GASB ruling will make tax breaks more transparent
Posted September 06, 2015 in Selected Press
Tax abatement has been a common carrot that communities use to attract development. To date, however, cities and other tax-abating governments haven't shared much about the accumulated financial consequences of those tax breaks.
Now, because of an edict from the board that oversees government accounting, they will. That means that the counties, cities and public authorities in seven counties of Northeast Ohio will have to provide details about the roughly $1.4 billion in taxes they are passing up annually.
“This is good news for taxpayers, it's good news for investors, and it's good news for good government,” said Zach Schiller, research director for Policy Matters Ohio, a progressive, research-oriented nonprofit with offices in Cleveland and Columbus. “This is a matter of transparency for investors and others interested in public finance.”
The Governmental Accounting Standards Board (GASB) in August ruled that some of the financial details of those tax breaks are essential for a clearer understanding by citizens, municipal bond credit analysts and even public officials of a governmental body's financial health.
“I'm going to be the happy recipient of more information,” said Tim Offtermatt, an investment banker with the Cleveland office of Stifel Financial Corp. who specializes in public finance. “It helps us put together a comprehensive credit package for credit analysts.”
The inclusion of this information follows recent rulings by GASB that will require better reporting of the long-term costs of unfunded pension obligations by some communities. The poster children for the consequences of insufficient financial reporting were Chicago, which recently saw its bonds reduced to junk status, and Detroit, which went through the country's largest municipal bankruptcy.
Under GASB 77, as the rule is called, all governmental bodies will be required for the first time to disclose on their public, audited financial statements the annual cost of tax abatement for the reporting year. In addition, notes in the statements will explain the purpose of the programs, commitments made by recipients (such as pledges to create a specific number of jobs), and any ways those dollars might be recaptured — for example, if new income tax is coming in from jobs created by the abatement.
“This new guidance will result in people who use governmental financial statements having access to essential information about the tax abatements governments enter into,” said GASB chairman David A. Vaudt in a statement when the rule was announced.
“Not only will this mean that they'll have access to information that will allow them to better assess a government's financial health, but it will also make the impact of these agreements much more apparent,” he said.
Big in Cleveland
Tax abatement is an incentive that governments use to attract new business into its borders or to encourage existing businesses to make substantial capital investments that, usually, bring new jobs.
It has a long history in Northeast Ohio. Tax abatement was first used in 1977 when Cleveland, under Mayor Ralph Perk, gave tax abatement to two downtown office projects — the National City Center (now PNC Center) and the Sohio Building (now 200 Public Square).
The city of Cleveland, not surprisingly, has used tax abatement significantly more frequently than other communities in the region. Had it never used tax abatement, the city would be collecting $484.5 million more in property tax revenue in 2014, according to Cuyahoga County's 2014 abstract of the property taxes foregone because of tax abatement.
The Ohio Department of Taxation puts the seven-county total at $1.4 billion. Cleveland did not make a spokesperson available before the deadline for this story.
The financial statements, though, will not include the long-term costs of the tax breaks — the tax exemption can run for as long as long as 15 years— or the names of specific recipients. Those requirements had been considered early in the rule-making process.
Policy Matters Ohio's Schiller questioned the lack of long-term cost projections — a key element in the pension fund crisis.
“It's hard to figure why (GASB) didn't approve any kind of forward-looking cost of this,” Schiller said. “From (a municipal bond) investor's standpoint, isn't your biggest concern not what they paid last year, but what they have to pay in the future?”
Some government officials fought the new regulation.
A letter circulated by the Ohio Municipal League that was sent to GASB by five major government associations, including the National League of Cities and the National Association of Counties, argued that the information would be difficult to compile and would provide a misleading impression by reporting only the amount of taxes foregone in a single year and not the future impact on taxes collected in future years because of new jobs created.
Several local public finance officers, though, are comfortable with the new reporting requirements.
Brent Leslie, chief financial officer of the Cleveland-Cuyahoga County Port Authority, said he didn't believe meeting the rule's requirements will add much time or cost to the Port Authority's financial reporting expense.
The Port Authority is not in a position to grant exemptions. But if the county were to grant a tax abatement, the Port Authority's tax levy, which provides $3 million of its $7.5 million of its revenue, would take a modest hit.
Matthew Rubino, finance director of Shaker Heights, which lost $5.5 million in taxable real estate to tax abatement in 2014, is prepared for the new disclosures.
“We saw this with pension reporting,” he said. “There is a desire in the financial markets for more transparency or reporting (from government) like they see in (public company reports).”
Original Article: http://www.crainscleveland.com/article/20150906/NE...