government the option of refusing the funds and continuing to keep its

books according to non-uniform principles. In this sense it is non-coercive. From the public standpoint, it makes revenue sharing more clearly an investment in better government, and offers the benefit of improved municipal management and greater comprehensibility of municipal financial

statements.

The Business Model

In establishing a standard-setting body, an important question is the degree to which municipal accounting standards should differ from business standards. If they differ greatly, it makes it more important to have separate standard-setting bodies.

We at the Council on Municipal Performance would prefer to see municipal standards approximate as closely as possible business accounting standards. We believe that we would have on our side most accountants, underwriters, municipal bond buyers and civic leaders. Readers of financial statements are accustomed to the business format.

Accountants

are familiar with business accounting practices, and a body of accounting principles has been developed which could be applied to municipal governments with few modifications.

The argument on the other side, heard mostly from government accountants, is that government accounting is different because it is used for different purposes; that municipalities don't make a profit; that depreciation is inappropriate for municipal assets; that each fund is a legal entity; that enterprise funds are entirely different from general government funds; and that governments are subject to restrictions on the use of their money that have no private parallel.

This debate has stood in the way of establishing a standard-setting body. Donald J. Kirk, Chairman of the FASB, has said that the FASB is willing to expand its work into government accounting standards, including broadening its structure by adding government officials. But government officials have opposed giving the standard-setting job to a businessoriented body.

A year ago, one would have said that the issue was unresolvable, like a Highland feud between the McIntoshes and McDonalds. Now, however, the respected Vice Chairman of the National Council on Governmental Accounting (NCGA, the municipal counterpart of the FASB), Dallas Auditor James Fountain, has stated that the NCGA in its present form couldn't take on standard-setting alone. He would support a Government Accounting Standards Board on a five-year "sunset" basis, with postponement of a decision on a permanent body.°

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Equally significant, the NCGA has recently published a Research Report entitled "A Study of Selected Concepts for Government Financial Accounting and Reporting," which comes down squarely on the side of the business model with a few relatively insignificant variations. The exceptions are so minor that it's like the McDonalds settling with the McIntoshes for a bushel of apples.

The NCGA report was introduced by former New Orleans Mayor Moon Landrieu, now Secretary of HUD. It was monitored by a panel of Advisors appointed by the NCGA. It deals effectively with several traditional points of contention which can be summarized as follows:

1. Fund Consolidation. Most government accountants have opposed consolidation of funds along business lines. This makes municipal reports

bulky and unreadable. The NCGA report favors consolidation of all funds under the "command" of a given set of elected officials.9

2. Segregation of Enterprise Funds. Government accountants have argued that enterprise (revenue-based) funds can't be combined with general government (tax-based) funds. The NCGA report says they can and should, although they should be reported separately in subtotals within the consolidated statements.

3. Elimination of Interfund Transfers. Outsiders haven't been able to consolidate municipal fund statements because of numerous interfund transfers which need to be netted out. The NCGA report argues that all such transfers should be eliminated in the consolidated statements. This seems like common sense, but present municipal GAAP prohibits eliminating interfund transfers.

4. Development of Managerial Operating Statements. Most government operating statements are based on expenditures--outlays recorded when obligated. Such statements are of limited value to managers, because they don't show true costs. The NCGA report favors basing operating statements on expenses--outlays recorded when used. This implies depreciating investments in long-lived assets, and thereby coming up with a figure for "changes in municipal equity." The long-sought "bottom line" for municipal governments would thereby be obtained. The NCGA report also favors comparisons between expenses and budgets in footnotes „10 or supplementary schedules, "where necessary for fair presentation."

5. Depreciation. Finally, while enterprise funds commonly depreciate their long-lived assets, general governments do not. Depreciation requires maintenance of a set of asset accounts, and even the latter are seldom

kept in a rigorous way by general governments. The NCGA report recommends that long-lived assets be depreciated where possible for all government accounts, and that a statement of 'financial position and changes in financial position be developed accordingly.

In short, the NCGA report recommends that the business model be used for municipal accounting, with modifications to identify enterprise and restricted funds. Use of the business model would make it easier to compare public and private agencies for service delivery, and would greatly enhance public awareness of the true costs of public and private services.

Implications for Oversight

There is overwhelming agreement that a municipal accounting standards board is needed, and that a strong compliance provision is essential for its success. Revenue sharing renewal provides a unique and crucial

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opportunity for establishment of such a compliance provision.

It is less important where the authority for setting standards should be lodged. One approach is to put the SEC in charge of monitoring the standard-setting process--something with which it has had ample experience--and letting the SEC decide how the process should evolve.

Another approach is to define in the legislation where the standardsetting authority should be, as is attempted in S. 1236 (without an enforcement mechanism).

If the legislation does specify such an authority, we at the Council on Municipal Performance favor giving it to the FASB, for reasons outlined in the previous section. If the business model is appropriate for municipalities, then let the business standard-setting body extend its scope (and its board membership) to include government accounting standards. However, we would prefer any compromise solution of the kind proposed by

NCGA Vice Chairman Fountain to a continued vacuum in this area.

Once we have an authoritative GAAP model for states and localities, independent auditors could define more clearly deviations from this model. The SEC or other enforcement agency could monitor the audits and invoke penalties where appropriate, to be executed by the ORS through deductions from revenue sharing payments.

The cumulative impact of such changes would be a management revolution in state and local government. Proposition 13 type initiatives and continued municipal financial crises indicate that the public is ready for such a revolution. It holds out the promise of better public services at less cost to the taxpayer. It could be a major answer to our drop in American productivity and the desperate plague of inflation. It might even improve public and business confidence in the government process.

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