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Popular annual financial reports: current trends and future prospects.

What characteristics distinguished the outstanding popular reports selected in the GFOA's first Popular Reporting Awards competition?

The Governmental Accounting Standards Board (GASB) set forth nine goals of financial reporting for governmental entities in its Concept Statement No. 1, "Objectives of Financial Reporting." They can be summarized as providing users with the financial information to enable them to:

* assess the government's accountability;

* evaluate the government's operating results for the period; and

* determine the government's ability to meet its obligations as they become due, yet still provide acceptable levels of service to the public.

The Comprehensive Annual Financial Report (CAFR) represents governments' attempt to meet these objectives. These reports do an excellent job of conveying information to sophisticated users, such as bond counsels, underwriters, rating agencies, bankers and the like, for the purpose of helping governments efficiently finance their operations and capital improvements.

Although they fulfill legal reporting requirements and generally accepted accounting principles (GAAP), the reports are notoriously baffling to nonspecialists. While the public typically relies on financial analysts to decipher the reports of large corporations, no one translates the technical language contained in CAFRs to the legislators, citizenry, press, business community and other potential users.

One way to ameliorate this situation is to supplement the CAFR with a Popular Annual Financial Report (PAFR). PAFRs are designed to provide citizens and other users with easily understood information about a government's finances and economic condition. PAFRs are supplements to, not replacements for, CAFRs.

GFOA's Popular Reporting Awards

To encourage the development of PAFRs, the Government Finance Officers Association's (GFOA) Executive Board approved the concept of a popular reporting awards program. In June 1991, the GFOA provided for the Popular Annual Financial Reporting Task Force to administer the program, evaluate reports submitted for awards and select winners. The first awards were presented at the GFOA annual conference in June 1992. This article reports on the program, the scoring and the characteristics of the reports cited by the task force.

The GFOA did not specify any particular format for PAFRs. Ingenuity was encouraged so that the PAFRs would better fit the needs of the reporting entity's constituency. In keeping with the theme of creativity, the 38 reports that were submitted from across the United States and Canada for the first awards were quite varied: at the extremes of technology were a folded sheet of paper filled with facts and figures and a video tape that the entity broadcast over its cable television channel. In general, however, the reports were in the format used by most organizations: a letter-size booklet containing financial data, figures, narratives and charts. Some, on plain white paper, were printed only on one side and bound with plastic fasteners, while others were professional jobs on glossy paper. Some had no illustrations, but most contained photographs. Again, diversity was encouraged, and diversity is what was evident.

The Selection Process. The Popular Reporting Task Force consisted of 12 members. Each member was asked to review roughly 15 of the 38 reports, and each report was reviewed by five members. No member reviewed his or her own report or any report from the same state or province. The GFOA Executive Board developed 22 criteria that were used by the task force in voting on the entries. Balloting was done using a five-point scale except for the summary, which was double-weighted with a 10-point rating.

In general, the task force assumed that the keys to successful reporting were brevity, readability and presentation of data derived from the CAFR. Additionally, some narrative that interpreted the numbers and described the accomplishments of the entity, the economy of the area and so forth was necessary to translate the CAFR to the public. The 22 criteria were broken down into five groups: reader appeal, understandability, reliability, distribution and other. Exhibit 1 lists the criteria and their interpretations.

Analysis of the Scoring. After the awards were presented, the tally and written evaluations of the task force members were made available for this article. The authors made a statistical comparison of the scores for reports that did and did not receive awards to determine which criteria most differentiated the nonwinning reports from the winning entries. This information may be useful as a starting point for those governments wishing to prepare their own PAFRs.

All the votes were grouped by criteria into two categories, winners (four PAFRs) and nonwinners (34 PAFRs). The average score for each criterion was calculated by group. For example, winners averaged a score of 4.25 for brevity, while nonwinners averaged only 3.79.

The differences in the average votes (0.46 for brevity, for example) were statistically analyzed. These analyses determined whether the differences were due to chance or were real differences in the perception of the task force. Clearly, the greater the difference, the greater the likelihood that the task force perceived a real difference in criteria affecting quality.(1)

Social scientists categorize the results of this type of process into three classes depending on the likelihood of the differences being subject to chance (i.e., the variation was due to haphazard voting):

* very different (the probability of chance is 5 percent or less),

* different (the probability of chance is between 5 and 10 percent),

* not different (the probability of chance is greater than 10 percent).(2)

Thus, for a given criterion, if the probability of a difference in average score because of chance was 15 percent, that criterion would not be considered important in differentiating between winners and nonwinners. On the other hand, if the probability of a difference in average score because of chance was 1 percent, that difference would be considered a real difference and the criterion would be considered very important in determining quality.

