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  • Emerging Issues in Government Accounting & Auditing Rutgers University November 30, 2017

    1

  • Today’s Agenda • State Fiscal Outlook • Legislative and Regulatory Issues • Uniform Guidance Implementation • Accounting and Auditing Issues • Other Emerging Issues

    2

  • State Fiscal Outlook Cloudy with a Chance of Storms….

    3

  • NATIONAL OVERVIEW

    GDP growth: 1.6% in 2016 compared to 2.6% in 2015 (lowest since 2011) 2.4% so far in 2017 (3.1% in second quarter; 3% in third quarter)

    Recession: WSJ panel of economists 16% probability of recession in next 12 months (Oct. 2017); down from 20% a year earlier

    Unemployment: 4.1% in October 2017 (a 16-year low) Household income: 2016 – median $59,039, up 3.2%; 2015 up 5.2%

    Jobs: October 2017 – 261,000 (the 85th straight month of positive job creation) 2016 – 180,000 2015 – 230,000

    Interest rates: Fed Reserve raised rates .25% in June 2017. Fourth increase since the Great Recession. 95% of economists expect rate increase in Dec. 2017.

    Stock Market: 2016 – DJIA up 15% “Trump Bump” – S&P 500 up 6% from election day to inauguration day 2017 – now over 23,000!

    Source: Wall Street Journal

    4

  • STATE FISCAL OVERVIEW

    State tax revenue grew by 2.2% in 2017; following 1.8% in 2016 Future revenue projections remain sluggish

    35 states ending year with general fund revenue collections below budget forecast

    Total state spending was up 5.2% in 2017 up from 2.2% in 2016 State general fund spending up 4% in 2017

    Growth in state spending on Medicaid projected to slow in fiscal 2017 – 3.0% (compared to 8.3% in fiscal 2016)

    While some states tapped reserves to smooth revenue volatility, most continue to bolster rainy day funds

    23 states reported net mid-year budget reductions in fiscal 2017, a historically high number outside of a recessionary period

    Source: NASBO 2017

    5

  • GENERAL FUND SPENDING

    6

  • STATE GENERAL FUND SPENDING GROWTH PROJECTED TO SLOW CONSIDERABLY IN FISCAL 2018

    Annual General Fund Expenditure Growth (%)

    3.2 4.0

    1.0

    -8

    -6

    -4

    -2

    0

    2

    4

    6

    8

    10

    12

    %

    *Average

    *39-year historical average annual rate of growth is 5.5 percent . **Fiscal 2018 percentage growth is based on recommended budgets.

    Source: NASBO Fiscal Survey of States

    7

  • FISCAL 2017 GENERAL FUND SPENDING NOW EXCEEDS INFLATION-ADJUSTED PRE-RECESSION PEAK

    General Fund Spending: FY 2008 – FY 2018

    $687

    $661

    $623 $645

    $667

    $695

    $726

    $758 $782

    $813 $828

    $807

    $550

    $600

    $650

    $700

    $750

    $800

    $850

    FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

    (in b

    illi on

    s)

    Source: NASBO Fiscal Survey of States; Fiscal 2018 figure is based on governors’ recommended budgets. *Aggregate spending level needed to total at least $807 billion in fiscal 2017 to be equivalent with or exceed real 2008 spending level.

    8

  • GENERAL FUND REVENUE

    9

  • 35 STATES REPORTING REVENUE COLLECTIONS BELOW BUDGET PROJECTIONS

    General Fund Revenue Collections Compared to Original Budget Projections

    36

    9 10 7

    20

    7

    25 35

    2

    9 5 6

    5

    4

    5

    4

    12

    32 35 37

    25

    39

    20 11

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    2010 2011 2012 2013 2014 2015 2016 2017

    N um

    be r o

    f S ta

    te s

    Fiscal Year

    Higher On Target Lower

    Source: NASBO Fiscal Survey of States.

    10

  • SLUGGISH GENERAL FUND REVENUE GROWTH FOR TWO CONSECUTIVE YEARS Modest Improvement Expected in Fiscal 2018

    General Fund Revenue: FY 2008-FY 2018

    $680

    $626 $610

    $650 $669

    $716 $730

    $767 $779 $797

    $824 $799

    $500

    $550

    $600

    $650

    $700

    $750

    $800

    $850

    (in b

    ill io

    ns )

    Source: NASBO Fiscal Survey of States; Fiscal 2018 figure is based on recommended budgets. *Aggregate revenue level needed to total at least $799 billion in fiscal 2017 to be equivalent with or exceed real 2008 spending level.

