GASB Proposes New Reporting Standards for State and Local Governments

Overview

On Oct. 30, 2014, the Government Accounting Standards Board (GASB), a nonprofit organization that sets financial reporting standards that nearly all state and local governments conform to, proposed a rule that would redefine generally accepted accounting principles in order to increase transparency around tax incentive, or abatement, programs. The Pew Charitable Trusts, which works with states to measure the costs and benefits of incentives and make them more predictable, examined the rule, particularly as it relates to transparency and to the ability of jurisdictions to implement the requirements.

Pew’s review found that GASB’s proposal offers an opportunity for governments to collect and share consistent data about their tax abatement programs.  The emphasis on transparency should encourage state and local policymakers to use more reliable information to conduct robust evaluations and plan strategic programs. However, the proposal may also present compliance challenges for some governments, particularly smaller jurisdictions and those that lack the capacity to collect and report on new information.  

After a year-long effort to survey legislators, citizens, and bondholders, GASB found significant demand for information about the extent and results of abatement activity in state and local governments. The financial impact of tax incentives has grown quickly and unexpectedly in recent years and can throw state budgets out of balance, potentially necessitating tax hikes or spending cuts.^[1] Yet only six states have statutes that require external reporting after tax abatements are granted, and “only fourteen states include provisions for benefit recovery (clawbacks) in instances of nonperformance by the recipient of the abatement,” according to GASB.^[2]  

The proposal comes at a time when a growing number of state and local leaders, policy analysts, and citizens are calling for greater accountability for economic development investments. Although it is not clear whether the rule will take effect, policymakers seeking to better understand the cost of tax incentives can nevertheless pursue ways to increase coordination between state and local governments and encourage detailed and frequent reporting on these investments and their impact.

Governments may differ in their ability to comply with the proposed rule

Some states and local governments are already collecting the necessary data

For some states and localities, implementing the type of reporting that GASB is proposing may not require much additional effort. In recent years, 43 states and the District of Columbia have produced either tax expenditure or economic development reports that may have included some of the data needed to comply with GASB.^[3] As James Reardon, Vermont’s commissioner of finance and management, noted: “I don’t foresee [the proposed requirements] as being a huge administrative burden in Vermont.”^[4]  

Similarly, the rules may require only minimal changes in some large cities that actively monitor incentives through performance agreements, clawback provisions, and pre-award cost-benefit analyses. For example, New York City issues a regular tax expenditure report that includes the number of recipients and total forgone revenue for each municipal incentive program.^[5] Like many states, some local governments may be able to use the information they already collect to comply with the GASB standards. 

Challenges for governments with limited capacity

If GASB passes this rule, compliance could prove difficult for state and local government agencies with limited capacity to collect and report on new information. Smaller cities in particular may face additional challenges. Findings from a recent International City/County Management Association (ICMA) survey highlight this point: Most cities of 1 million or more people have some reporting and accountability measures in place for economic development incentives, but this practice becomes less common as city populations get smaller. “It’s a mixed bag,” said ICMA survey research director Evelina Moulder when asked about overall local reporting and accountability procedures. “What I found was that where you see a noticeable variation is by population size.”^[6]  

Several municipal officials said they were concerned about whether their limited staff would have time for additional reporting—even if they already collect the data. Some argue that a one-size-fits-all approach may particularly burden smaller organizations and jurisdictions.^[7] 

Limited coordination across all levels of government

The GASB proposal introduces new opportunities for coordination between state and local governments in collecting data and preparing reports, even those that already collect disclosure information. The proposed rule states that if a tax abatement program involves multiple jurisdictions, such as a school district and a local government, those jurisdictions may opt to file reports either individually or jointly. Pew research finds that at the state level, coordination and sharing of information across multiple government offices and economic development agencies are necessary to conduct quality evaluations.^[8] Thus the GASB proposal may offer an opportunity for state and local governments to work together in a similar manner to give policymakers a more complete picture of tax abatement program outcomes across jurisdictions. 

Although sharing information about tax incentives is an important goal that can lead to more effective evaluations, in practice it can present substantial challenges to governments, some of which may be exacerbated by the requirements in the GASB proposal. Some localities already struggle to provide the information currently required by their states. In Indiana, for example, only three of the state’s 92 county auditors filed required tax abatement information with the state in 2013.^[9] In the same year, the Washington state auditor’s office found that only 611 of the state’s 1,956 local governments filed their required annual financial reports.^[10] 

Further, many jurisdictions include multiple organizations that offer incentives without established protocols for sharing information. For example, a 2012 report from New Mexico’s Legislative Finance Committee found that the state’s approach to job creation was “fragmented and uncoordinated” and that the state lacked a consistent process for collecting data on and measuring results of incentives.^[11] 

Despite the potential challenges presented by the GASB proposal, state and local policymakers should seek opportunities to introduce new practices to improve coordination—such as regularly collecting and sharing better data—which in turn can support better evaluations of tax incentive programs. For governments that have already begun to evaluate or monitor incentives, more robust requirements, such as those in the proposed rule, could improve and standardize reporting on specific program aspects. And for governments that do not prepare such reports, such requirements could prompt necessary action toward future evaluation.

Governments can do more to evaluate tax incentives

State and local policymakers seeking to better understand tax abatements may consider regularly evaluating economic incentives to ensure a more effective, comprehensive economic development policy. As Stephen Klein, chief fiscal officer with the Vermont Legislative Joint Fiscal Office, said, the proposal is “a first step … in trying to capture some of the stuff that goes on that isn’t being captured now.”^[12] Pew recommends that policymakers not only collect regular data but also translate that information into timely and relevant evaluations and use those to inform policy decisions.^[13]

One important element of this effort is identification of the specific purpose for every incentive program, as required in the GASB proposal. Pew has found that a lack of clarity about the objective of economic development incentives is a major obstacle to completing high-quality evaluations.

Many states are already attempting to better define the purpose of their incentives. For example, a 2013 legislative audit in Nebraska found “that the program goals expressed by the Legislature in the statutes and during legislative debate are too general to permit a meaningful evaluation of whether the programs are, in fact, accomplishing what the Legislature hoped they would accomplish.” As a result, Nebraska lawmakers passed a bill in 2014 to clarify the purpose of the state’s major tax incentives and created a special legislative panel to offer recommendations on how to further refine and measure goals.^[14]

Regardless of what happens with the proposed GASB rule, recognition of the need for better information to inform rigorous evaluations is growing among policymakers across the country: From 2012 through 2014, 10 states and the District of Columbia enacted laws that require regular evaluation of all major economic development tax incentives or improvement of existing processes.^[15] Rather than basing decisions on anecdotes, lawmakers want frequent, rigorous, independent analyses that measure outcomes and recommend ways to improve effectiveness.

Endnotes