Commonly Used Terms & Abbreviations in Government Reporting

000's Omitted, Thousands Omitted, Millions Omitted

The reference to "000's omitted" is most often found in financial reports and refers to the practice of presenting tables of numbers presented in "thousands of dollars" (hence 000's omitted).

The problem with reporting in this manner is that the resulting numbers, to the casual observer, appear to be a thousand times smaller than in reality. In other words, $1,000 becomes $1 – or one million dollars becomes $100,000.

When reviewing government issued financial reports, it is important to keep this practice in mind. At it's more extreme, it is possible to find annual reports issued by the government which report summary numbers in "millions of dollars" – in which case $1 would equate to $1,000,000.

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AAL – Actuarial Accrued Liability

As defined by GASB: "The portion of the actuarial present value allocated to prior years of employment—and thus not provided for by future normal costs—is called the actuarial accrued liability (AAL)."

In less technical terms, the AAL represents the amount that should already have been set aside in a prefunded-investment account to pay for future, post-retirement healthcare benefits based upon the employees existing record of past service. The "future normal costs" would be those amounts that the employer "should be" setting aside in their current year's expenditures for the benefits being earned during the current year.

Shortfalls or failures to fund "future normal costs" are now being recorded on the balance sheet of the employer as long term liabilities. This current policy, however, does not address the underlying problem of the employer's failure to pre-fund the associated investment asset account - even for the current year's earned benefits - and, again, pushes the responsibility for payment off to future generations of taxpayers.

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Accrual & Accrual Basis Accounting

Accrual basis accounting recognizes and records expenses when incurred (not when paid) and revenues when the transaction or sale is occurs (not when payment is tendered). Accrual basis accounting is designed to better match the timing of revenues and associated expenses, thereby providing a more timely, accurate and reliable picture of the financial effects of operations.

In this context, it would be expected that a government operation would record the expense and liability of a future payment obligation at the time the expense (and associated liability in the case of deferred expenses) is created and not at the time the actual payment is tendered. Under this interpretation, the liability for a post- retirement promise (OPEB) would be recognized during the period in which the employee was working and actually earning the associated future benefit. Under this interpretation, the liability for the future or deferred expense would be recognized as an expense of the current period and booked immediately as a liability to be paid.

To insure that cash flows in future periods would not unduly burdened by historical, but unpaid expenses (such as OPEB liabilities) best practices would normally dictate that corresponding assets be set aside during the current period to provide a future payment mechanism rather than simply push the responsibility for payment off to a future accounting period and a future generation.

Unfortunately, this in not the system currently being followed by agencies of the government at federal, state or local levels.

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Actuarial

Actuarial value is a mathematical calculation, often of the financial condition of a pension plan. It includes the computation of the present monetary value of benefits payable to present members, and the present monetary value of future employer and employee contributions, factoring in mortality among active and retired members and also to the rates of disability, retirement, withdrawal from service, salary and interest. It is the value of cash, investments, and other property belonging to a pension plan, as used by the actuary for the purpose of an actuarial valuation. The actuarial value of assets may represent an average value over time, and normally differs from the amount reported in the financial statements, which is a measurement as of the date of the statement of net assets. Definition by USLegal.com http://definitions.uslegal.com/a/ actuarial-value/

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ADC – Actuarially Determined Contribution

A formal term developed by the Government Accounting Standards Board intended to represent the actuarially determined annual contribution necessary for a given jurisdiction in order to amortize its Unfunded Liability for OPEB benefits. The amortization amount is based upon the term and assumed rate of return elected by the jurisdiction involved.

It has been suggested by some that the term has been changed from "required contribution" to an "actuarially determine contribution" to avoid possible misinterpretation that the amount is actually a "required" amount as opposed to merely a reference amount.

Effective with GASB ruling number 72, this term has been redefined as the Actuarially Determined Contribution (ADC).

