAs) SCAs are a type of public / private partnership or public / public partnership Needs – Transferor Government Has rights and can impose obligations through the use of infrastructure or facilities – Operator Can be a another government or a private entity

5. GASB 60- Service Concession Arrangements (SCAs) Terms of the SCA may include – Payments from the operator to the government for the right to build, operate and collect user fees on infrastructure or public asset – May include revenue sharing arrangements What are the potential benefits of SCAs to you? Audience Participation Portion of the Program!

6. GASB 60- Service Concession Arrangements (SCAs) SCAs exist when all criteria are met: – Transfer must be between a government and either another government or a private entity that will serve as an operator – Right and obligation is conveyed to provide public services through the use and operation of a capital asset in exchange for significant consideration. Can be up front payment or installments, a new facility or a betterment to an existing facility

7. GASB 60- Service Concession Arrangements (SCAs) SCAs exist when all criteria are met: – The operator collects and is compensated by fees from third parties – The transferor government is entitled to a residual interest at the end of the SCA – The transferor government has the ability to modify / approve the services that the operator provides, to whom it is provided and the prices / rates charged

8. GASB 60- Service Concession Arrangements (SCAs) Reporting is only on full accrual financial statements (not in governmental fund statements) If provisions are met then: – Transferor government continues to report capital asset for facility If new facility, capital asset reported by transferor at fair value along with any contractual obligations – Deferred Inflow of Resources reported as the difference (STAY TUNED LATER)

9. GASB 60- Service Concession Arrangements (SCAs) Liability is at present value of the obligation when – Contractual obligation relates to the facility (capital improvements, O&M, insurance etc.) – Could relate to a minimum level of service provided by the government for the facility (e.g. police / fire presence)

10. GASB 60- Service Concession Arrangements (SCAs) Capital Asset rules carry forward unless the asset is required to be returned to the government in its original or better condition – Improvements capitalized / depreciated Deferred Inflow of Resources recognized and reduced / revenue recognized systematically over life of arrangement – If liability is set up for future services that need to be provided – reduced as services provided

11. GASB 60- Service Concession Arrangements (SCAs) What about up front or installment payments from operator? – Record at present value as an asset – Contractual obligations as liabilities – Deferred inflow of resources as difference Revenue recognized as deferral reduces

12. GASB 60- Service Concession Arrangements (SCAs) What about governmental operators? – Right to access facility is an intangible asset per GASB-51 – Any improvements increase the intangible asset – Amortization is over the life of the agreements – If specified condition is needed upon return If asset not in the condition If amount to restore is estimable Liability declared then

13. GASB 60- Service Concession Arrangements (SCAs) Revenue Sharing Arrangements – Transferor government only reports revenue that accrues to them – If revenue sharing amount is fixed Amounts should be reported at present value by transferor government and governmental operator Note disclosure – Nature of arrangement, assets, liabilities, deferrals, rights, guarantees Transition – periods beginning after 12/15/11 – restate prior periods

14. GASB 60- Service Concession Arrangements (SCAs) – a picture’s worth 1,000 words

17. GASB 61

18. GASB 61 – Modification of GASB 14/39 Component Units Modifies fiscal dependency criteria to add that there must be financial benefit / burden between the potential component unit and the government – Result – some component units may no longer be component units and vice versa Also modifies blending so that if an entity exists ostensibly to sell debt on behalf of a primary government will now be required to be blended Clarifies equity interests in joint ventures

19. GASB 61 – Modification of GASB 14/39 Component Units “Misleading to Exclude” doctrine clarified – Primary Government has the responsibility to determine if a component unit should be included even if the tests aren’t met Included because misleading to exclude Result could be that some related organizations may become component units based on primary government’s policies

20. GASB 61 – Modification of GASB 14/39 Component Units Fiscal Dependency Changed – The primary government is financially accountable if an organization is fiscally dependent on and there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government regardless of whether the organization has (1) a separately elected governing board, (2) a governing board appointed by a higher level of government, or (3) a jointly appointed board.

21. GASB 61 – Modification of GASB 14/39 Component Units If a financial benefit or burden exists, then it is reported as part of the primary government’s entity (discrete or blended) Specifically mentions school districts where a local general purpose government may approve the school board’s budget or levy property taxes – They are component units – Could occur even if the City doesn’t appoint the school board – Judgment allowed in most cases

22. GASB 61 – Modification of GASB 14/39 Component Units “Major” Component Unit concept clarified – Include as major based on nature & significance to primary government – including: Services provided to citizens Significant transactions with primary government Significant benefit / burden – Presentation can be Columns on statement of net assets / activities Combining after fund statements Condensed financials in notes Nonmajors aggregated – combining is OSI

23. GASB 61 – Modification of GASB 14/39 Component Units Blending will now be required if – C/U’s total debt outstanding, including leases, is expected to be repaid entirely or almost entirely with resources of the primary government Usually a pledge exists – Result – end to “off balance sheet” financing

