What's wrong with government financial reporting

There's a gap between how governments provide info and what the public wants.

Happy Finance Friday! During a panel I moderated this week at the Government Finance Officers Association annual conference in Portland, Oregon, I asked the audience of around 500 hundred practitioners who would keep the current model for annual financial reports if given the choice. Almost nobody raised their hand.

To be fair, the panel was titled “Rethinking Financial Reporting” so attendees were probably skewed toward those interested in how the system could change. But it’s still very telling. If public finance officers—who tend to be risk- and change-averse—are up for something new, this is really an issue.

This week, I’ll lay out what’s wrong with financial reporting and how the Great Recession, watchdog organizations and technology have laid the foundation for an overhaul of how governments report their fiscal health. Next week, I’ll explore ways to improve all of this (assuming I don’t end up writing about how the federal government defaulted on its debt, upending the global economy…).

Why most people ignore government financial reports

At a fundamental level, we all want the same thing: To know what our government is spending money on and whether it can afford to do so. The first one gets a lot of ink because that’s a budget question. Budget season is usually the time when elected leaders lay out their policy priorities and when taxes get debated. 

It’s also usually when the prior year’s revenue totals start becoming clearer which leads to debates about either budget cuts or a surplus. But those debates tend to be narrowly focused on fixing a revenue gap with a few budget moves and don’t usually engender a larger conversation about fiscal health.

I’ve written before about how the Annual Comprehensive Financial Report (ACFR) is the real measure of a government’s overall health. It’s the full body scan, physical, and medical history while the budget is the diet and exercise plan you come up with after. But ACFRs barely get any coverage. Reasons include:

• Unlike budgets, there is no “annual reports season.” A government might issue its report in January of one year and in March the next year. This unpredictability makes it less likely to be closely followed.

• Most places take between six months to a year to issue their reports and many take longer than that. Even for the “faster” ones, the information still seems stale to taxpayers and elected officials who are more focused on the current moment.

• They’re long and boring. If you don’t want someone to read something, make it in a PDF that’s over 200 pages long and throw in a lot of numbers and tables but few (if any) charts or graphics. That, in short, describes most government financial reports.

Pro tip: The most readable portion of an ACFR is the section in the beginning called “Management Discussion and Analysis.” (Here’s an example.) This gives you the basic story of a government’s main economic drivers, how it fared in the past year and many include a graphic or two.

For a long time, the only folks “reading” ACFRs were researchers or credit rating analysts and they were mainly trolling for data. But that was before the Global Financial Crisis upended government finances.

State and local finances exposed

The Great Recession brought more scrutiny upon state and local government finances than perhaps any other time in the modern era. Taxpayer frustration, actions at the federal level, an increase in watchdogs and new technology all conspired to demand more transparency and accountability from state and local governments.