Should governments have to issue five-year projections?

The Government Accounting Standards Board has decided to begin requiring state and local governments to begin disclosing five year forecasts of revenue, expenses and other obligations, including debt service and pension costs. This decision was made as the recession and 2008 credit crisis exposed the vulnerability of municipalities as tax revenue faltered, pensions lost money and financial turmoil hit them with spiraling interest bills. The pressure has since left public officials struggling with budget deficits and raised concern about the ability of governments to pay their bills.
I believe this is a smart move as investors in state and local bonds deserve to know as much information as possible before they decide to put their money in the hands of the government. These projections should be fairly accurate as government revenue is generally predictable. Do you think governments should be forced to forecast five years into the future as part of their annual reports?
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About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

5 comments

  1. In my opinion, it would be a great idea to require state and local governments to forecast five year projections as part of their annual reports. This would enable people to have a better depiction of what funding different local entities will receive such as fire houses, police stations, schools, etc., thereby allowing the leaders of these groups to plan accordingly. If this were to be imposed, GASB should propose some guidance that will tell the state and local governments how to come about these projections. After all, what good are projections if not realistic?

  2. I completely agree that governments should be forced to disclose five year projections. The recession has proved that municipalities are not recession proof and that towns and governments can go bankrupt and default on their debt. Just like public companies are forced to disclose projected pension expenses and lease payments, municipalities should also have to disclose projections. Investors have to right to know if the municipality backing the bonds is in or will be in financial trouble in the near future. There is no reason why municipal bond investors shouldn't have projection information available like corporate bond investors do.

  3. Overall I think this would be an excellent idea, although the cost of accomplishing this is probably incredibly high. I would love to have economic forecasts for every spending initiative that comes to a vote in my town. A 5 year projection would be good when a budget is issued but it would be tremendously helpful to the community to have a view of the actual costs of each measure and how much it will cost over a period of time. Just like anything else with the government, I would worry about the costs involved. This would probably mean increasing the size of government in an effort to tell you what the increasing size of government is. In theory it sounds good, but when it is applied it may just be one more thing that the government doesn't do very well at all.

  4. I think this is a tremendously good idea that makes a lot of sense. There is nothing less democratic that when the government forces everyone to follow rules, and yet they are above them (I am talking about insider trading and how members of Congress do it all the time, Nancy Pelosi being one of the many who made millions of dollars by inside trading). Another great benefit from this proposal would be that politicians would have to use forecasted numbers to make decision or propose legislations rather than just base their arguments on populist ideas.Like spfahey mentioned, one of the potential downsides would be an even bigger and more wasteful government than what we already have (The government spending more money to tell us how much money the government is spending). Investors will also benefit tremendously from this information. Despite being sold as one of the most secure investments out there, Muni bonds from local governments, states and municipalities are just as susceptible to economic downturns as the private sector (Camden declared bankruptcy a few weeks ago if I am not mistaken.)I am a big supporter of transparency, and I think this would a move in the right direction.

  5. Definitely! I believe that if the government is made to present a five year forecasts of revenue, expenses and other obligations, including debt service and pension this will create the much needed transparency for investors. However, I agree with Yvonne that GASB should have some guidelines for this level of reporting with particular emphasis being placed on the need to be conservative. As the author states, "while GASB rules aren’t federally enforced, they are followed by auditors who determine whether annual reports comply with generally accepted accounting principles."

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