The Basic Financial Statements

Statement of Net Position

Let's start with Bothell's government-wide balance sheet, formally known as the Statement of Net Position. It shows Bothell's balances for its assets, liabilities, and net position on the final day of its fiscal year (December 31, 2021). This statement includes separate presentations for governmental activities and business-type activities.

Taxes and other non-exchange revenues support governmental activities. Business-type or proprietary activities are supported by exchange-like revenues or fees the government charges for goods and services it delivers.

For local governments, government-owned utilities (water, gas, electric, sewer, solid waste), recreational facilities (e.g., convention centers, golf courses, hotels, swimming pools, ice arenas, etc.), and other enterprises are almost always considered business-type activities. For state governments, business-type activities often include state lotteries, unemployment benefit funds, workers' compensation funds, university tuition assistance programs, public hospitals, universities, community colleges, and public authorities supporting housing and economic development, to name a few.

On the asset side, we see many of the same assets reported in the Statement of Financial Position for Treehouse. The city of Bothell reports cash and cash equivalents, investments, receivables, restricted assets, and capital assets (non-depreciable and depreciable). Recall assets will be listed in reducing order of liquidity – the most liquid assets, cash and cash equivalents, are reported first, and the least liquid assets – capital assets (or infrastructure investments) and net pension assets – are listed last.

Governments will report amounts owed to the city for goods or services (e.g., outstanding payments for licenses, permits, fines, rents, royalties, or charges for services) separately from amounts due from taxes. Taxes receivables consist of property taxes and related interests and penalties the city of Bothell was owed at the end of 2021. Keep in mind that governments will report receivables for special assessments (a surtax in addition to the regular property tax) separately from taxes receivable as funds are used to fund specific activities (e.g., sidewalks, street lighting, economic development activities, etc.). Governments will also report receivables due from other governments. These capture inter-local agreements or cross-jurisdictional sharing arrangements common in areas like transit, emergency management, police and fire response, and public health.

It is important to note that this is the only financial statement that will report the value of the government's investment in infrastructure or capital assets. Capital assets may be reported by type (e.g., land, buildings, leased assets, infrastructure, etc.) or classification (e.g., depreciable versus non-depreciable). Capital assets are reported at historical costs. Depreciable capital assets are reported net of depreciation.

Liabilities are listed in increasing order of maturity. Maturity refers to the moment in time when payment is due. The proportion due in the next twelve months is reported under "due within one year." The accounts payable, unearned revenue, long-term liabilities, and other post-employment benefits due within one year are considered current liabilities. The remainder is non-current.

The city reported unearned revenue, sometimes referred to as deferred revenue. Unearned revenues represent revenues the government has received for services it has yet to provide. If the city fails to provide services, it will need to issue refunds. If the city owed another government based on an inter-local agreement, that obligation would appear here as due to other governments.

The city reports long-term liabilities, other post-employment benefits (OPEB), and net pension liability. Long-term liabilities include a variety of bonds (general obligation and revenue), as well as loans and leases associated with capital improvements. State and local governments finance most of their infrastructure improvements with long-term loans, bonds, notes, and leases that are paid off over 20 to 30 years. Cities, counties, and school districts rarely cease operations, even when they go bankrupt, so investors are willing to invest in them for long periods. It is quite different for non-profits and for-profits, where the question of going concerned is not always so clear.

Net pension liability represents the net obligation of retirement benefits the government owes its current employees, retirees, and beneficiaries. It represents the difference between the present value of projected retirement benefits and the plan assets, mainly financial investments. A net pension liability is reported if the current value of investments is less than the present value of projected benefits. If the current value of investments is greater than the present value of projected benefits, a net pension asset is reported.

