GASB’s Continued Focus on Fiscal Sustainability

The Governmental Accounting Standards Board (GASB) continues to issue new accounting standards with seemingly no end in sight. Most of these standards have one thing in common: They continue GASB’s emphasis on introducing fiscal sustainability measures and disclosures into the annual comprehensive financial report (ACFR).

Read on to understand what these changes mean for government accountability and why they’re drawing close attention from financial professionals.

What is fiscal sustainability?

Fiscal sustainability is defined as the local government’s ability to maintain its current spending, tax, debt, and other financial management policies without threatening its solvency. It can also be considered the risk of a government defaulting on some of its promised long-term expenditures and liabilities can also be considered. Such measures are tremendously important to the government’s citizens, but increasingly, the driving force behind the focus on such measures is the bond underwriting, investing, and insuring entities.

Historic fiscal sustainability measures

From its inception, GASB has focused on developing fiscal sustainability measures. Perhaps the most prevalent fiscal sustainability measure has been the annual budget to actual statements. These statements give financial statement users an indication of whether the government lived within its means—its annual adopted budget—during the past fiscal year. Such statements and schedules have historically been presented as basic financial statements or as required supplementary information (RSI).

In addition to the budgetary statements, governments that have presented an ACFR must also present certain fiscal sustainability measures in their statistical section. These measures are generally presented for the current year and the prior nine fiscal years (10 years total) and include the following:

• Schedule of net assets by component
• Schedule of changes in net assets
• Schedule of fund balances
• Schedule of changes in fund balances
• Schedule of local general revenues
• Schedule of the assessed value of taxable property
• Schedule of direct and overlapping property tax rates
• Schedule of principal taxpayers
• Schedule of principal debt outstanding
• Schedule of direct and overlapping debt
• Ratio of debt to assessed value
• Schedule of legal debt margin
• Schedule of demographic statistics
• Schedule of economic statistics
• Listing of principal taxpayers

One common theme in all this data is that these schedules do not get full opinion-level assurance. Therefore, the perception is that this data is inherently less reliable than the financial data presented that gets full opinion-level assurance. The “power users” of the government’s financial information—the aforementioned bond community—have clamored for such measures to get opinion-level assurance. And, in recent years, they have become increasingly successful.

The rise of required supplementary information

While RSI has been present in the GASB literature since its inception, it did not become prevalent until the issuance of GASB Statement 34. After adopting GASB 34, several additional fiscal sustainability disclosures were introduced.

• Management’s discussion and analysis - MD&A is an excellent qualitative discussion of the government's current condition and operations results in the current and prior years, emphasizing what has changed from this year to last year. This allows users to obtain an explanation of the trends in fiscal measures.
• Modified approach to infrastructure – certain governments have adopted a modified approach to accounting for infrastructure investments. Under the modified approach, governments must declare a policy indicating the level to which they will maintain their infrastructure assets and present how well they comply with that policy of maintaining their infrastructure. Their compliance is measured in 3-year increments, and they must present the results of their last three condition assessments, resulting in a total of 9 years of information being presented. These metrics also present a snapshot of how well a government maintains its infrastructure, often the most significant investment of financial resources, both in the short and long term, of governments.
• Deferred maintenance on these infrastructure assets is historically a significant unfunded or underfunded government liability, and the modified approach to infrastructure is a nominal measure of such deferred maintenance. Presentation of this deferred maintenance liability has long been a goal of the bond community. However, such measures are only currently presented for those governments that use the modified approach, which is a very small number of governments.

These RSI data points present key financial measures over a longer term.

Pension and OPEB sustainability

While infrastructure costs, or deferred maintenance, represent a significant long-term cost of government, they are closely followed by costs associated with the pensions and retirement healthcare benefits a government provides to its employees. Many of these government pension plans are multi-employer plans where the government’s long-term liability under the benefit plan is an allocated amount. Because of the nature of that allocation, historically, the allocable share of the government’s liability was not presented in its ACFR.

Under GASB 67 and 68 for pensions and GASB 75 and 75 for the other post-retirement costs liability, GASB required that the allocable share of any unfunded liability be presented on the government’s balance sheet. However, GASB did not stop there, requiring 10 years of funding information to be presented as RSI. This allows the bond community to assess the long-term funding of these significant liabilities.

Preliminary views on infrastructure assets

In October 2024, GASB released a preliminary views document to obtain feedback on a regular re-assessment of the quality of the infrastructure assets presentation and disclosure and certain new infrastructure asset disclosures. A preliminary view document is a first look at where such new disclosures may develop over the next several years. Here are some examples of new presentations and disclosures under the PV document. All are examples of measures of fiscal sustainability.

• Infrastructure assets must be disaggregated by major class, and the depreciable lives on such classes of infrastructure assets must be disclosed.
• Infrastructure assets that have been depreciated to at least 80% of their historical cost must be separately disclosed in the notes to the financial statements. Again, this disclosure is by major asset class.
• Annual maintenance costs for each major infrastructure asset class must be disclosed in the notes to the financial statements.
• Historical cost of infrastructure assets by major asset class, net of accumulated depreciation, must be disclosed as RSI for the past 10 fiscal years.

While the historical requirements for reporting infrastructure assets under the modified approach will generally continue, these preliminary views incorporate the “regular” infrastructure assets into the same reporting as those accounted for under the modified approach. Users will be able to understand the annual maintenance funding for infrastructure assets. Further, users can determine which assets will likely have to be replaced because they are reaching the end of their depreciable useful lives. Both are key fiscal sustainability measures not previously disclosed in the financial statements.

Again, these are just preliminary views, and disclosure will not be required for several years and may be in a substantially different form after the due process on this potential standard runs its course.

What’s next?

As you can see, these fiscal sustainability measures continue to evolve, and their placement is moving from RSI to the notes of the financial statements. A logical evolution, especially with the advent of the Financial Data Transparency Act, will likely revolve around the historical presentation of aggregate financial measures (current assets, current liabilities, total assets, total liabilities, net assets, etc.).

With transparency and accountability in sharper focus than ever, these changes underscore the importance of proactive financial planning and reporting. The momentum and volume of such fiscal sustainability measures will not slow soon, resulting in a government financial landscape where informed decisions lead the way toward long-term stability.