24. GASB 61 – Modification of GASB 14/39 Component Units If government owns equity interest – Government’s intent depends on reporting Enhance providing of services – C/U Rate of Return – Investment Transition – Effective for periods beginning after June 15, 2012 Retroactive restatement

25. GASB 61 – Modification of GASB 14/39 Component Units– a picture’s worth 1,000 words Italics = changes by GASB 61

26. GASB 62

27. Why Was This Issued? – FASB Standards applied by governments all the time Election in GASB-20, paragraph 6 used by BTAs Old FASB Standards (e.g. FASB 116) don’t exist anymore – AICPA standards sometimes in conflict with GASB standards Clarity project of AICPA auditing standards removes direct references to GAAP – Removes “urban legends” No new GAAP – but items “left on the table”

28. GASB 62 – Which Bases of Accounting Apply What? Both Governmental And Business Type OK – subject to reporting distinctions of Governmental Funds Business Type Activities / Fund Types Only Special and Extraordinary ItemsCapitalization of Interest ContingenciesRevenue Recognition with a Right of Return Related PartiesInventory LeasesRegulated Operations – as long as: -Rates are established by independent regulator or by governing board with that power -Rates are designed to recover costs -Rates are assumed to be collectible

29. GASB 62 – Which Bases of Accounting Apply What? Items That Apply to ALL Fund Types Revenue Recognition – Exchange Transactions Troubled Debt Restructuring Statement of Net Assets ClassificationForeign Currency Transactions Comparative Financial StatementsImputation of Interest Prior Period AdjustmentsInvestment in Common Stock Accounting Changes / ErrorsNonmonetary Transactions Disclosure of Accounting PoliciesSales of Real Estate Construction Contracts – Long TermResearch and Development Operations Extinguishment of DebtBroadcasters Cable TV OperationsLending Activities Insurance Entities (not risk pools)Mortgage Banking Activities

30. GASB 62 – Left on the Cutting Room Floor Items that are in FASB / AICPA GAAP that GASB didn’t include in GASB-62 but are being studied – Fair Value Measurement (old FASB-157) – Asset Retirement Obligations – Governmental Combinations (old APBO-18)

31. GASB 62 – Items in GASB 62 Slated for Reexamination in the Future Capitalization of Interest Real Estate (Rentals / Sales) Extinguishment of Debt Inventory Leases Nonmonetary Transactions Prior-Period Adjustments / Changes / Errors Regulated Operations Research and Development Revenue Recognition – Exchange Transactions Troubled Debt Restructuring

32. Future Standards

33. Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position Exposure Draft: Statement of Net Position

34. Background Initiated in May 2010 Concepts Statement 4 identifies 5 elements that make up a statement of financial position: – Assets – Liabilities – Deferred outflows of resources – Deferred inflows of resources – Net position This differs from the composition currently required by Statement 34, which requires the presentation of assets, liabilities, and net assets in a statement of financial position Statements 53 and 60 require deferrals

35. Definitions Deferred outflows of resources – A consumption of net assets by the government that is applicable to a future reporting period – Has a positive effect on net position, similar to assets Deferred inflows of resources – An acquisition of net assets by the government that is applicable to a future reporting period – Has a negative effect on net position, similar to liabilities Net position – The residual of all elements presented in a statement of financial position

36. Proposed Provisions Deferred outflows should be reported in a separate section following assets, but the two should not be combined to provide a subtotal Similarly, deferred inflows should be reported in a separate section following liabilities, but the two should not be combined to provide a subtotal Net Position components resemble net asset components under Statement 34, but include the effects of deferred outflows and deferred inflows – Net investment in capital assets – Restricted – Unrestricted

37. Accounting Equations Governmental activities in Government-wide statements: Statement of Net Position: assets + deferred outflows – liabilities – deferred inflows = net position Governmental fund format: Balance sheet: assets + deferred outflows = liabilities + deferred inflows + fund balance

39. Disclosures Governments should provide details of different types of deferred amounts in the notes in significant components of the total deferred amounts are obscured by aggregation on the face of the statements If the amount reported for a component of net position is significantly affected by deferred inflows or outflows, governments should disclose an explanation in the notes

40. Related Project on the Current Agenda Concepts Statement 4 provides that recognition of deferrals should be limited to those instances specifically identified by GASB The Board added a project to identify deferrals (ex. deferred revenue, prepaid expenses) that would be subject to requirements of this proposed statement.

41. Timeline November 2010: issue Exposure Draft February 2011: comment period deadline May 2011: issue final Statement

42. Pension Accounting and Financial Reporting

43. Pensions Reexamination One or two Exposure Drafts expected in June 2011 Public hearings and user forums in October

44. Tentative Decisions The difference between the pension obligation and plan assets would be reported as a net pension liability in the financial statements of the government Ad hoc COLAs would be incorporated into projections of pension benefit payments if an employer’s practice indicates that the COLAs are essentially automatic

45. Projections Projected pension benefits would be discounted to each employee’s entry age and attributed to the employee’s expected term of service as a level percentage of payroll. Discount rate would be based on the long- term expected rate of return for projected benefit payments that will be covered by current and expected plan assets; otherwise, a AA or higher municipal bond index would serve as the discount rate.