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ARC – Annual Required Contribution

A formal term developed by the Government Accounting Standards Board intended to represent the actuarially determined annual contribution necessary for a given jurisdiction in order to amortize its Unfunded Liability for OPEB benefits. The amortization amount is based upon the term and assumed rate of return elected by the jurisdiction involved.

This contribution refers to the amount a jurisdiction should now be setting aside to fund the cost of future retiree benefits. Virtually all public jurisdictions now operate on a Pay As You Go basis – meaning they contribute only the amount required to pay for current, retired employees – with nothing being contributed towards the fund necessary to support the current generations of active employees once they migrate to retirement. Following the Pay As You Go approach insures that retirement health care benefits of today's employees will be paid by future generations of taxpayers. Importantly, the ARC is intended merely as a reference number or target, reflecting that amount that should be set aside and invested, annually, if a given jurisdiction is serious about liquidating the unfunded liability over the period established. In this sense, it is not a required or compulsory contribution as it would be under the terms of most Pension obligations. Under GASB 54, jurisdictions were required to begin recognizing and reporting their annual progress in meeting their projected liquidation schedule for converting this liability into a formal balance sheet entry. To date, however, jurisdictions are only required to expense that portion of the ARC which they actually fund. As such, any underfunded amount (an amount which should have been set aside if the liability were to be effectively liquidated on schedule) is not reflected in current expenses or current budgets.

Effective with GASB ruling number 72, this term has been redefined as the Actuarially Determined Contribution (ADC).

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CAFR (Comprehensive Annual Financial Report)

A government mandated Annual financial report for all public entities. The format and content of the reports are formally proscribed. As a tool for financial management of the jurisdiction being reviewed, many of the reports are redundant and the information provided is useless in terms of helping to explain or understand the patterns of spending or the trends they reflect.

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Deferred Compensation

Sometimes offered as an optional method of employee compensation in which a portion of an employee's current compensation is withheld and shifted from current compensation to future, or deferred compensation. Such programs can benefit both the employer and employee by reducing the employer's current reported expenses, while allowing the employee the opportunity to defer receipt of taxable income until future periods.

In such instances of deferred compensation, private sector employers are required by law, to formally set aside funds during the current period in order to pay for such deferred expenses at a future date – thereby providing the employee some measure of financial security in the knowledge that adequate funds have been set aside in a formal trust account.

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Deferred Expenses

According to the Accounting Coach: "The term "deferred expense" is used to describe a payment that has been made, but it won't be reported as an expense until a future accounting period."

Sadly, this almost the opposite of how the Government would define this term – for rather that paying for an expense in the present and reporting it as an expense in the future. Our government is more apt to incur the promise or liability for the expense in their present, then set aside nothing towards its payment and simply book it as a deferred expense to be paid by some future generation.

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Deficit

As defined by Wiktionary a deficit is: 1. Deficiency in amount or quality; a falling short; lack. 2. A situation wherein, or amount whereby, spending exceeds government revenue.

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Deficit Spending

First, it is important to keep in mind the most discussion of "deficit spending" is in reference to Federal deficit spending. Charged as it is with oversight of the Treasury's fiscal and monetary policy, the Federal Government has the necessary where-with-all to control everything from interest rates, to money supply and credit policy.

There are many arguments over the value and consequences of deficit spending as a tool to spur economic growth – i.e. Stimulus spending. Throughout our country's short history, there have periods where such policies – employed on a short-term basis - have helped to stabilize the economy in meaningful and important ways. Unfortunately, however, all deficit spending is not the same.

Deficit spending to spur investment in long-term infrastructure construction, when properly authorized and administered, has generally be viewed as a valuable and worthwhile use of such policy – particularly where the resulting asset is one that can be shared and enjoyed by all.

Deficit spending practices can easily be manipulated, however, to satisfy demands of powerful interest groups (think wall street, auto, construction, auto or solar industry), or in satisfaction of politically motivated endorsements (think organized labor – private and public). When such policies, often described as "Crony capitalism" are employed for extended periods, often without the promised stimulating effects, the results are often reflected in the creation of massive long term debt obligations which then become the burden of future generations to repay – without any of the benefits of the stimulus which gave rise to their creation.

