Georgia County Government - Fall 2016 - 17

Why GASB 77 is Important to Financial Statement Users Tax abatement agreements are often used by a government to encourage new development, redevelopment of blighted areas, and job creation and retention. These agreements result in foregone revenue for a period of time. Prior to Statement 77, there were no required disclosures to communicate the foregone revenue. Legislative and oversight bodies, investors, creditors, rating agency analysts and others using financial statements to assess accountability, fiscal health and revenue capacity had to make inquiries of management to determine foregone revenues resulting from tax abatement/tax incentive agreements. The disclosure requirements of GASB 77 will make it easier for financial statement users to access information pertaining to tax abatements and incentives and to better understand the impact these agreements have on a government's revenue. Definition of a Tax Abatement For purposes of financial reporting, the GASB defines a tax abatement as, "a reduction in tax revenues that is the result of an agreement between a government and an individual, or entity in which the government promises to forego tax revenues and the individual or entity promises to subsequently perform a specific action that contributes to economic development or otherwise benefits the government or its citizens." Essentially, a tax abatement has the following three characteristics: * It is the product of an agreement. A tax abatement results from an identifiable agreement (not necessarily in writing or legally enforceable) in place prior to the abated taxes whereby the government promises to reduce a specific individual's or entity's tax liability in return for the latter's promise to take certain actions. * The agreement is intended to promote a public purpose. Tax abatements are used to promote economic development or benefit the government or its citizens in some way. * The agreement abates taxes, rather than some other type of revenue. The agreement abates a tax rather than a fee or charge. It is important to note that the GASB did not amend their definition of a tax abatement to specifically include or exclude any particular type of tax-reduction arrangement like PILOTs, or payments in lieu of taxes. Rather, the board added the following sentence after the definition of a tax abatement: A transaction's substance, not its form or title, is a key factor in determining whether the transaction meets the definition of a tax abatement for the purposes of this statement. Therefore, when reviewing various tax incentive agreements governments should look at substance over form when deciding which agreements to disclose. Moreover, it is also recommended that you discuss the various agreements for inclusion with legal counsel and your independent auditor. Form and Content of Disclosure1 Reporting Your Agreements For a government's own tax abatements, it may provide required disclosures by individual agreement, in the aggregate, or using some combination of both. Regardless, the information presented should be organized by program. If individual agreements are disclosed, a government must use a quantitative threshold of its choosing to determine which programs will be presented individually. For example, you may choose a threshold of 10 percent. Therefore, you would disclose individually only those tax abatement agreements that exceed 10 percent of the total amount abated. However, the identification of recipients is not required. Specific contents of the disclosure include: * A brief description that includes: names and purposes of tax abatement programs; specific taxes abated; authority for abatement; eligibility criteria; abatement mechanism; recapture ("claw-back") provisions and conditions; and commitments made by tax abatement recipients. * Dollar amount by which tax revenues were reduced during the reporting period. * Amounts received or receivable from other governments in association with foregone tax revenue. * Government commitments (other than the abatement of taxes). For example, infrastructure improvements that are a part of the agreement. * Quantitative threshold used to trigger disclosure of individual tax abatements. Professional judgement may center on a percentage of total taxes abated or specific dollar amount abated. * Information concerning disclosures that are missing as the result of a legal prohibition. For example, if information is legally prohibited from being disclosed, then the agreement should be summarized, and the legal authority for prohibition should be disclosed. Reporting Agreements of Other Governments For tax abatements of other governments that reduce a government's revenues, a government once again may provide the required disclosures by individual agreement, in the aggregate, or by using some combination of both, this time organized by government and by specific tax abated. If individual agreements are disclosed, a government must use a quantitative threshold of its choosing as a basis for individual disclosure. This threshold may be different from the threshold used for individual disclosure of a government's own tax abatements. Specific contents of the disclosure are: * A brief description that includes the name of the governments and specific taxes abated. * Dollar amount by which tax revenues were reduced during the reporting period. * Amounts received or receivable from other governments in association with foregone tax revenue. * Quantitative threshold used to trigger disclosure of individual abatements. * Information concerning disclosure that is missing as the result of a legal prohibition. The disclosures for all tax abatements should begin in the period in which a tax abatement agreement is entered into and continue until the agreement expires. Economic Benefits and Other Outcomes While GASB 77 will shed light on the amount of foregone revenues resulting from tax abatements/incentives, it raises the question, "What about the benefits associated with the agreements?" In other words, "What is the jurisdiction receiving in exchange?" Additionally, "Where should this information be included in the financial statements?" Many jurisdictions are concerned that the disclosures are unbalanced because they fail to take into account the anticipated benefits which underpin the agreements. While some believe that omitting the economic benefits and other outcomes from the disclosures is misleading, the GASB concluded that "it was not an objective of the statement to provide information needed to evaluate the effectiveness of tax abatement FALL 2016 www.accg.org 17 http://www.accg.org

Table of Contents for the Digital Edition of Georgia County Government - Fall 2016