California lawmakers are weighing decisions on the $214 billion budget this year without the benefit of the state’s audited financial documents.
California Controller Betty Yee said the state’s comprehensive annual financial report for the fiscal year ended June 30, 2018 won’t be released until Wednesday. It was due out April 1.
Yee attributed the delay in an emailed response to “interface delays” with FI$CAL, the state’s new digital accounting system, and implementation of GASB 75, a change to the accounting rules that requires that the full liability of other post-employment benefits, such as retiree medical, be included on government balance sheets.
The FI$CAL system was designed to create a comprehensive budget program to replace a patchwork of outdated accounting programs. The project was supposed to be completed by July, but has experienced delays. The delay means lawmakers will only have the audited financial report available for the final ten days of the budget process.
“It’s May 30 and we haven’t received the CAFR for California,” said Sen. John Moorlach, R-Costa Mesa, Thursday during the state’s joint Senate and Assembly budget conference committee hearing. “Will we receive it before we approve the budget?”
Moorlach pointed out that the state’s Department of Finance has reported a $21.5 billion surplus, but the most recent CAFR for year-end June 30, 2017 showed an unrestricted net deficit of $168.5 billion and $91 billion in unfunded retiree medical liability benefits for state employees, teachers and judges.
“That’s a quarter-trillion dollars,” said Moorlach.
Part of budget discussions have been over how much money to dedicate to paying down pensions and other long-term debt as opposed to placing more money in the state reserves.
Moorlach asked the state’s legislative analyst, Gabriel Petek, if he was planning on doing further analysis of problems related to implementation of FI$CAL.
“I want to make sure, we don’t get surprised by the numbers,” Moorlach said. “If you can help with that, I would appreciate it. When I was a county supervisor for Orange County, we used to get our CAFR in December — and here we are in June.”
The state has unaudited financial documents for year-end fiscal 2018 posted on the Municipal Securities Rulemaking Board’s EMMA site under disclosures for the state’s bonds.
“The unaudited financial figures are complete and submitted to the state treasurer,” Yee said. “I have no concern that a later fiscal year 2017-18 CAFR will harm the state’s financial position.”
That response is much different from what Yee
The controller also noted that California does not have a statutory deadline for completing the CAFR.
California regularly releases its CAFR roughly two months later than the average for U.S. states even when it hits its April 1 deadline, according to data from Truth in Accounting, a Chicago-based think tank.
“It’s significant that California is slower than other states, if you think all governments are slow in releasing them, which we do,” said Bill Bergman, director of research for Truth in Accounting. “It is not that significant if you consider how much larger and more complex California is than other states.”
While financial statements are a valuable check on the accountability of governments, the value of that check diminishes the longer it takes to get the information, Bergman said.
Much of the financial information states put out regularly is cash-based and doesn’t take into account the accrual of long-term liabilities like pensions, OPEB or bond debt, Bergman said.
“I think for most people’s purposes the unaudited financial documents are adequate,” said Marc Joffe, a senior policy analyst with the Reason Foundation. “I think it reflects poorly on the state’s credit when they can’t get a CAFR out on time.”
Two Fitch Ratings senior directors, Karen Ribble and Karen Krop, who co-rate the state, didn’t see the late CAFR as an issue, primarily because the state puts out so much “robust” financial information throughout the year.
“CAFRs are important, but in the best case, the fiscal year ends in June and they are released in November, so that information is six months old,” Ribble said.
For California, in particular, the interim data is sufficiently robust for Fitch to do a rating, Krop said.
California received the Government Finance Officer Association’s certificate of achievement for excellence in financial reporting for its 2017 CAFR.
In order to win the award, governments have to release their CAFR’s within six months of the end of the fiscal year. California asked for a six-month extension from GFOA for this year and was granted one, said Michele Mark Levine, director of GFOA’s Technical Services Center.
Though timeliness is a criteria for the award, Levine said GFOA has a “tightrope to walk, because we understand information needs to be as timely as possible, but we are aware of the challenges governments face in getting out the information on time.”
“Sometimes there are a shortage, or backlog of firms, who are interested in doing government audits, and the actuarial information needs to be prepared. There are a great variety of reasons governments might be late, but we do think timeliness is important,” Levine said.
The new accounting regulations around reporting on OPEB has been a challenge for other states, she said.
