GASB 77: A new rule that could cause major headaches for elected officials

[private]The phrase “GASB 77” is not just a random collection of letters and numbers.

It is a new accounting rule that applies to all state and local governments and has the potential to cause massive headaches for elected officials when it takes effect in about a year and a half.

GASB 77 will require governments to include footnotes in their annual financial reports that detail the impact of tax breaks they grant to private businesses.

When the General Assembly grants a special tax break to Mercedes-Benz as it did this year at the request of Gov. Nathan Deal, GASB 77 will require the state to disclose in its audit footnotes the financial impact of that abatement: the amount of money that Mercedes-Benz is not paying because it was given the tax break.

If a governor signs a bill that gives him an enormous tax exemption on property he owns in Florida, GASB 77 will require that the state’s annual financial report include a footnote detailing how much revenue the state is forgoing because of that tax break.

If a county development authority grants property tax breaks to a company in order to persuade it to relocate a factory there, the amount of taxes that the firm doesn’t have to pay to the county government and local school board will have to be publicly disclosed in every financial report and audit.

“They’ll have to put out statements about what they’ll do to taxpayers,” said Miller Edwards, a certified public accountant with the firm of Mauldin & Jenkins. “It’s in the interests of transparency and will be retroactive as well.”

Edwards’ firm performs the outside audit of the Georgia Building Authority’s finances; he briefed the authority last week on the implications of the new accounting disclosure rule.

Deal, who chairs the Georgia Building Authority, immediately grasped what the ramifications of the new rule could be for local elected officials who approve lucrative tax breaks for private companies and then later try to run for reelection.

“It really does lend itself to political exploitation,” Deal said.

In other words, political opponents of an elected official could have a potent weapon to use against that officeholder in the next election: detailed information on the tax exemptions promised to private businesses and how much it costs the taxpayers.

“It’s not good news for governments,” Edwards told a reporter after his briefing to the GBA. “It’s not going to be an upbeat, uplifting thing.”

“It does hit you between the brows – it hits you pretty hard as to what you have to disclose,” Edwards said of the new rule, which takes full effect on June 30, 2017. “All agencies affected by the abatements have to disclose it.”

The kind of public disclosure required by GASB 77 would have been useful back in 2012 when the Joint Development Authority of Jasper, Morgan, Newton, and Walton counties announced it had succeeded in persuading Baxter International, a pharmaceutical company, to locate a manufacturing facility at the Stanton Springs industrial park.

Although state officials at first said the tax breaks and financial incentives promised to Baxter would total about $78 million, a more detailed examination later showed that the incentive package would actually be worth more than $200 million.

Those financial incentives included 10-year abatements on the property taxes that Baxter normally would have been required to pay to the Newton and Walton County school boards.

The only problem there was that nobody involved with the Baxter negotiations bothered to tell the two school boards that they were going to be hit with tax breaks that would cost them several million dollars a year in tax revenues.

After the Baxter facility was announced, lawyers for the development authority met with the two school boards and demanded that they vote to approve the tax breaks that had already been promised to Baxter, a request that did not sit well with some of the board members.

Here’s how the Walton Tribune reported it at the time:

Tommy Craig, a Newton County lawyer who represents the Four County Development Authority, said it happened as part of the negotiations with Baxter.

“The development authority made the decision on your behalf,” Craig told the board of education at its monthly work session Tuesday.

Among the board members, however, that explanation was received with complaints. The Baxter negotiations were kept secret until the last second, with only a handful involved in the talks, most from Newton County. The board members were unaware their school taxes would be part of the abatement plan until it was brought to them as part of the completed negotiations.

“We’ve never abated school taxes,” said Coleman Landers, board member for District 4. “I didn’t see this as going to be an issue.”

And Landers and other board members felt aggrieved at being asked to sign off on the agreement after it was already completed.

“The feeling of disenfranchisement of board members is real,” Landers said. “We need to make sure board members are brought in like any other elected officials.”

But Craig said few could be told about the talks until they were already done, as both Baxter officials and Gov. Nathan Deal’s office maintained a near-paranoid secrecy about the negotiations.

Landers was unconvinced, saying the school tax abatement was offered up without a second thought just to placate Baxter.

“I think they asked for it because they can,” Landers said.

GASB stands for the Governmental Accounting Standards Board, a private organization of accountants who set the generally accepted accounting principles that governments follow in issuing and auditing their annual financial reports.

The intent of GASB rules is to ensure that taxpayers and businesses that buy government bonds are getting an accurate picture of how governments collect and spend the tax money they receive each year.

When it released the new rule in August, GASB included this explanation about the need for it:

Although many governments offer tax abatements and provide information to the public about them, they do not always provide the information necessary to assess how tax abatements affect their financial position and results of operations, including their ability to raise resources in the future . . .

Financial statements prepared by state and local governments in conformity with generally accepted accounting principles provide citizens and taxpayers, legislative and oversight bodies, municipal bond analysts, and others with information they need to evaluate the financial health of governments, make decisions, and assess accountability.

© 2015 by The Georgia Report

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Tags: economic development , GASB , government audits , Nathan Deal , tax breaks , taxpayer transparency