Lastly, we have the most insidious form of continuing deficit spending as exemplified by our massive, underfunded Federal entitlement programs and Federal employee pension plans. Indeed, it is this category of deficit spending – perhaps better described as "stealth spending" that is the most troubling of all – as it often isn't accurately or fully reflected in the operating budgets or balance sheets of the departments affected AND the bill for such laragesse is almost always pushed off to future generations – who once again are stuck with a bill for services delivered to their parents or grandparents.

As defined by Wiktionary a deficit is:
3. Deficiency in amount or quality; a falling short; lack.
4. A situation wherein, or amount whereby, spending exceeds government revenue.

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Fiduciary (Wikipedia definition)

A fiduciary is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person. One party, for example a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to the other one, who for example has funds entrusted to it for investment. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.

A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.

—Lord Millett, Bristol and West Building Society v Mothew[1]

A fiduciary duty[2] is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the "principal"): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.

In English common law the fiduciary relation is arguably the most important concept within the portion of the legal system known asequity. In the United Kingdom, the Judicature Acts merged the courts of equity (historically based in England's Court of Chancery) with the courts of common law, and as a result the concept of fiduciary duty also became available in common law courts.

When a fiduciary duty is imposed, equity requires a different, arguably stricter, standard of behavior than the comparable tortious duty of care at common law. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from his fiduciary position without knowledge and consent. A fiduciary ideally would not have a conflict of interest. It has been said that fiduciaries must conduct themselves "at a level higher than that trodden by the crowd"[3] and that "[t]he distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty."[4]

Definition by Wikipedia http://en.wikipedia.org/wiki/Fiduciary

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GASB – Government Accounting Standards Board

As defined by GASB: "The GASB is the private, nonpartisan, nonprofit organization that works to create and improve the rules U.S. state and local governments follow when accounting for their finances and reporting them to the public. The GASB was founded in 1984 under the auspices of the Financial Accounting Foundation (the Foundation), which appoints the GASB's board, raises its funds, and oversees its activities. The Foundation also oversees the GASB's counterpart for the private companies and not-for- profit organizations, the Financial Accounting Standards Board. The mission of the GASB is to establish and improve standards of state and local governmental accounting and financial reporting that will: • Result in useful information for users of financial reports, and • Guide and educate the public, including issuers, auditors, and users of those financial reports.

Although the GASB does not have the power to enforce compliance with the standards it promulgates, the authority for its standards is recognized under the Code of Professional Conduct of the American Institute of Certified Public Accountants (AICPA). The Code requires auditors to note any departures from GASB standards when they express an opinion on financial reports that are presented in conformity with generally accepted accounting principles. Also, legislation in many states requires compliance with GASB standards, and governments usually are expected to prepare financial statements in accordance with those standards when they issue bonds or notes or otherwise borrow from public credit markets."

From the employee's and taxpayer's perspective, both, the key take-away from this description of GASB's role is the fact that "GASB does not have the power to enforce compliance with the standards it promulgates,". For practical purposes, this means that neither the Employee nor the Taxpayer is protected from the failure of the employer to adequately fund the necessary contributions if they are to be able to make good on their promise of future benefits.

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Infrastructure Investment

Infrastructure investment originally referred to government policy initiatives involving long-term investment of public funds in major improvements to support our national transportation system of highways, roads and bridges (this was our first national infrastructure investment established under the original constitution). Today, that definition has broadened substantially. It is now employed to describe virtually all >major "public works" projects – ranging from buildings to house government operations ranging from the post office, to schools and libraries, to jails and prisons, to social services, to ports and railways and airports, to monuments and national parks, to local water and wastewater systems, to national laboratories and veteran's hospitals (just to name a few).

