Budget guts: CA financial reporting impacts of eliminating redevelopment agencies.
Such agencies are units of local government that use a portion of the property taxes collected to benefit local communities by eliminating blight, providing infrastructure, providing low- and moderate-income housing; and creating jobs and revenue by assisting business in establishing themselves within that community.
Under the legislation, redevelopment agencies will be dissolved and the funding previously assigned to them will be used to make up part of the state's budget shortfall for fiscal year 2011-12 and beyond.
However, the legislation does allow for redevelopment agencies to continue operating--at reduced funding levels if certain voluntary payments are made to the county's auditor-controller to replace a portion of the state's funding of the public school system. These voluntary payments will be made by the city that establishes the redevelopment agency from "any available funds not otherwise obligated for other uses."
Redevelopment agencies may establish a reimbursement agreement so that this money can be used to fund this payment.
If the voluntary payments are not made, the redevelopment agency will not be permitted to initiate new projects, obligations or activities after July 1, 2011. Such agencies will only be permitted to pay existing obligations as defined by this legislation.
This legislation is facing lawsuits challenging its constitutionality; The League of California Cities and the California Redevelopment Association filed a lawsuit July 18, 2011, on behalf of cities, counties and redevelopment agencies petitioning die California Supreme Court to overturn the bills XI-26 and Xl-27 on the grounds that thev violate the California Constitution. The California Supreme Court issued a stay Aug. 1 1 tor all of Assembly Bill Xl-27 and mosl of Assembly Bill X 1-26. The Court, staled, "The briefing schedule is designed to facilitate oral argument as early as possible in 2011, and a decision before Jan. 15, 2012."
A second Court order issued Aug. 17 indicated thai certain provisions of Assembly bills XI-26 and 27 were still in effect and noi affected by its previous stay, including:
* Requirements to Hie an appeal of the determination of the community remittance payment by Aug. 15;
* The requirement to adopt an Enforceable Obligations Payment Schedule by Aug. 29, 2011; and
* The requirement to prepare a preliminary draft of the initial Recognized Obligation Payment Schedule by Sept. 30, 2011.
Because of the uncertainties and fiscal impacts created bv this legislation and related litigation, certain disclosures arc required to properly inform the reader of these risks. Auditors of those agencies will need to evaluate the adequacy of those disclosures.
An example note, available at www.calcpa.org/exampleRDAnoie. is only one representation of the many possible ways in which the risks and uncertainties associated with this legislation and the related lawsuits may be eommunicaled to the user or the financial siaicineius.
The form and extent ol these disclosures will vary to reflect the reporting preferences of each reporting government and the facts and circumstances associated with thai agency.
Going Concern Issues
Because of the way that the legislation was written, certain redevelopment agencies may continue to meet the requirements to be considered a "going concern" as defined by the auditing and accounting standards. Agencies that choose to make the voluntary payments will be allowed to continue to exist, but at a reduced level of operation.
Agencies that decline to make the payments to the state provided by the legislation are permitted by Assembly Bill XI-26 to pay fas they became due) those obligations that are identified in certain obligation schedules adopted by the agency (Enforceable Obligation Payment Schedule and Recognized Obligation Payment Schedule).
In certain circumstances, the payment made bv the agency to avoid dissolution mav create difficulty for that agency in meeting its obligations when clue. The auditor should carefully consider the specific actions being contemplated by the agency and evaluate its sufficiency of cash Hows to allow it to meet its obligations as they become clue.
Although the auditor is only responsible lor evaluating the client's ability to pay obligations as they become clue for the 12-month period following the balance sheet date, GASB Statement No. 56 imposes upon the reporting government a somewhat longer period to evaluate the sufficiency of cash flows for financial statement disclosure purposes.
Paragraph 16 of GASB 56 provides that "financial statement preparers have a responsibility to evaluate whether there is substantial doubt about a government's ability to continue as a going concern for 12 months beyond the financial statement date. Moreover, if there is information known to the government that mav raise substantial doubt shortly thereafter ifor example, within an additional three months), it should be considered.'
Accordingly, for certain agencies, the auditor may need lo evaluate cash flows of the agency for up to 15 months alter the balance sheet date.
Because of the significance of the uncertainties surrounding the status of redevelopment agencies, auditors may consider putting an emphasis of a matter paragraph in the audit opinion for the component unit financial statements and in the audit opinion for the financial statements of the reporting entity of the local government.
Expenditure Recognition Requirements
For those agencies that choose to make the payment to the state, one question to ask is when to recognize the expense associated with that payment. The accounting standard applicable to dis type of transaction is GASB Statement No. 33, which is generally understood to apply lo nonexchange revenue transactions, but provides for the paying party the expense recognition considerations (hat are applicable to nonexchange transactions.
GASB Statement No. 33 provides for a number of different types of nonexchange transactions with different recognition considerations for each type. Based on the guidance, the payments to be made by redevelopment agencies to California are best characterized as voluntary nonexchange transactions.
GASB Cod. N50.118 provides that "providers should recognize liabilities (or a decrease in assets) and expenses from government-mandated or voluntary nonexchange transactions, and recipients should recognize receivables (or a decrease in liabilities; and revenues (net of estimated uncollectible amounts), when all applicable eligibility requirements, including time requirements, are met."
Under these requirements, California will record a receivable and the redevelopment agencies will record a payable when the state has met all of the eligibility requirements entitling it to receipt of the voluntary payment.
For most redevelopment agencies, the fiscal year in which all applicable eligibility requirements wall be met (and the expense associated with the payment should be recognized) will be the fiscal year ending-June 30, 2012, for the following reasons:
* Under the legislative requirements of Assembly bills X 1-20 and XI-27, the payment to the stale is contingent upon each redeployment agency making the determination to make that payment. Until that determination is made, the state is not entitled to receive die payment. Typically the date the determination is made will fall within the fiscal year endingjune 30, 2012.
* One of the eligibility requirements specified in GASB Statement No. 33 is timing requirements. Timing requirements pertain to the time period when the resources provided to the state are required or permitted to be used. The payments provided by redevelopment agencies will be used by the state in the fiscal year endingjune 30, 2012. From a practical standpoint, use is not permitted until the fiscal year endingjune 30, 2012.
* GASB Statement No. 33 requires symmetry In other words, a proper application of the standard by the payor and the recipient should result in similar recognition results. The legislation creating this payment was designed to provide funding to the state for its budget year endingjune 30, 2012. Recognition by both the state and the agencies in the fiscal year endingjune 30, 2012 is consistent with the budgetary intent of the legislation.
Ken Al-Imam is a shareholder at Mayer Hoffman McCann P.C. You can reach him at KAIimam@CBIZ.com.
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|Date:||Nov 1, 2011|
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