The statistical analysis of the scoring of the 38 PAFRs resulted in a classification of the 22 criteria according to these differences, as shown in Exhibit 2. The criteria in the "very different" category had the greatest likelihood of substantial divergence between the two groups. While the "different" criteria were still important, the scoring between the groups was not as disparate. The "not different" category indicates that there were not important differences between the groups along these criteria. Note that "not different" does not mean the criteria were unimportant; it means the winners and nonwinners were similar along these yardsticks in the opinion of the task force.

Winning Characteristics

The four entries cited for popular reporting excellence in 1992 were the City of Mississauga, Ontario; the City of Gainesville, Florida; the Ontario Teachers' Pension Plan Board; and the City of Raleigh, North Carolina. Each of them exhibited outstanding informational and aesthetic appeal. All but one were booklets printed on letter-size paper.

The City of Mississauga, Ontario. Printed on textured pages, this 24-page booklet titled 1990 Annual Report reflects a relatively unstructured format. It starts with a general theme of three pages (two of which are devoted to drawings, most of which are repeated later). The mayor and city manager each contribute a one-page letter to the citizenry. The bulk of the report follows. An extensive essay discusses the achievements of the city government and its departments written in a stream of consciousness style without subheadings to direct the reader's attention to different activities. Key phrases printed in a "handwritten" style are inserted from time to time to keep the reader's interest. Accompanying the essay and taking up almost half of the space are repeats of the pencil and pastel drawings seen earlier. They highlight accomplishments and objectives in an attractive, cheery manner: the city transportation plan, staff reorganization, commitment to citizens and the environment.

The remaining six pages of the booklet are devoted to the auditor's report and the financial statements: 1989 and 1990 assets, liabilities, reserves and reserve fund operations; reconciliations of capital fund operations for those years; and revenue fund operations for 1989 and 1990, with the latter compared to budget. The section concludes with general, but mostly financial, data about the city for 1989 and 1990: population, households, employees, assessments, tax arrears, long-term debt and debt charges, and operating expenditures. To simplify the presentation, all Canadian-dollar amounts are stated in thousands, and sidebars are colored line graphs and pie charts explaining key points in the statements over two- or three-year periods: revenues and expenses; sources and uses of them by activity (e.g., engineering, libraries) and nature (e.g., debt, salaries); and capital financing. The last page contains pictures of the mayor and members of the city council.

This PAFR has a buoyancy about it, a quality generally lacking in publications of a financial nature. While the narrative is very easy to read and quite informative, it is lacking information about financial matters which are dealt with only in the side bars. The financial statements are left to stand by themselves, including the terse notes. The lack of jargon is exemplary. Even such words as revenues and expenditures are replaced with "where the money came from" and "to provide the following services." A note from the commissioner of finance/treasurer assures the residents that the information in the PAFR is drawn from the audited financial statements and provides information on where the statements can be obtained.

The task force did feel that more trend data should have been presented in the PAFR to round out the background discussed in the narrative. Again, only two or three years of data were presented; however, as shown in Exhibit 3, the uncluttered presentation invited reading by the public. The task force votes indicated that the recognition earned by this PAFR was well deserved.

The City of Gainesville, Florida. This PAFR was appropriately titled Citizen's Report. The 26-page document is printed on glossy paper and contains a wealth of colored pictures and graphs, with major topics being highlighted in color. While the PAFR is a bit wordy, the spacious charts were exemplary.

The report can be divided into three sections. After a three-page introduction containing a very original organization chart, 13 pages are dedicated to the general fund, discussing services, taxes and fees. Each operating department is reviewed: community development, public works, police, fire, traffic, recreation and parks, cultural and nature operations, and public safety. Crime, always of concern to citizens, is highlighted with two charts showing total crimes with a focus on convenience store robberies from 1988 through 1990. Pictures of the mayor and other commissioners are followed by brief discussions of charter officers: clerk, city manager, city attorney and city auditor. Likewise, each of the functions of support services receives a brief description: equal opportunity, finance, management and budget, and human resources. The monetary aspects of the general fund are graphically depicted with pie charts showing the percentage of each source and the use by category for 1990 (but not for other years), and with a bar chart showing the general fund balance from 1987 through 1990. A bar chart also compares budget versus actual revenues and expenditures for the general fund in 1990.

