Local Governments: Make Sure You Understand the Full Scope of GASB 77
As GASB initially crafted its Statement No. 77 and ran it through the early review process, it gave local governments the impression that the standard would only address tax abatements and leave tax increment financing districts out of its scope. When the final statement was issued in 2015, however, it was written to include anything that appeared to be a tax abatement, including pay-as-you-go districts.
At its core, GASB 77 was ultimately written to require more disclosures about tax abatement agreements within local governments. The differences between the draft and final versions, however, have left some governments a little confused and possibly out of compliance. Understanding the spirit and objectives of the standard can go a long way in helping you stay on the right side of the regulations and be transparent with the people your government serves.
GASB 77 gives local taxpayers the information about tax abatements that they are entitled to
Before GASB 77’s release, very little information about tax abatements was required to be disclosed in financial statements. Tax abatement agreements are used to encourage economic development and can be a great resource for a local government. A tax abatement results from an agreement between a government and an individual or entity in which the government promises to forego tax revenues in return for the individual’s or entity’s contribution to economic development. The individual or entity could potentially increase the value of a property or create additional jobs and have a portion of their taxes paid back to them, after they meet the requirement in the agreement. Tax abatement agreements can last for any number of years. These agreements are entered into with the thought that, when the agreements are over, the government will end up with a higher tax base.
Tax abatement agreements are public information, but governments have not always made it clear how they affect the government’s financial position and whether they reduce tax revenues or adjust tax rates.
GASB 77 requires additional footnote disclosures
Because such information affects local taxpayers, GASB 77 aims to provide additional information about all tax abatements within all local governments. It requires additional footnote disclosures to be added to the financial statements, with all of the details about any tax abatements the government has entered into. Required disclosures include:
- The tax being abated
- Provisions for recapturing abated taxes
- The type of commitments made by tax abatement recipients
- The gross dollar amount of taxes abated during the period
- Commitments made by a government, other than to abate taxes, as part of a tax abatement agreement
Tax abatements can be a reduction of a percentage of taxes collected or a flat rate amount, which may vary by agreement. A governmental entity can opt out of a tax abatement agreement. For instance, if a city approves a tax abatement with a local business, the school district and county can opt out of participating in that agreement. In such a case, only the city would have to disclose the additional information about the tax abatement. However, if the school district or county would join the agreement, they would need to add additional disclosures about the agreement. Any agreement that reduces a government’s collection of taxes would need to be disclosed, even if the government did not directly enter into the agreement.
GASB 77 includes pay-as-you-go agreements and collect-and-remit situations
Some tax abatement agreements are structured as pay-as-you-go arrangements. In these cases, the agreements are funded through current-year payments. As the payments are made to the governments in the form of tax payments, the payments to the individual or entity are then made. So if payments are not made in a given year, the payment back out would not be made by the government. This is a common type of agreement, as the risk is not with the government, but rather with the individual or entity, which has to finance the project on its own and then make tax revenue payments to the government in order to get a portion of that payment back.
There are some situations where a government might not actually receive less tax revenue but collects excess taxes from an entity and then remits them back to it. This is still considered to be a tax abatement agreement because the collection occurs and the revenue is remitted back to the entity and would need to be disclosed in the financial statements.
How we can help
CLA’s state and local government professionals can help you interpret and apply GASB 77 within your organization. We can work with you to place compliance processes into your regular activities and add the appropriate disclosures to your financial statements.