Cities required to present Y2K report cards

The Year 2000 challenge is one of the most serious undertakings facing governmental entities today. Not only are they faced with the daunting task of testing all systems for compliance with the Year 2000; they also are challenged to correct all systems that are not expected to work properly as they enter the year 2000. And now, their budgets have to reflect how well they think they are doing in both regards.

Disclosure requirements instituted by the Securities and Exchange Commission and the Governmental Accounting Standards Board (GASB), as well as the audit issues raised by the American Institute of Certified Public Accountants (AICPA), have created a disclosure crisis for local government finance officials. Indeed, the Y2K problem is changing the way in which government accountants and auditors are required to report the financial activities of their particular entities.

A Y2K meltdown could wreak havoc on many government operations outside of information technology systems. For example, local governments could feel the effects in everything from transportation systems to elevators – anything that might contain date recognition features that could cause machinery to cease working when it can no longer properly interpret dates.

Fixing those systems is only part of the solution. Rule-making bodies governing local government finance have determined that it also is necessary to disclose information related to Y2K in local government budgets.

GASB’s technical bulletin Released in October 1998, GASB Technical Bulletin 93-1, “Disclosures about Year 2000 Issues,” requires specific disclosures in financial statements dated after Oct. 31, 1998. Financial statements for periods ending after Dec. 31, 1999, do not have to meet the requirement unless systems and other equipment are not Year 2000 compliant as of the report’s balance sheet date.

The Technical Bulletin requires the government to de-scribe any pertinent Y2K issues and any significant resources committed to make critical computer systems and equipment Year 2000 compliant. It also re-quires that the government declare the phase or stage it is in regarding its solution to the Y2K problem.

Compliance spans four stages: awareness, assessment, remediation and validation/testing. The awareness stage is the time period when the budget is established and the project plan for dealing with the Year 2000 issue is written. In the assessment stage, all systems that are critical to conducting governmental operations should be identified. Those systems could include software applications, system software and hardware and embedded chips. In the remediation stage, all changes are made to the systems and equipment, and the final stage involves testing those systems.

Jim Petra, the Ohio Auditor of State, suggests going beyond those stages. A sample disclosure form on the auditor’s web site (http://soccer.dec.odn.state.oh.us.) contains suggestions for complying with the requirements. “Governments should prepare [to disclose] the stages of work in process or completed as of the end of the government’s reporting period to make computer systems and other electronic equipment Year 2000 compliant,” notes Petra on the web site. They also should disclose committed resources, he adds.

The auditor’s office requires each statement to incorporate the following words: “Because of the unprecedented nature of the Year 2000 issue, its effects and the success of related remediation efforts will not be fully determinable until the year 2000 and thereafter. Management cannot assure that the [government] is or will be Year 2000 ready, that the [government’s] remediation efforts will be successful in whole or in part, or that the parties with whom the [government] does business will be Year 2000 ready.”

Recently, finance directors and those charged with budget preparation have questioned where the disclosures on Y2K should be located in a government’s Comprehensive Annual Financial Report. Because the year 2000 disclosures are required by a GASB pronouncement, they are considered “Generally Accepted Accounting Principles.” Consequently, if the disclosures are in the footnotes and they are material to the financial statements, they must be covered by the auditor’s opinion. However, the AICPA has cautioned auditors about being associated with such disclosures.

Originally, Y2K disclosures were required to be in the footnotes, and, because of scope limitations, most entities were told to expect (or actually received) a qualified audit opinion. Such qualification was necessary because, for the most part, the disclosures are neither assertable by management nor verifiable by auditors.

Recognizing the dilemma for auditors, GASB recently amended Technical Bulletin 98-1 to allow Year 2000 disclosures to be reported as part of the required Supplementary Information. That amendment apparently removes the requirement that the auditor issue a qualified opinion on Y2K disclosures. Many governments have delayed issuing their financial statements to take advantage of the amendment, and others are planning to reissue their statements to remove the qualified opinion.

Securities and Exchange Commission releases The SEC’s Interpretive Releases Nos. 33-7558 and 34-40277, “Disclosure of Year 2000 Issues” and “Consequences by Public Companies, Investment Advisors, Investment Companies and Municipal Securities Issuers” require issuers of securities to disclose Year 2000 issues. They cover government issuers, as well as public companies, investment advisors and investment companies that are issuing securities.