The second part discusses funds of less immediate interest to the public: special revenue, debt service, capital projects, internal service, deferred compensation. General fixed assets and general long-term debt are given quick overviews. Two pages, however, are devoted to the enterprise fund since this covers the airport, storm water management and regional transit, operations that have a day-to-day impact on the citizenry.

The financial statements themselves are covered in the last six pages: combined balance sheet--all fund types and account groups; combined statement of revenues, expenditures and changes in fund balances; combined statement of revenues, expenses and changes in retained earnings and fund balances; and combined statement of revenues and expenditures--budget and actual. The statements are presented without comment--presumably, all of it was explained before--and in much detail. A small note presented by itself on the last page discloses where copies of the CAFR can be located.

The task force noted that more explanation of some of the numbers would have been useful. For example, 46 percent of the increases in the general fund during 1990, almost $22 million, was represented by "operating transfers in," unexplained in the PAFR. (Oddly enough, "operating transfers out," $4 million, was explained.) Another weakness noted was the lack of trend data: there was none besides the items noted earlier, and little was said about the local economy. While utilities were excluded, it was noted that this area would probably cause more confusion than was worth explaining.

The difference between this report and Mississauga's is striking, the former being more structured and in a more traditional business format, perhaps twice the length of Mississauga's. Both receiving well-deserved awards reinforces the diversity encouraged by GFOA. The task force evaluations showed the PAFR for the City of Gainesville was an exemplary effort, well deserving the recognition it earned.

The Ontario Teachers' Pension Plan Board. This PAFR was the only non-municipal entry to win an award. Traditionally, pension plan reports are chock-full of data that the typical pensioner cannot understand. This report, however, was a 5 1/4-by-8 1/4 inch, 20-page pamphlet that conveyed a remarkable amount of information without frightening the reader. A French version is also available.

The 1990 Annual Report to Members puts business first: two statements of financial highlights, shown in Exhibit 5, are on the first two pages (in millions of Canadian dollars). The first statement, "Changes in Money Available," is a condensed statement of changes in assets available for benefits. The second statement shows funds available and needed for future benefits. No comparative information is presented in these summaries since the valuation of assets was changed from historical cost to market (pointed out in a note). Pie charts showing the investment mix, sources of contributions and type of administrative costs are small but effective.

Six pages are devoted to messages from the chairperson and the president of the board, the latter discussing various aspects of operations. Most of his points are examined in an eight-page narrative: client services and investments and actuarial information, discussed more fully below. Throughout the chronicle, charts and exhibits detail highlights such as return on investments, by decade from the 1930s, and number of pensioners and unreduced pension since 1985. The last two pages list the market values of major equity investments and who's who in the organization. Again, there is not much comparative financial data, but the board was reorganized in 1990 making comparisons difficult. Throughout the pamphlet, small photographs of the board of directors and employees in work situations attempt to bring the reader into the environment.

While task force members felt that some of the president's remarks seemed somewhat technical, they also felt the narrative did an excellent job setting the financial information into a proper context. Unfunded pension costs, the critical problem faced by all pension plans, was addressed not only by the president but also in a two-page narrative defining the problem, the legal facets and the uncertainties involved in making actuarial assumptions. This PAFR did an excellent job of enlightening its readers and conveying the quality of service rendered by its directors and employees.

The City of Raleigh, North Carolina. The biggest of the four winners, with 36 + glossy pages, the 1989 Financial and Management Report represents yet another approach to popular reporting. Printed on heavy stock, this PAFR looks very much like a corporate annual report. The biggest section is devoted to a report on fiscal conditions and management (20 pages) printed on white paper. It starts with a two-page spread on economic growth in Raleigh over the past decade, discussing progress and comparing 1980 and 1989 population, property value, construction and the like; a bar graph shows retail sales from 1985 through 1989. A second spread is devoted to city government, including pictures of the mayor, council and administrative officials and a traditional organizational chart. A third spread discusses the budget and is highlighted by two colored pie charts breaking down the latest budgeted revenues and expenditures by source.