It is inevitable that such major improvements carry with them the burden of sustained, long term maintenance expense. As it turns out, government accounting standards are not well suited to establish the sinking funds necessary to insure the long term maintenance of such facilities. The fact that government policy does not specifically mandate maintenance investments is largely to blame. Such expenses are not very sexy and don't generally reward any particular constituent group. Accordingly, this class of "discretionary" expenditures doesn't have a great deal of political support and generally falls to the bottom of the agenda. If such programs were allowed their fair share, it would place serious budget pressures on the "more popular" budgetary demands associated with increases in payroll and benefits and other "more politically popular" programs viewed as rewards by faithful political supports. Accordingly, we are finding an increasing incidence of major shortfalls in the maintenance costs necessary for proper maintenance and repair of our aging infrastructure investments.

We can expect to hear more about this eroding category of government investments.

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Liability

As defined by Google: 1) The state of being responsible for something, esp. by law; 2) A thing for which someone is responsible, esp. a debt or financial obligation.

Liabilities are created every day in connection with routine commerce. Such liabilities are generally considered as ‘Trade or Accounts Payables' and classified as Short Terms liabilities. Examples include routine purchases of goods and services, which create Accounts Payable, that are generally paid in the following month.

Long term liabilities are another category of liabilities and generally refer to formal borrowing arrangements where the terms of repayment extend beyond more than one year. This category of liability is represented by mortgage debt or long term bonds to finance the purchase of long terms fixed assets such as buildings, dams or other infrastructure investments.

In the context of government accounting, the term "liability" is most commonly associated with the value of recorded obligations or debts owed by the reporting in connection with services rendered, yet remaining partially or fully agency unpaid as of the reporting date. The most common examples of such liabilities would be represented by promises made to public employees involving pension and post-employment healthcare obligations.

Particularly in the case of pension liabilities, whether public or private, it is formal practice to require an annual audit which compares the actuarial value of the projected future benefits to be paid with the current actual value of investment assets that will serve as the funding source for the future benefit payments. When maintained in proper balanced, with assets equaling liabilities, such arrangements are referred to a fully-funded obligations or liabilities.

The final category of government liabilities is a category defined as Unfunded Liabilities or unfunded obligations. And, it is at this juncture that Government standards for reporting of liabilities substantially departs from commonly accepted accounting rules as practiced in the private sector.

Unfunded Liabilities represent a distinct and separate class of liabilities. Among other things, they are not generally included in our governments' calculations of overall debt. Unfunded liabilities are further discussed throughout this web.

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OPEB (Other Post Employment Benefits)

An acronym referring to a class of non-pension, post-employment retirement benefits – generally healthcare insurance benefits - available to public sector employees. This category of benefits differs from pension benefits in two important respects: 1) they are not protected in the sense that Pension benefits are, 2) they are not uniformly offered by all jurisdictions, and 3) they have been uniformly under if not entirely unfunded by those jurisdictions that have elected to offer such benefits.

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Pay Go (Pay As You Go)

"Pay-As-You-Go" is perhaps the most misused and misunderstood terms in all of government account. Most average taxpayers, and a large majority of most public employees, believe this term to mean that our governments (their employers in the case of public employees) are setting aside sufficient current contributions (paing as they go) to properly fund associated future retirement benefits.

Quoting Directly from GASB's Plain Language document:

"In general, postemployment benefits are financed in one of two ways. Some governments follow an actuarial approach, which entails paying to a pension or OPEB plan an amount that is expected to be sufficient, if invested now, to finance the benefits of employees after they are no longer working for the government. This approach is commonly followed for determining pension contributions.

Unlike accounting for PENSIONS, the accounting standard for OPEB, however, most governments currently follow a pay-as-you-go approach, paying an amount each year equal to the benefits distributed or claimed in that year. The new OPEB standards do not mandate the funding of OPEB benefits (in other words, to set aside assets in advance to pay benefits in the future). As noted above, they address accounting and financial reporting issues only."

Why and how this distinction in accounting for defined benefits has been allowed to morph from a fully pre-funded model to a wholly unfunded program is the subject of this website.