Most governments report pension and OPEB liabilities. OPEB (also known as other-post employment benefits) liabilities represent the net obligation of benefits other than pension benefits (principally healthcare benefits – including medical, dental, vision, hearing, death benefits, life insurance, disability, and long-term care) a government owes its employees and retirees. While governments have consistently funded their pension plans, few have set aside funds to meet their OPEB obligations. This is true for the city of Bothell – which reported $1.5 million in net pension liabilities and more than $6.5 million in OPEB obligations at the end of FY 2021.

Below total assets and total liabilities are two new categories of deferrals – deferred inflows of resources and deferred outflows of resources. A government records a deferred inflow of resources when it receives resources as part of a non-exchange transaction in advance. Pre-paid property taxes are a good example. Imagine a property owner in Bothell who paid property taxes for 2022 in October of 2021. The City of Bothell might be tempted to call this deferred revenue because it received payment in advance for services it will deliver next year. However, that would be incorrect because property taxes are a non-exchange revenue. Taxpayers in Bothell do not pay property taxes for specific services at specific times; they pay for a variety of services delivered at various times throughout the year. There is no real exchange. In this case, the city would recognize the taxpayer's payment as an asset but simultaneously recognize a deferred inflow of resources. Next year, when the city delivers services funded by property taxes, it will reduce cash and reduce that deferred inflow.

The inverse is true for deferred outflows. Say, for example, that most of the city's employees belong to the public employee retirement system (there are several, including PERS 1, PERS 2/3, PSERS 2, LEOFF 1, LEOFF 2). The pension systems, collectively administered by the State of Washington, send the city a bill for $2.7 million to cover pensions and other costs related to the city's employees. That bill is due on January 20, 2022. If, before the city closes its books on December 31, 2021, the city council signs papers acknowledging its commitment to making that $2.7 million payment shortly after the start of the coming fiscal year, those resources are effectively unavailable for the following year. The City of Bothell might be tempted to classify this under accounts payable because it owes money. But that is not entirely true. A state retirement system is not a service, and even if it were, it would not deliver that service until the next fiscal year. Instead, the city will book this as a deferred outflow of resources and book a corresponding increase in liabilities. By not booking a liability and not spending the cash, the city's balance sheet looks much stronger. At the same time, it has committed resources to the future, which will impact its operations in the coming year. By recognizing a deferred outflow of resources, the city has offered us a clearer picture of how well the resources it collects each year cover its annual spending needs.

With the addition of deferrals, we re-write the fundamental equation for the government-wide financial statements as

Assets + Deferred Outflows = Liabilities + Deferred Inflows + Net Position

In the traditional fundamental equation, we use "net assets" to identify assets minus liabilities. When we add deferrals, the "net assets" label no longer captures everything on the right side of the equation, but "net position" does. The net position and its components are also uniquely governmental reporting features. Here, Bothell's net position is similar to that of other states and local governments.

• Net Investment in Capital Assets is the historical cost of capital improvements or infrastructure investments – net of depreciation – and debt associated with the acquisition, construction, or improvement of capital assets. All capital assets are reported in this component of net assets, even if there are legal or other restrictions on how the government uses them for service delivery.
  
  
• Governments restrict portions of their net position for many purposes. Restricted net position is virtually the same as restricted net assets for a non-profit. According to governmental GAAP, a portion of net position is restricted if: 1) an external body, like bondholders or the state legislature, can enforce that restriction, or 2) the governing body passes a law or other action that imposes that restriction. If there are assets that are restricted, that restriction will be reported in the net position. The city reports a restricted net position for a wide variety of activities, including transportation, parks, and street maintenance. These restrictions are based on laws adopted by the governing board or contracts with an external third party (e.g., bondholders).
  
  
• The government's unrestricted net position is akin to a non-profit's unrestricted net assets. These are net assets available for spending in the coming fiscal year. A negative unrestricted net position occurs if liabilities exceed assets. This does not mean the government is on the brink of fiscal disaster. It simply means the government's non-current liabilities, particularly retiree benefit obligations, far exceed its unrestricted non-capital assets. Governments reporting a sizeable unfunded liability are more likely to report a negative unrestricted net position.