The next part of this section is devoted to an extensive discussion of financial planning and management systems. Five pages are devoted to capital improvements in transportation, public utilities, parks and recreation, housing, community and economic development, and city facilities. While the narrative is lengthy, it covers quite a bit of material and each section is efficiently recapped. Throughout the pages, excellent photographs are used to capture what is stated in words (new trolleys, a waste water treatment plant, new fire engines, low- and moderate-income housing, etc.).

The financial aspects of city government are covered in one- or two-page narratives devoted to cash management, with a colored pie chart showing the amount and percentage of investment by type; debt management, with two colored area charts showing aspects of the bonded debt; and the accounting system and internal controls. This last part discusses, in layperson's terms, what is accomplished by a good accounting system and how internal controls safeguard efficient operations. The narrative also notes that Raleigh has won the Certificate of Achievement for Excellence in Financial Reporting for the past nine years for its CAFR, and that the CAFR is the source of the final section.

The conclusion of the PAFR is 17 pages devoted to condensed financial statements and disclosure, preceded by a paragraph relating the unqualified audit opinion on the CAFR and where one could be obtained. It is easily distinguished from the rest of the PAFR since it is printed on gray paper. The first two pages are devoted to revenues and expenses, relating their sources and uses in amount, percent and increase over the prior year. A brief narrative discusses the general fund, highlighted by colored bar graphs showing ad valorem and sales tax collections over the past five years. The next three pages are devoted to enterprise funds showing revenues and expenses with percentage changes for 1988 and 1989 for the water and sewer fund; narratives discussing other funds in this category, such as mass transit and parking; and details about their current financial position and future prospects.

Condensed financial information is presented in four statements. The first is a balance sheet showing assets, liabilities and fund equity broken down into governmental fund types, proprietary and fiduciary fund types, and account groups. Comparison of the totals of these three groups at the end of 1988 and 1989 are shown. Next comes a condensed statement of revenues, expenditures and changes in fund balances for all governmental fund types, followed by a similar statement for proprietary fund types and the pension trust fund. Finally, there is a condensed statement of changes in financial position for the proprietary fund types and pension trust fund. The latter three statements show dollar amounts for 1988 and 1989. All of this information is explained in six pages of notes that follow the statements.

The last two pages of the PAFR present, in tabular form, a 10-year history of selected financial data: property value, construction and bank deposits, demographics, governmental expenditures by function and revenues by source, property tax data, and information about bonded debt. Much of this information already was presented in chart form in the narratives. While an improvement could be made by reducing the notes into easier-to-read language when discussing bonds and pensions, which are notoriously difficult subjects, the City of Raleigh's entry did an excellent job of presenting the complexities of the CAFR in a meaningful way to its citizens and deserved its recognition.

Developing the Selection Process

A change in the process of selecting winning PAFRs is underway for the 1993 awards. The GFOA has recruited 150 additional reviewers to assist the original Popular Reporting Task Force in selecting the 1993 award winners. Each PAFR will be reviewed by two reviewers and one GFOA staff member. The reviewers will not be assigned reports from their own state or province. Strict confidentiality will be maintained, as it is in the Certificate of Achievement program.

The reviewers will evaluate the PAFR based on the criteria described in this article. Each criterion has been assigned a grade value and will be evaluated on a scale of 1 (poor) to 5 (excellent). The total weighted average grade will be calculated for each PAFR, and the PAFRs receiving the highest weighted average grade will be eligible for a review by a seven-member executive committee of the Popular Reporting Task Force. Those PAFRs receiving at least five of the seven executive committee votes will be granted the award. The awards will be presented to the winners during the 1993 GFOA Annual Conference in Vancouver, British Columbia.

For information on eligibility to participate in the Popular Reporting Awards program contact the Technical Services Center of the GFOA at 180 N. Michigan Avenue, Suite 800, Chicago, IL 60601 (312/977-9700).

NOTES

1 The results of flipping a coin 100 times can be used as an analogy. If the coin's heads/tails ratio was 51 to 49 (a difference of two), it probably would be considered an unbiased, or honest, coin. On the other hand, if the ratio was 80/20 (a difference of 60), the coin would probably not be considered unbiased.