46. Expense Recognition Immediate recognition as expense: – Pension benefits earned – Interest cost on the beginning balance of the total pension liability – Changes in plan net assets not related to investments – Changes in pension plan terms that affect the total pension liability

47. Expense Recognition Recognize as expense over a period equal to the remaining service periods of employees: – Differences between expected and actual changes in economic and demographic factors – Changes in assumptions Differences between actual and projected earnings on plan investments should be recognized as pension expense over a five- year, closed period

48. Cost-Sharing Plans A government participating in a cost-sharing plan would report a liability in its own financial statements that is equivalent to its proportionate share of the collective unfunded obligation.

49. Notes Components of the change in the total liability, plan net assets, and net liability Components of the pension expense Components of the change in the deferred outflows (inflows)

50. RSI 10-year schedule of changes in the net pension liability 10-year schedule of total liability, plan net assets, net liability, net assets as a % of the total liability, and net liability as a % of covered payroll 10-year schedule of actuarially calculated employer contribution, contributions made, the difference, and contributions made as a % of covered payroll

51. What Will the 10 Year Schedule Look Like? Year 1~~~~~Year 10 Beginning Balance Service Cost Interest Benefit changes related to past services Experience losses (gains) Changes in Assumptions Contributions (employer) Contributions (other entities on behalf of the employer) Employee Contributions Net Investment Income Refunds Benefits Plan Administrative Expenses Other Ending Balance

52. Other Items 10 Year Schedules / RSI similar to today except for 10 years instead of 3-6 years Clear that there is more work to do but exposure draft is fairly complete – Unless something is really wrong, provisions in previous slides will be in the exposure draft

53. Fiscal Sustainability Reporting Federal Government has been doing this for about 5 years – audited schedules for social insurance (Medicare, Social Security other items) Central discussion in current politics – Pensions – Health Care – Debt levels

54. Tentative Decisions Categories of information – Ability to generate inflows of resources What is the source and mix of resources; nonrecurring resources; and resource volatility – Ability to honor current service commitments What are the types and levels of public services; and the cost of services (inputs) related to service commitments – Ability to meet financial obligations and commitments What is the government’s debt and debt service information; postemployment benefit information including pension and other postemployment benefits; capital asset and infrastructure information; and information on contractual obligations

55. Tentative Decisions Categories of information – The effects of interdependencies between governmental entities What is the government’s revenue interdependency; and service interdependency on another government? – The potential effects of the underlying environment within which a governmental entity operates What is the government’s employment information; demographic information; and information on growth and wealth-producing activities – Ability and willingness of a governmental entity to make decisions that will keep it fiscally sound Information on legal and governmental structure and processes; and governmental willingness

56. Key Items on the Table Where to present this information? – Should it be RSI, statistics in a CAFR or a separate report? Present how many years? Does GASB have the jurisdiction or is this budgetary / other information What are the assumptions and how should the assumptions be disclosed?

57. Maybe We Should Look at the Federal Report Amounts in Billions20102009 Net Deficit of Government ($4,296)($3,435) Revenues2,2162,181 Net Operating Cost($2,080)($1,254) Assets$2,884$2,668 Liabilities: Public Debts($9,060)($7,583) Benefits($5,721)($5,284) Other($1,576)($1,257) Total Liabilities($16,357)($14,124) NET POSITION($13,473)($11,456) Social Insurance Cost($43,058)($52,145) (Open Group)($30,857)($45,878)

58. Maybe We Should Look at the Federal Report – Per Person Actual Amounts20102009 Net Deficit of Government ($13,914)($11,394) Revenues7,1777,235 Net Operating Cost($6,737)($4,160) Assets$9,341$8,850 Liabilities: Public Debts($29,345)($25,154) Benefits($18,530)($17,528) Other($5,105)($4,170) Total Liabilities($52,980)($46,852) NET POSITION($43,639)($38,002) Social Insurance Cost($139,461)($172,974) (Open Group)($99,943)($152,185) 2010 Population – 308,745,538 2009 Population – 301,461,533

59. Who Owns Our Debt? Amounts in Billions, US Treasury as of 2/28/11

60. Maybe We Should Look at the Federal Report

63. Questions and/or Comments? To the left is our new home in Pasadena, California. Please feel free to visit us at the corner of Colorado and Hudson, on the Rose Parade route which is also historical US Route 66 790 East Colorado Boulevard, Suite 908B Pasadena, California, 91101 Tel: 626-240-0920 Fax: 626-240-0922 Mobile: 626-375-3600 Email: eberman@bacpas.com