    +1.8% +2.2%

    +3.4%

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  • AT LEAST 23 STATES MADE MID-YEAR BUDGET CUTS IN FISCAL 2017, TOTALING $4.9 BILLION

    Enacted Budget Cuts Made After the Budget Passed

    20 28

    35

    22

    9 8 13

    7 2 3 1

    16

    37 37

    18

    5 2 4 13

    41 39

    23

    8 11 8 14

    19 23

    0

    10

    20

    30

    40

    50

    $0

    $5

    $10

    $15

    $20

    $25

    $30

    $35

    $40

    Nu m

    be r o

    f S ta

    te s

    $ I n

    Bi llio

    ns

    Number of states Amount of reduction

    Recession ends

    Recession ends Recession ends

    Source: NASBO Fiscal Survey of States

    12

  • STATE SAVINGS ACCOUNTS (RAINY DAY FUNDS)

    13

  • STATES CONTINUE TO STRENGTHEN RAINY DAY FUNDS SINCE HITTING RECENT LOW IN FISCAL 2010-2011

    47 States

    Median Rainy Day Fund Balance as % of Expenditures

    Source: NASBO Data

    4.6%

    0.7%

    4.9%

    2.0%

    5.5%6.0%

    0%

    1%

    2%

    3%

    4%

    5%

    6%

    7%

    Pe rc

    en t o

    f G en

    er al

    F un

    d Sp

    en di

    ng

    Fiscal Year

    14

  • FEDERAL OUTLOOK FOR STATES

    15

  • 1 2

    3 4

    FEDERAL UNCERTAINTY FOR STATES

    The Affordable Care Act, especially Medicaid – Per capita caps, Expansion, Flexibility

    Tax Policy Considerations – municipal debt, state/local tax deductibility

    Infrastructure The Fiscal 2018 Budget

    16

    Source: NASBO

  • CHALLENGES: LONG TERM BEGINS NOW

    • Tighter Resources for Years

    • Demographic Changes

    • Debt and Pension Liability

    • Infrastructure

    • Medicaid Changes and Federal Budget Cuts

    17

    Source: NASBO

  • Legislative and Regulatory Issues

    18

  • Municipal Disclosure – What Are the Key Requirements?

    • SEC Rule 15c2-12 – Underwriters are prohibited from purchasing

    or selling municipal securities unless an issuer has committed to annually provide financial information and operating data

    • Continuing disclosure agreement (CDA) • Electronic Municipal Market Access (EMMA)

    – www.msrb.org

    – Material events (14) • 17 CFR 240.15c2-12

    19

    http://www.msrb.org/

  • Municipal Disclosures – SEC Proposes Amendments to Rule 15c2-12

    • Proposal issued on March 1, 2017 – Improves investor protection and enhances

    transparency in municipal securities market • Addresses concern about private bank lending

    – Comments due by May 15, 2017 – 111 pages in length! – Effective date: three months after adoption

    • Adds two new event notices under continuing disclosure undertakings – Currently there are 14 listed events – Requires notice within 10 days of the

    occurrence

    20

  • Municipal Disclosures – SEC Proposes Amendments to Rule 15c2-12

    • Two new events are: – Incurrence of a financial obligation of the

    issuer, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation, any of which affect security holders, if material

    – Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer of obligated person, any of which reflect financial difficulties

    21

  • Municipal Disclosures – SEC Proposes Amendments to Rule 15c2-12

    • “Financial Obligation” is defined as: – A debt obligation, – Lease, – Guarantee, – Derivative instrument, or – Monetary obligation resulting from a

    judicial, administrative, or arbitration proceeding.

    22

  • Municipal Disclosures – SEC Proposes Amendments to Rule 15c2-12

    • What should be disclosed? – A description of the material terms of the

    financial obligation, including: • Date of incurrence • Principal amount • Maturity and amortization • Interest rate (or method of computation of the

    interest rate) • Default rates

    23

  • Municipal Disclosures – Material Events

    • Just a reminder - the current 14 material events: – Principal and interest payment delinquencies – Non-payment related defaults – Unscheduled draws on debt service reserves reflecting financial stress – Unscheduled draws on credit enhancements reflecting financial stress – Substitution of