2 Why these cutoff points are used is beyond the purview of this article. They are, however, widely recognized in the social sciences.
Exhibit 3
CITY OF MISSISSAUGA'S STATEMENT OF ASSETS AND LIABILITIES
Year End Balances of Assets and Liabilities
as at December 31, 1990
 1990 1989
Assets $(000) $(000)
Unrestricted
Cash & short term deposits 8,563 24,362
Taxes receivable 32,884 20,146
Accounts receivable 18,953 23,142
Other current assets 2,954 1,856
 63,354 69,506
Restricted
Cash & short term deposits 174,742 175,605
Investments 88,782 77,575
Accounts receivable 8,886 8,640
Long term receivables 2 4
Investments in own debentures 100 100
 272,512 261,924
Loss on foreign exchange 269 471
Capital outlay financed by
long term liabilities
and to be recovered in future years 4,829 7,192
 5,098 7,663
Total assets 340,964 339,093
Liabilities
Accounts payable & accrued liabilities 32,008 31,827
Other current liabilities 2,791 2,819
Net long term liabilities 5,098 7,663
Total liabilities 39,897 42,309
Fund Balances
Reserves & reserve funds 297,547 285,488
Surplus from revenue fund operations 11,470 14,925
Unfinanced capital outlay (7,950) (3,629)
Total fund balances 301,067 296,784
Total liabilities and fund balances 340,964 339,093
Notes:
1. The 1990 Financial Report has been prepared on a
consolidated basis and includes the Revenue Fund, Capital Fund
and Reserve Funds of the City of Mississauga and the
Mississauga Public Library Board. Also included are the
accounts of the Port Credit, Clarkson and Streetsville Business
Improvement Districts.
2. Taxation, levy requisitions, assets and liabilities of the
Region of Peel and the School boards are not reflected in these
financial statements.
3. Restricted assets relate to the assets of reserve funds.
4. The municipality has a liability of $6,086,862 (1989 -
$5,637,123) under the terms of the vested sick leave plan. The
balance in the Sick Leave Reserve Fund to meet these costs is
$5,432,148 (1989 - $4,871,076).
Exhibit 5
ONTARIO TEACHERS' PENSION PLAN BOARD FINANCIAL HIGHLIGHTS
Financial Highlights
(in millions of dollars) 1990
Changes in Money Available
for Year Ended December 31
How Income was Earned
Investment income - 90% of this income
from Province of Ontario debentures 1,958
Contributions from members 526
Contributions from Province of Ontario,
including interest 579
Contributions from other employers 8
Contributions from Province of Ontario
for unfunded liability 187
Other sources of income 33
Total income earned 3,291
How Income was Used
Decline in the market value of
investments over the year 929
Cost of benefits 761
Administrative costs 20
Total income used 1,707
 1,584
Increase in Estimated
Cost of Benefits 1,770
(Increase in Deficiency)
in Money Available (186)
Position at Year End
How Much Money is Available
Fixed income investments held mainly
in the form of Province of Ontario debentures 16,245
Investments in money market 1,385
Stocks 1,324
Contributions earned but not yet received,
primarily from Province of Ontario 945
Interest and dividends earned but not yet received 502
Cash
Total money invested 20,401
Adjustment to market values to smooth
fluctuations 709
 21,110
How Much Money
will be Needed
Estimated cost of benefits for service
prior to December 31 24,391
Other liabilities 277
Total money needed 24,668
(Deficiency) in Money
Available (3,558)
Our 1990 financial information differs from that of previous
years
For the first time, assets are at market value; in prior years,
assets were valued at cost. The 1990 figures combine the assets
of the former Teachers' Superannuation Fund and the portion of
assets in the provincial goverment's Superannuation Adjustment
Fund that supported cost-of-living increases in teachers'
pensions. Consequently, the 1990 results cannot be fully
compared with prior years and should be viewed as the benchmark
for comparing future financial performance. For the purpose of
valuing liabilities, realized and unrealized gains and losses
re amortized over five years.


BARBARA R. HENNESSY, CPA, city controller for the City of Long Beach, California, serves as coordinator of the Popular Reporting Task Force. She also serves as chairperson of GFOA's Special Review Executive Committee, is a member of the Committee on Accounting, Auditing and Financial Reporting, and has been a frequent speaker at GFOA's annual conferences. FRANK P. DAROCA, Ph.D., CPA, is professor and chairperson of accounting and the Deloitte & Touche Faculty Scholar at Loyola Marymount University. A member of the American Institute of Certified Public Accountants, the Decision Sciences Institute, the American Accounting Association and the California Society of CPAs' Education Committee, he is the author of articles in both practitioner and academic journals.
COPYRIGHT 1993 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Hennessy, Barbara R.; Daroca, Frank P.
Publication:Government Finance Review
Date:Feb 1, 1993
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