Friday, November 20, 2015

New financial reporting requirements on economic development incentives

A room of close to 100 accountants, attorneys, economic development professionals, city and county staff, and state officials spent a day in Columbia this week learning about the many aspects of a recent change in how governments report economic development tax abatements on their financial statements.

The Government Accounting Standards Board recently released a new regulation, GASB 77, effective for reporting periods beginning after December 15, 2015. This new rule requires state and local governments to disclose on their financial statements any economic development incentives that would affect the entity’s ability to raise revenue.

According to GASB, the goal of this reporting requirement is to increase transparency of state and local governments to show how these incentives affect the entities’ overall fiscal and economic picture.

The morning session at the conference sponsored with the SC Economic Developers Association featured Edward Kluiters (left), an attorney with Haynsworth Sinkler Boyd P.A., and Larry Finney, CPA, an accountant with Green, Finney and Horton, discussing the technical aspects of implementing this new standard. Read their presentations to get detailed information about the financial and legal implications of GASB 77. (Finney additional handout)

A panel discussion composed of government officials focused on the policy and practical implications of GASB 77. One common theme among the panel members was the importance of communication related to several aspects of meeting this new reporting requirement. 

State Comptroller General Richard Eckstrom, who is responsible for preparing the state’s audited financial statements, said the new reporting standard is a positive in that it increases transparency. However, he acknowledged that it will result in additional administrative and reporting efforts. 

Eckstrom emphasized that when talking about this new standard, it’s important to talk not only about the cost but also about the public benefit the government entity expects to receive in exchange for the abatement. There are many more advantages than disadvantages from these incentives, and being able to explain that aspect of using tax abatements as an economic development tool is important.

Ann Harty, chief financial officer in Rock Hill, noted that on the accounting and auditing side, communication among all of the government entities involved with an abatement is important since the reporting entity must get the required information from the entity providing the tax abatement. She noted that Rock Hill is already collecting this information in preparation for this reporting.

Kevin Yokum, finance director in Florence County, explained communication between economic developers who are making the deals and financial staff who would be implementing the abatements is key.

Disclosure doesn’t have to include only the dollars that will be “lost” with the abatement, stressed Mark Farris, president and CEO of the Greenville Development Corporation. He said, it’s important to also include in the notes to the financial statements how the incentive would benefit the community in the long run.
The day concluded with a presentation by Mark Simmons (left), a site selection expert and partner with Parker Poe Consulting. He stressed that his firm’s clients are interested in doing “fair” deals regarding incentives. While incentives help reduce both up-front and recurring costs, most of his clients recognize that local governments need to show a “return on their investment” and, thus, justification for their incentive deals.

He noted that these disclosures do not seem to require any additional information that would not already be considered public information and subject to disclosure through FOIA. Plus the requirements are universal and prospects will face the same rules in every state.

Simmons’ bottom line was that GASB 77 likely won’t adversely affect site selection activities in the state. Plus, as Eckstrom pointed out, these new reporting requirements are the rule of the land, and, despite the somewhat sensitive nature of the reporting, these disclosures give governments the chance to show the benefits of good economic development deals that benefit all.

Another good resource on the economic development implications of GASB 77 is this briefing paper from the Urban Institute.

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