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Are Comprehensive Annual Financial Reports Useless?
For all their charts and graphs, CAFRs don’t tell public officials anything about fiscal sustainability

JANUARY 22, 2013 | GOVERNING

They’re dense. Only the hardiest of souls would dig into a city or county comprehensive annual financial report (CAFR), called “kafers” by those hip to the inner workings of public finance and auditing.

Characterized by a mind-numbing array of charts, graphs and number columns, CAFRs include such heart-palpitating headings as, “Expenditures and Changes in Fund Balances of Governmental Funds” and “Statement of Activities For the Year Ended September 30, 2006.”

That latter and particularly mundane title can be found on page 10 of the Jefferson County, Ala., CAFR. Sept. 30, 2006, however, is anything but an ordinary date in the history of Jefferson County’s finances. By that date, the county was well on its way toward experiencing the largest local government fiscal meltdown in U.S. history.

Yet even a trained auditor reading the 2006 CAFR would conclude that the county’s finances were OK. That, of course, is more than a little surprising inasmuch as the financial misconduct that eventually led to the county’s defaulting on billions of dollars in sewer upgrade bonds had been in full swing for a decade.

In other words, the scandal that would sweep a host of public officials into jail and the county into a financial sinkhole had been whirlpooling along for nearly a dozen years. Those years had been covered by as many CAFRs, apparently without a hint of what was actually going down with the county’s finances.

Indeed, the only concern expressed by the 2006 CAFR related to the county sewer system was on the fourth-to-last page of the 128-page report: a short note indicating that the county might not be properly billing every customer who was tapped into the county’s gold-plated new sewer system.

“You look at the Harrisburgs and the Scrantons and the Jefferson Counties and you naturally ask, ‘How did we not know this was coming five or 10 years in advance?’” says Joe Stefco, who follows public finance for the Rochester, N.Y.-based Center for Governmental Research. And for that matter, one might question where the red flags were on Stockton, Compton or San Bernardino, Calif., or even Central Falls, R.I.?

The question of how officials failed to foresee such colossal fiscal calamities is naturally linked with the question of who ought to be blamed for such blindness. In Jefferson County’s case, looking beyond the actual perpetrators, it would be natural to blame the person who signed off on the CAFRs, including the very last one released before the scandal splashed across the national news, the Sept. 30, 2006 report. In that case, the seeming culprit would be Ronald L. Jones, chief examiner for the Alabama Department of Public Accounts, who expressed no concern whatsoever about the contents of the county’s CAFR. Blaming Jones, however, wouldn’t really be fair.

“Comprehensive” may have the ring of authority to it, suggesting that CAFRs are some sort of exhaustive and accurate look at a government’s true financial health. Certainly trying to lift one off a desk would suggest that there’s nothing the report could possibly have missed by way of financial accounting and investigation. But all CAFRs really are is a snapshot of a government’s finances at a given point in time; at best, they’re a look backward for a year. “It’s a thorough documentation of financial actions over the course of a fiscal year,” says Sam Tyler, president of the Boston Municipal Research Bureau. “But it’s a year after the fact.”

For all their charts and graphs, CAFRs don’t tell public officials -- or the public -- anything about fiscal sustainability or whether a locality’s finances might be trending south. That’s just as true for those localities teetering toward insolvency for mundane reasons -- like lousy fiscal management or just unhappy circumstances -- as it is for those that have been fleeced by a crowd of bad actors (or as in the recent case of Dixon, Ill., merely one bad actress). That’s the key point worth making, say those who want to improve government financial reports. They want the information to offer earlier warnings of fiscal trouble ahead. What might push a local government into deep fiscal despair probably won’t be a scandal like Jefferson County’s or Bell, Calif.’s.

What actually sinks city and county finances is that slow, steady accretion of bad -- and hidden -- fiscal news that either nobody is getting or no one wants to hear. That news invariably takes the form of commitments to future spending, like bond and pension obligations, as well as other liabilities, such as deteriorating or outdated infrastructure versus the jurisdiction’s revenues to cover those commitments and liabilities.

What really cripples municipal finances comes on relatively slowly -- then avalanches. By the time anyone figures out something’s wrong, it’s often too late for any moderate corrective action; only bankruptcy, state oversight or emergency fiscal managers will do.

 

 
Is your state on the Fiscal "sinkhole" list?  Find out on Institute for Truth in Accounting site here.
 
Read the full article on Governing here.

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