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Within the last week, multiple events have occurred that will affect public sector entities nationwide. Notably, the Federal Reserve, displaying optimism with regards to the U.S. economy’s growth prospects, announced that it would be raising short-term interest rates for the first time since 2006.
December 28, 2015

Within the last week, multiple events have occurred that will affect public sector entities nationwide. Notably, the Federal Reserve, displaying optimism with regards to the U.S. economy’s growth prospects, announced that it would be raising short-term interest rates for the first time since 2006. The decision, which also includes further scheduled interest rate increases in 2016, could have an effect on those public sector entities looking to issue bonds or other debt in the future.

However, the effect will not be as significant or detrimental as it appears at first glance for two reasons: First, the rate increase will not affect those governments with outstanding fixed-rate debt, as the interest rate on such debt will remain fixed. Second, the increase announced by the Federal Reserve, as of now, only affects short-term interest rates. Because governments frequently issue debt with maturity dates often a decade or more in the future, this announcement will not influence such governments for whom long-term rates are more applicable.

Even though the rate increase will raise the cost of short-term borrowing for the near future, it means good news for one segment of public sector entities that recently has proven problematic — employee pension funds. An increased rate means that pension funds can now invest in higher-yield securities, generating more interest income on bond investments. Coupled with the Federal Reserve’s display of confidence in the U.S. economy, it could also encourage entities to become more optimistic about the rate of return on its pension plan assets, which would positively affect the projected pension obligation. With many public sector entities facing a crisis of underfunded employee pension plans, an increase in interest rates is welcome news.

While not as immediate in scope or significant in public recognition as the increase in interest rates, another story made news in recent days that will affect the financial reports of public sector entities. The Governmental Accounting Standards Board (GASB) announced that it is going to make the evaluation of the current governmental financial reporting model a top priority for 2016.

In 1999, GASB issued Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments, which dictated the contents of governmental financial statements and made it easier for users of the financial statements to assess the overall well-being of the government. However, the model laid out by Statement No. 34 has not been re-examined in detail since its issuance, and GASB has stated it needs to re-evaluate the model within the context of statements issued since Statement No. 34 went into effect. Numerous aspects of the current governmental reporting model will be further examined, including:

  • Governmental Fund Financial Statements
  • Government-Wide Financial Statements
  • Major Fund Reporting
  • Management’s Discussion and Analysis
  • Budgetary Comparison Information

During its consideration of the financial reporting model, GASB will be placing particular emphasis on finding solutions regarding how governments can improve on providing more timely information to the users of their financial statements. In line with this goal of increased punctuality, the Board expects to have an initial document prepared and ready for public comment and feedback by the end of 2016.

Sources:
Governing the States & Localities - What the Fed Rate Hike Means for the Municipal Market

The New York Times - Rates Are Going Up. What Could Go Wrong?

GASB - What You Need to Know: The Financial Reporting Model Reexamination

 

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