Congress exempted municipal securities offerings from the registration requirements and civil liability provisions of the Securities Act of 1933. It also exempted them from a mandated system of periodic reporting under the SEC Act of 1934. However, it did not exempt those securities from the antifraud provision of those acts. And that is where the Y2K disclosures come into play.

The antifraud provisions prohibit misleading statements in the offering, purchasing or selling of municipal securities. In addition, in recent years, the antifraud provisions as to municipal securities issues have been interpreted with increasing broadness. Basically, the provisions require all governments that issue securities to consider Year 2000 issues in preparing all disclosure documents, whether official statements, disclosure covenants that provide for continuing disclosure, or any other information that is reasonably expected to reach investors and the trading markets.

The SEC is well aware of the fact that local governments cannot absolutely ensure Y2K compliance. In fact, a recent SEC report states, “It is not, and will not, be possible for [a government] to represent that it has achieved complete Year 2000 compliance and, thus, to guarantee its remediation efforts.”

Ohio State Auditor Petra cautions that governments should not claim that they are Year 2000 compliant, and that auditors should not attest to such a claim. Governments may, however, represent that individual systems are compliant, he says.

Advice from GFOA Some governments are concerned about submitting statements with qualified audit opinions. And, the deadline for submitting statements to the Government Finance Officers’ Association for review for the Certificate of Excellence in Financial Reporting is approaching. (The deadline is six months after the close of the fiscal year. Thus, for local governments on a calendar fiscal year, the deadline would normally be June.) GFOA is allowing a 30-day extension on its due date because some governments still are unsure about the status of the audit opinion and the placement of the disclosures. GFOA will accept a budget statement containing a qualified audit opinion issued pursuant to Y2K. However, the statement will be rejected if the qualification is caused by failure to present the required disclosures.

The provisions and required disclosures of the GASB Technical Bulletins and SEC releases are extensive. However, the requirements are achieving an important goal: providing financial statement users and purchasers of municipal securities with information needed to assess outstanding commitments and the current stage of Y2K readiness. Information on disclosure requirements can be found at www.gfoa.org/resrch/specrpt/Y2K.htm; at www.aicpa.org; or at www.gasb.org.

Margaret Simmons is the financial services administrator for Clearwater, Fla., and president of the Florida Government Finance Officer’s Association.

A creative solution combining political stamina, public finance and private initiative dramatically raised the value of DeKalb County’s former 94-acre County Farm to capture nearly $2 million in annual revenue split between DeKalb County and the city of DeKalb, Ill. That is a far stretch from the $11,000 netted annually just a few years ago. It also allowed the county to keep its County Home elderly care facility open.

The solution tapped what DeKalb County Administrator Ray Bockman calls one of the most undervalued assets in the public sector – excess real estate. The process began with a challenge: how to continue operating the county’s public nursing home, maintain its 35 percent market share and end county budget hemorrhages totaling $7 million over the prior 10 years.

In search of answers, DeKalb County officials set a simple goal – examine alternatives to county operation and select the best long-term strategy to operate a competitive health care enterprise. The solution, extending over seven years and spanning four county board chairmen, was considerably more complex. “We needed a long-term sustainable revenue stream to meet our goal,” Bockman says.

DeKalb County’s excess real estate included two adjacent parcels: the 94-acre County Farm and the 9.8-acre County Home site, located in DeKalb’s best commercial setting. The county had attempted to market the farm property to private developers, but, “We were totally unsuccessful,” Bockman says. “The legalities were too complex and we didn’t know how to make it attractive to a retail user.”

While the site had value because of its location between two growing cities and near a respected state university, development risks still existed. (For instance, water, sewer and road infrastructure was not in place at the site.) The county hired St. Louis-based Landside Resources to minimize the risks. The company prepared all “due diligence” documentation for a public offering of the site, reducing developer risks to attract interest from the largest possible number of qualified bidders. County and city officials each pledged $500,000 for site preparation and reimbursement of such infrastructure costs as road reconfiguration, and water and sewer services. Later, when Wal-Mart became a serious contender, the county and city pledged another $500,000 each to complete infrastructure construction.

