Will Johnson, shareholder in our Columbia office, recently reviewed GASB 77 for the South Carolina Economic Developers' Association October newsletter.
1. What is GASB 77 and why does it exist?
GASB 77 is an accounting pronouncement applicable to the financial statements of state and local governments. In order for their financial statements to be prepared in accordance with generally accepted accounting principles, they must comply with GASB 77. The stated purpose of GASB 77 is to enable users of government financial statements to understand “(1) how tax abatements affect a government’s future ability to raise resources and meet its financial obligations and (2) the impact those abatements have on a government’s financial position and economic condition.”
2. How will GASB 77 impact local and/or state governments engaged in economic development?
For the first time, state and local governments will have to report the fiscal impact of all tax incentive agreements publicly. As budgets are tighter at all levels of government, the analyses that are publicly released will undoubtedly garner attention. These analyses require a hypothetical determination of “foregone revenue” under an assumption that all projects receiving tax incentives would have made the same capital investments and paid full, unabated taxes on those investments absent the incentives.
3. What should local government economic professionals do to prepare?
Local government leaders should prepare in a number of ways. For purposes of compliance efforts, as a starting point, leaders should identify all tax incentive agreements for which GASB 77 requires reporting, compile the abated taxes or fees in lieu of taxes for each covered project, and obtain the property tax filings reflecting capital investments for such projects. In addition, local governments should recognize that compliance will be burdensome, in terms of staff time and/or costs. Most likely, a county’s financial professionals and economic development staff will need to be involved at a minimum. More strategically, leaders should keep in mind that agreements may be more closely scrutinized in the GASB 77 area. If local governments are not already preparing cost-benefit analyses for economic development projects, we at Haynsworth Sinkler Boyd recommend that they consider adopting that practice.
4. How will GASB 77 affect non-governmental people working in the economic development field?
Non-governmental people working in the economic development arena should recognize that GASB 77 will heighten the sensitivity of local governments to tax incentive agreements. In many ways, this increased awareness could be a positive aspect of GASB 77, as government leaders should be fully cognizant of the revenue impact of their incentive agreements in order to ensure that they are responsible stewards of their taxpayer dollars. However, public scrutiny will almost certainly bring increased attention and could make government leaders more leery of tax incentive agreements that have been considered the norm in prior years. Because South Carolina relies heavily on tax incentives to reduce our disproportionately high property taxes, a decrease in the use of these incentives could hinder our economic development efforts.
5. How could GASB 77 impact companies looking to locate in South Carolina?
Companies looking to locate in South Carolina could see the same impact in that local governments may not be as eager to provide attractive tax incentive agreements. However, on many projects that are competitive with other states or communities, both companies evaluating projects and professionals assisting those companies can make the case that GASB 77 does not take into account the fact that many projects would not have located in South Carolina (or the respective communities) absent the tax incentives. In those case, the “foregone revenue” of GASB 77 is a farce.
6. When will the public start seeing GASB 77 reporting information?
GASB 77 applies to reporting periods beginning after December 15, 2015. For most local governments, the fiscal year is from July 1 to June 30. Accordingly, the first fiscal year to which GASB 77 applies is July 1, 2016 to June 30, 2017. Preparations of financial statements applicable to that fiscal year are well underway in many cases, and we expect to start seeing financial statements with GASB 77 reporting information in the very near future.
7. What do you think will draw the most attention in GASB 77 reporting and/or be the most misunderstood?
Fee in lieu of tax agreements are likely to draw the most attention as a result of GASB 77. South Carolina has the highest property tax on manufacturers in the country and manufacturers are often the prime targets of our economic development efforts. Many counties view a basic fee in lieu of tax agreement as simply getting to the same starting point as other states and not as a real incentive. GASB 77’s rigid parameters do not have a simple mechanism for explaining the nuances of a particular state law to justify the often valid decisions of local governments to enter into incentive agreements, but a number of options for doing so are available. We at Haynsworth Sinkler Boyd are encouraging the local governments we represent to get that message out to the public.