GASB 45 – Other Post-Employment Benefits and Why they are Important

Source: "Other Postemployment Benefits: A Plain-Language Summary of GASB Statements No. 43 and No. 45"

"Employees of state and local governments may be compensated in a variety of forms in exchange for their services. In addition to a salary, many employees earn benefits over their years of service that will not be received until after their employment with the government ends through retirement or other reason for separation. The most common type of these postemployment benefits is a pension. As the name suggests, other postemployment benefits (OPEB) are postemployment benefits other than pensions. OPEB generally takes the form of health insurance and dental, vision, prescription, or other healthcare benefits provided to eligible retirees, including in some cases their beneficiaries. It may also include some types of life insurance, legal services, and other benefits."

Why Has the GASB Issued New Standards for OPEB?

Source: "Other Postemployment Benefits: A Plain-Language Summary of GASB Statements No. 43 and No. 45"

"The GASB established standards in 1994 for how public employee pension plans and governmental employers participating in pension plans should account for and report on pension benefits, but similar provisions did not exist for OPEB. Although the OPEB may not have the same legal standing as pensions in some jurisdictions, the GASB believes that pension benefits (as a legal obligation) and OPEB (as a constructive obligation in some cases) are a part of the compensation that employees earn each year, even though these benefits are not received until after employment has ended. Therefore, the cost of these future benefits is a part of the cost of providing public services today. However, most governments report their cash outlays for OPEB in a given year, rather than the cost to the employer of OPEB earned by employees in that year; these two amounts may be vastly different. In the absence of standards similar to those the GASB enacted for pensions, most governments do not report the full cost of the OPEB earned by their employees each year.

Furthermore, most governments do not report information about the nature and size of their long-term financial obligations and commitments related to OPEB. Consequently, the readers of financial statements, including the public, have incomplete information with which to assess the cost of public services and to analyze the financial position and long-run financial health of a government. The purpose of the new standards— GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions—is to address these shortcomings."

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UAAL – Unfunded Actuarial Accrued Liability

As defined by GASB: "The excess of the AAL over the actuarial value of assets is the unfunded actuarial accrued liability (UAAL or unfunded liability)."

Keeping in mind that the value of the UAAL represents an investment amount that should have already been set aside in prior years, the current GASB guidelines allow a government employer to establish what amounts to a level repayment schedule based on a 30 year time frame. GASB explains: "Like a home mortgage, the level dollar method divides the liability into equal dollar amounts over the selected number of years; each payment is part interest, part principal."

As noted in our discussion of the AAL, however, there exists no enforcement mechanism (as does exist in the case of most employee pension benefits) which "forces" the employer to actually fund - even the current year's benefits. As such, we see a number of employer issued annual reports (CAFRs) that are reflecting a rising AAL & UAAL, with zero value in associated investment assets.

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Unfunded Mandate

An unfunded mandate is perhaps best described as a government imposed requirement, restriction or regulation which results in additional direct or indirect costs for the employer or taxpayer. Such mandates can affect both private and public sector operators. As example, recent government legislation governing waste water discharge requirements has placed heavy burdens on many local municipal utilities and hence local taxpayers. The scope and range of such legislation ranges from healthcare mandates, to air pollutions limitations, to automobile mileage requirements. In virtually every instance, the consequence of unfunded mandates is the imposition of new costs which must either be absorbed by the operator, or passed on to the consumer or taxpayer.

The greatest risk of unfunded mandates is the prospect that such addition imposed costs will result in the gradual financial weakening, or worse, the financial collapse of the entity being directly affected.

Currently, there exist very few protections or pathways to appeal for affected parties – those covered by the mandate are simply expected to comply – regardless of cost or economic impact to the operation. Moreover, such new regulations often become pathway to financial success for litigators eager to serve as the enforcers of new government-enacted mandates.

Left unchecked, such mandates hold the potential to render many business models financially unsustainable. Taken to the extreme, over time, the cumulative effect of such initiatives could render an entire community, or even a nation, financially unsustainable.