Initially, the land was put under contract for $8.8 million. The money from the sale allowed the county to fund construction of a new county home facility. The county combined its cash from the land sale with a $1.2 million contribution from the DeKalb County Department of Public Health to fund the new $18 million DeKalb County Nursing Home and Public Health Facility. About $12 million in Public Building Commission bonds financed the balance.

Those costs will be offset further by the long-term ground lease of the 9.8 acres that are the site of the existing nursing home. The efficiencies of the new facility, including a one-floor layout that affects everything from patient transportation to the provision of care, are expected to enable it to operate on a totally self-sufficient basis, removing the rising $700,000 annual subsidy burden from the county’s expenditures.

Additionally, improved operating practices are focusing health care efforts on remaining competitive in the Medicare sector and slightly increasing its number of private-pay residents. The governing board, formerly made up of members of the county board, is now independent. (Additionally, operation of the nursing home is contracted out to St. Louis-based Management Performance Associates.)

Traditionally, port authorities have supported public sector development efforts by encouraging maritime and aviation commerce through the construction and operation of facilities. Today, a growing number of states and local communities are using port authorities as part of a more general economic development effort, including project or development financing.

In Cleveland, for example, a two-year-old development vehicle allows the Cleveland-Cuyahoga County Port Authority (CCCPA) to provide long-term, fixed-rate financing to small and medium-sized businesses relocating or expanding in the area. Through the Port of Cleveland Bond Fund, the authority can issue taxable and tax-exempt bonds in the $1 million to $6 million range to aid in the city’s economic renaissance.

The financing, designed to assist private industry in retaining and creating jobs in the area, is restricted to owner-occupied facilities. Loans may be used for land and building acquisition, new construction, renovation of existing buildings and/or equipment or acquisition of multiple-use machinery and equipment. Bond proceeds may not be used to finance working capital, rolling stock or inventory and receivables.

“As a port authority, we have the flexibility to work with other government entities – city, state and federal – and to involve the private sector,” says Gary Failor, executive director for CCCPA. “The long-term, fixed rates available through this program offer the security of level payments in a market that has fluctuated dramatically over the past 20 years – translating into significant long-term cost savings over the floating rates.”

In addition to being a financing vehicle, the bond fund allows small and medium-sized firms access to U.S. capital markets that are generally available only to larger publicly traded or nationally rated firms. “We pride ourselves on expedited service, streamlined paperwork and reasonable fees,” Failor says. “Applications are processed in days rather than weeks or months, and the financing is typically completed in 45 to 90 days.”

The fund is backed by a three-tiered reserve system. A project reserve is funded by each borrower at 10 percent of the amount borrowed; a program reserve in the amount of $8 million (which includes a $2 million state grant and a $4 million letter of credit) is funded by the port; and a program development fund accumulates interest-earnings on amounts in the common funds. The latter fund is used only if needed for a defaulted project, and any money not needed in a given year can be transferred to the port’s general revenue fund.

Notable projects that have received financing through the Fund include the Jergens Manufacturing Center, the first project in Cleveland’s Collinwood Yards Industrial Park (previous site of a train maintenance depot in the city); the downtown Cleveland headquarters of the Northern Ohio Area-wide Coordinating Agency, the area’s regional metropolitan planning organization; and the ESSROC Cement transfer facility and distribution center on the Cuyahoga River. Additionally, port financing was key in the construction of the Rock and Roll Hall of Fame and Museum on Cleveland’s lakefront.

The CCCPA also provides other forms of funding, most notably Stand Alone/Off-Balance Sheet Financing. That program provides companies with variable or fixed-rate, long-term financing, from $5 million to more than $100 million, for expansion or relocation. Usually part of a multi-source funding package, the plan typically involves the city, county and state as well as the port. Aimed at larger, often publicly traded companies, the program allows the port to finance, build and own the assets acquired and lease them to the company.

Cleveland-based Climaco, Lefkowitz, Peca, Wilcox & Garofoli served as the port authority’s general counsel. The firm assisted in structuring the bond fund.