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We're From the Government and We Need HELP!

Creative ideas to avoid municipal bankruptcies.

June 10, 2010
Sponsored by Gear Up 1040 Individual Tax Seminars

You know it seems like a day doesn’t go by that there isn’t a story on the evening news or in the local paper about another governmental entity struggling to address a significant budget short fall. This is a problem that seems as though it should have a very simple solution. The government should simply live within its means and We're From the Government and We Need HELP!reduce their spending like you or I have to do; but that’s easier said than done. When you consider that 60 percent to 80 percent of a governmental entity’s budget usually goes to pay salaries and benefits you realize that solving the problem is not as simple as it first appeared. Where 80 percent of a governmental entity total budget is expended on salaries and benefits a reduction of 10 percent of the entity’s total budget is actually a 50-percent reduction of non-salary related expenses which is usually not a viable option. So what are their options?

The governmental entity basically has three options; raise taxes or reduce expenditures, neither of which is a popular solution or there is bankruptcy. Chapter 9 of the U.S. Bankruptcy Code specifically addresses municipalities which include cities, counties, townships, school districts and other special districts, but not states. In the 70-plus years since Chapter 9 has been part of the bankruptcy code, relatively few municipal bankruptcies have been filed. However, recent events and the current economic environment have made municipal bankruptcy a more prominent issue and provided a greater need to address the accounting implication that result from these filings. So in December 2009 the Governmental Accounting Standards Board issued GASB Statement No. 58, Accounting and Financial Reporting for Chapter 9 Bankruptcies, establishing requirements for recognizing and measuring the effects of the bankruptcy process by governments on assets and liabilities and classifying changes in those items and related costs. The Statement applies to all governments that have petitioned for relief under Chapter 9 or have been granted relief under the provisions of Chapter 9, including governments that enter into bankruptcy and are not expected to emerge as a going concern. The Statement does not apply to troubled debt restructurings that occur outside of bankruptcy. The Statement requires governments to re-measure liabilities that are adjusted in bankruptcy when the bankruptcy court approves a new payment plan. For governments that are not expected to come out of bankruptcy as going concerns, assets should be re-measured based on the amount expected to be received. GASB No. 58 is effective for periods beginning after June 15, 2009, with retroactive application required for all periods presented during which a government was in bankruptcy.

Bankruptcy is usually a means of last resort but I have seen at least one other very innovative way in which a government tried to close their revenue gap. They offered to their citizens the opportunity to buy naming rights to street lights and various other governmental infrastructures. So why shouldn’t government sell naming rights to their infrastructures, all of the major sports teams sell the naming rights to their stadiums? I don’t think that I would want my name on the local waste water treatment plant but city hall might be nice.

— From the CPE & Training Solutions Blog, by the Tax & Accounting business of Thomson Reuters. Read more blog posts from Editor Winford Paschall at: cpetaxaccounting.blogspot.com.
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