Federal Accounting Standards Advisory Board says public-private partnerships need targeted disclosure.
Public-private partnerships are on the rise in the United States. Largely in response to deteriorating infrastructure and reduced government spending, the public and private sectors increasingly collaborate to deliver necessary goods and services.
Individual states are passing legislation allowing for public-private partnership approaches to transportation infrastructure development. Cities are partnering with a variety of entities to improve public health outcomes. School districts are working with private actors to renovate their buildings.
Whether projects are funded by tax dollars or business investments, people want to know how money is being spent. But how should public-private partnerships keep their books?
In an effort to answer that question, the Federal Accounting Standards Advisory Board (FASAB), a federal advisory committee tasked by the Secretary of the U.S. Department of the Treasury, Director of the Office of Management and Budget, and the Comptroller General with developing accounting standards for federal entities, recently proposed a series of financial disclosure requirements for public-private partnerships. The proposal stemmed from a series of task force meetings held between February 2014 and May 2014.
FASAB standards are “generally accepted principles for federal financial reporting entities.” FASAB Chairman Tom Allen stated that public-private partnerships “involve risk sharing, are financially complex, and may impose long-term commitments.” Announcing the proposed disclosure requirements, he argued that the draft “represents an important step” because “the federal government is directly accountable to citizens for the proper administration of its resources.”
The proposal requests that private partners disclose the purpose, objective, and rationale of their partnerships with public institutions, as well as the monetary and non-monetary benefits they receive from in exchange for their work. Disclosures must also include the “mix and amount of funding” used to complete the project, and the “operational and financial structure” of the partnership, including how payments are made and the rights and responsibilities of each partner. Partners must identify and describe “significant contractual risks” that the partnership is undertaking that could “materially change the estimated cash flows” of the project.
At odds with some of these requirements, the draft also expressed an “alternative view” on disclosure requirements posited by board member and Government Accountability Office (GAO) Chief Accountant Robert Dacey. Dacey advocates narrowing the definition of a public-private partnership and limiting disclosure requirements for “remote contingencies” and business risks. He disagrees with the FASAB majority’s reasoning that “[c]onsideration should be given to those risks that management does not expect to be likely, but represent a significant exposure to the government if they were to occur.” From his perspective, these additional disclosures “could overwhelm or mislead users” with risks “that have only a slight chance of occurrence” and risks that “do not necessarily affect the financial statements.”
By more clearly defining the risk threshold these contingencies must meet before disclosure is required—that is, what “significant exposure to the government” truly means—Dacey states that the FASAB could “minimize the possibility of excessive disclosure.”
The FASAB’s majority espoused its own concern for “disclosure overload,” specifically requesting public comment on the risks mandating excessive disclosure. One solution, “aggregate or group disclosures,” would allow entities to submit abbreviated disclosures with less cost than disclosures calling for information at an “undu[ly] specific or granular level.”
Such disclosures can aggregate financial information around an entity’s “strategic objectives, departmental or bureau categorizations, program budget classifications, or other means.” According to the FASAB’s majority, permitting aggregate disclosures acknowledges “the relative complexity and potentially large number of [public-private partnerships] an entity might be party to” and minimizes the burden on financial statement preparers.
In its proposal, the Board stated that many participants—federal agencies, businesses, and citizens—felt that there was a stigma associated with the term “public-private partnership.” This stigma led some federal agencies and private actors to re-label public-private partnerships as “alternative financing” or “privatization initiatives.” The Board noted that some participants further argued that public-private partnerships erode notions of “what is inherently governmental” and a “belief in good government.”
To counteract these concerns with transparency and accountability, the FASAB’s draft stated that it is committed to “establishing clear and appropriate principles related to [financial] risk disclosure” in public-private partnerships. Chairman Allen asserted, “the information provided as a result of this proposed standard will help users answer questions concerning budgetary resources obtained and used, the costs of providing specific programs and activities, and the associated long-term risks.”
The FASAB will accept comments on its proposed public-private partnership disclosure requirements through January 2, 2015.
