1. Fiscal Management of Local Administration Forum Ankara, Turkey May 23, 2008 Michael G. Schaeffer 9/12/20151

2. Good Local Government Public Management Practices: Improve public sector performance supported by performance monitoring and incentives Separate policymaking and service delivery functions Decentralize / devolve service responsibilities Provide for greater managerial flexibility in financial management Provide for greater accountability/transparency in government operations Enhance ability to finance more effective service delivery 9/12/20152

3. Impetus for Better Local Government Financial Practice Reforms Stems from the recognition of: 1. Substantial wealth tied to local government fixed and property assets 2. Potential income or cost savings to be achieved from running municipal services 3. Budget constraints … prompting cost cutting measures, but still retain same or improved services 4. Reforms may increase the ability of municipalities to finance infrastructure and improve service delivery 5. Accelerated approaches to better manage local government assets 9/12/20153

4. Accounting Reforms Accelerate Improvements in Asset Management Move toward accrual accounting (IAS, GAAP) has made inroads with respect to local governments managing: Financial assets (cash, etc.), and, Real assets (property, roads, etc.) more appropriately Changing accounting methodology from cash to accrual changes will impact: 1. Manner that fixed and other local assets are accounted 2. Information flows that are needed to comply with newly adopted accounting standards 9/12/20154

5. From a Local Government Finance Perspective: Cash Accounting Local governments traditionally operate via annual budget requests Annual appropriations assigned on the basis of these requests. Cash accounting eliminated the need for a balance sheet All transactions are annual cash transactions Carry-over provisions exist Capital assets are written off in the year completed Value of assets is not accounted for in public ledgers 9/12/20155

6. From a Local Government Finance Perspective: Accrual Accounting Financial statements should report: All Assets All Liabilities All Revenues All Expenses (including interest, principal) Gains and Losses For capital assets, accrual account shows asset values related to debt Implies that governments should: Identify and record all assets Attach a value to each asset (include depreciation/amortization) Then re-evaluate these assets later (Mark –to –Market) 9/12/2015-6

7. Why are Accounting Systems Important? Local governments are increasingly competing for international financial resources Local governments need to understand both the equity and liability side of operations May be more appropriate to use equity (land, lease agreements, etc. ) instead of debt Accrual accounting increases the potency of local government financial reporting (now includes a balance sheet) Provides more information to creditors, rating agencies, etc May translate into lower cost of borrowing 9/12/20157

8. The Balance Sheet Local government’s balance sheet identifies all of the assets and liabilities that have financial value Local government balance sheet same accounting equation as in the private sector: Assets = Liabilities + Equity In public sector, this can be rearranged: Citizens/Taxpayer Equity = Assets – Liabilities 9/12/20158

9. Understanding Local Government Balance Sheets is Important Assets / liabilities of local governments are large compared to annual budget revenues / expenditures. For financial choices a more useful instrument is the balance sheet. Local municipal government should consider its appropriate mix of asset ownership in light of its service priorities and its mission. Possible to consider asset ownership choices within a budgetary framework, but it seems more natural to analyze it as a portfolio (assets, liabilities, etc ) choice. 9/12/20159

10. Use of Accrual Accounting and the Balance Sheet Accrual accounting matches revenue stream to offset the annual charge associated with amortizing capital cost For example, if fixed asset is: Amortized over twenty years as an expense, Corresponding revenue stream shown on the other side of the ledger Revenue stream may be derived from a capital charge May either be an imputed charge, or, Actual payment Introduced as primary means to force users to recognize true cost of using/consuming the asset 9/12/201510

11. Linking the Balance Sheet, Strategic Asset Management, and Capital Investment Planning Categorize “Portfolio” of government assets by use Government, Social, Surplus Essential to specify a different financial (and social) goal for each category 9/12/201511

12. Asset Portfolio Classification Model 9/12/201512

13. Justification of Government Use Asset Government Use Assets: Increasing efficient use of facilities - require governmental departments to justify their demand for space, additional facilities (e.g., schools, hospitals etc.) Justification process should include capital outlays, operations and maintenance, depreciation and amortization calculations Minimize operating costs 9/12/201513

14. Justification of Social Use and Surplus Property Assets Social Use Assets: Property used to satisfy social objectives of the government The financial goal is to quantify and minimize (where possible) the subsidy The goal for social assets can be achieved by: Presenting true capital, operational and maintenance, depreciation and amortization expenses to facilitate the best decisions. Surplus Property : Real assets (properties) not needed for federal use or social programs The goal for these assets is to maximize their financial return (which requires the highest and best use of the asset, if possible) and to control costs 9/12/201514

15. Understanding the Balance Sheet: Provides a Broader Possibilities Of Sources and Uses of Funds 9/12/201515

16. Expanding Funding Possibilities Historically, principal sources of funds on the revenue side of budget include: Operating/current account surplus Capital grants/transfers from higher levels of government Borrowing Range of possibilities for public financing increased (not just debt): Betterment levies Impact fees / developer contributions Sale of land assets (Istanbul Metropolitan Municipality approximately US$1.5 billion) Borrowing backed by land collateral Various combinations of public / private partnerships 9/12/201516

17. Concluding Remarks Accrual accounting increases potency of local government financial reporting, includes a balance sheet Accrual accounting provides more information to creditors, rating agencies and public private partnership investors Municipal balance sheets may expand the ability of municipalities to finance infrastructure and improve service delivery Municipalities should be able to use equity (land, etc) not only debt to finance infrastructure projects Greater transparency – may translate into lower costs of borrowing 9/12/201517