The problem I have with the overuse of the word “transparency” is that it really only means “we put it on the Web, but it is your job to dig through 1,000s of pages and millions of numbers to make sense of it.”
For instance, MISD puts the last several years of budgets and audited financial statements on the Web site. However, I’ll bet there aren’t collectively 10 people in the district (citizens, board members or non-financial staff) who read the audited financial statements and footnotes. That’s why real transparency would include the finance people highlighting certain key numbers and ratios at board meetings. I touched on just a few metrics in my last blog.
It is enlightening to realize that New York City defaulted on some of their bonds in 1975. It is important not only due to that single event, but something more profound happened. The governmental accounting industry ended up getting a big part of the blame. It was from that event that accounting standards got strengthened and several regulatory bodies and accounting authorities got established. That always happens with any segment of our society does not do their own policing.
To this day four decades later, the rules continue to get written. The underlying message has been “our profession is about disclosure and it won’t be us to blame if something runs amok.” The evolution has been fascinating. Many big ticket items have forced the accounting and auditing profession to take a hard look at themselves. Three of the largest have been pensions, post-employment benefits and infrastructure accounting. There have also been three stages of evolution and solution:
- Don’t recognize an expense at all.
- Recognize the expense but put it in a footnote.
- Move the expense to the income statement and deal with it on the balance sheet.
I believe it was in about 1987 that I started writing about how if certain expenses were recognized on the financial statements, many cities would find themselves in a deep deficit.
Tragically, the fatal flaw in all of these efforts to improve disclosure is that you can’t force people to read. You could force knowledgeable people to interpret and explain to the layperson – meaning the councils and boards. That flat ain’t happening anywhere.
What About Infrastructure?
If you dig into the MISD financial statements, you can find some very interesting numbers. First, there were $612,513,419 in Buildings & Improvements and Furniture & Equipment. Those are assets that depreciate. This does not count $40,071,014 in Land that is not a depreciable item. The fact that $612.5 million depreciate means they can also turn into liabilities at some point in time. Also, keep in mind that $612.5 million is the number for the original costs at the time built.
We can get an idea of how fast MISD thinks they will depreciate. Buildings are recorded as depreciating over 40 years; Building Improvements over 20 years; Vehicles over 10 years; Office Equipment over 7 years; and Computer Equipment over 5 years. That sounds fairly reasonable.
The one flaw MISD and every other governmental entity makes is that they think of depreciation as if that happens uniformly each year in a straight-line fashion. In reality, most assets depreciate in a geometric or exponential fashion. That means it is easy to get lulled into a period in the early life of an asset when the signs of deterioration are not too visible, pushing the inevitable confrontation off for a number of years. However, when signs of age and deterioration do begin to show, governments have to move swiftly to keep up.
However, it can hardly be a surprise that an expense is coming. That is when we can’t afford to skip basic maintenance that will soon turn into repair. And repair that will quickly turn into rehabilitation. And at some point there will be a total replacement likely. Done properly, replacement might be well past 40 years.
On the maintenance to replacement continuum, there is a graduation from the operating budget to the capital budget to the debt-funded options. The extremes of the continuum are easy to figure out. It’s the middle pieces that are judgment calls. However, a well-managed system has people who know the expected life of signage, roofs, HVAC systems, carpet and every other component of a building.
Okay, So What’s Your Beef?
I’ve already discussed the trickery that I think is involved in the current bond program for a stadium with a ton of basic maintenance and equipment in it so every school could show benefitting at least a little from bond money. I’m just wondering why more operating money hasn’t been spent in recent years to deal with the smaller items to keep the debt levels lower for MISD. My last blog raises the question about why is MISD sitting on $25 million more in reserves than they need?
In Note 4D found on page 30 of the FY 2015 audited finance statements, MISD shows that there was $16,099,959 recorded as depreciation last year. The numbers are broken down nicely by 10 different categories. I am quite certain those numbers are supported by an asset inventory that goes down to the individual water fountains in the halls and desks in the classroom.
My beef is this: if they know things are wearing out to the tune of $44,109 every day, why is MISD letting needs being deferred to roll up to a level that requires $170 million in debt to take care of basics? I know a chunk of the non-stadium money is for some building expansions, but you don’t sell bonds for things like defibrillators. Well, apparently MISD does.
The budgets provided online are the least informative set of budgetary documents I’ve seen in my career. I don’t see any meaningful financial policies that include replacement strategies and funding. No fund balance policies that I can find. Is the Sheep-Board asking for this kind of information? If not, why not? If they are getting this kind of management and policy making information, why isn’t it on the Web site? Even the documents on the MISD Web site are listed in a random order. If you were going to have links for the last 10 years of audited financial statements, wouldn’t you think they would be listed in chronological order?
I just don’t undestand why the stable of credentialed officials at MISD don’t get it. MISD may be governed by a Sheep-Board, but I’m sensing the Sheep-Citizens are getting a little restless. We want more information to understand how MISD business is run. LFM