Why Can’t Government Financial Reporting Match Private Sector Standards?

If you want current financial information on California’s state government, you won’t find it. The most recent consolidated annual financial report for California’s state agencies is for the fiscal year ended 6/30/2018. That’s over two years, or nine quarters ago.

To put this in perspective, America’s publicly traded multinational corporations, with operations spread all over the globe, are required to submit to the IRS detailed 10K reports within 90 days of filing their tax returns, which in-turn are due “the 15th day of the fourth month following the close of the fiscal year.”

This means that Walmart, with $514 billion in revenue, or ExxonMobil, with $290 billion in revenue, along with dozens of other mega corporations, have at most 195 days, or just over six months, to pull together and submit a comprehensive financial report on their operations.

In reality, corporations rarely need 195 days. Walmart released its annual report for their fiscal year ended 1/31/2020 on 4/23/2020, eighty four days later. ExxonMobil’s most recent fiscal year ended 12/31/19, and their 2019 annual report was issued prior to their annual meeting of shareholders on 5/27/2020, 148 days later.

So why is it that the State of California, where “the expenses of the primary government totaled $300.7 billion for the fiscal year ended June 30, 2018,” still cannot convey similar information for the fiscal year ended June 30, 2019? Corporations of comparable size do it in 195 days or less. As of 9/24/2020, California’s 2018-19 fiscal year ended 452 days ago.

What anyone concerned about the California’s state government’s entire system of financial management should wonder is not only why there’s still no report for the fiscal year ended 6/30/2019, but when will the report be produced for the fiscal year ended 6/30/2020. If they could pull together their numbers with efficiency merely matching what corporations have been doing for years, we would see financial reports for the 2019-20 fiscal year by January 15th, if not sooner.

A recent article in the California Globe discussed these delays, noting that “California is the only state that has not yet published a Comprehensive Annual Financial Report (CAFR) for the fiscal year that ended more than 12 months ago.” In terms of meeting deadlines to file financial reports, the ongoing superior performance of not only corporations, but every other state in America, should put to rest any claims that the COVID pandemic is responsible for this slowdown.

So why does it take California’s state government so long to let taxpayers know how they’re doing? State Senator Moorlach, the only licensed CPA in the state legislature, looked into the reasons for the delay. Also courtesy of the Globe, here’s what he learned:

“We were informed that the Secretary of State’s office and the State Water Resources Control Board have not yet given their data to the Controller. Can you imagine? The Secretary of State? A department run by an independently elected statewide official is late? The same department that had faulty software in place when motor voter was initiated? The same department that will be overseeing the state’s first all mail-in ballot process in November?”

It’s easy enough for the state controller to assign blame to another department, and it is certainly ominous that yet another example of incompetence is directed at the Secretary of State’s office, which we must trust to oversee our election integrity. But the Office of the State Controller has faltered in ways going well beyond delinquent financials.

Back in 2013, the California Policy Center published our first assessment of California’s total state and local government debt.  At that time, we were able to rely on Consolidated Annual Financial Reports not only for all state agencies, but for cities, counties, and special districts. Up until 2002, even California’s school districts had a consolidated annual report. There was even a consolidated annual financial report for the state’s public employee pension systems. All of those reports, with the exception of the one for state agencies, have been discontinued.

These consolidated annual reports, released as PDF documents, contained readable, useful information that made it relatively easy to compile total a debt profile for California’s state and local government agencies. But they have since been scrapped in favor of a “By the Numbers” website that offers superficial analysis in the form of interactive graphs and charts, along with downloadable Excel files that contain an overwhelming amount of data.

To be fair, both of these forms of data are useful. It’s good to see topline data on revenues and expenditures, and it’s good to have a mountain of raw data to pick through. But what’s missing – kind of like California’s disappearing middle class – is a mid-level written analysis where someone has done the work to analyze what’s beneath the topline numbers. Anyone who thinks this mid-tier of explanatory material is not invaluable is invited to download one of these Excel spreadsheets.

For cities, for example, the spreadsheet format consists of 482 rows of data, corresponding to each of California’s reporting cities, then there are 12 columns containing various categories of data. These columns list the name of the city, the estimated population, and other basic information. But that’s just the first tab. The “Cities Raw Data 2018” spreadsheet has 46 tabs containing data. These tabs have enigmatic names, such as “CIX_INTER_SERV_FUND” or “CI_FUNC_REV_EXP. Some of these tabs have several thousand rows of data, since many cities, for example, have several tranches of outstanding debt. Most of these tabs also have several dozen columns, and while these columns for the most part have reasonably explicable headers, no attempt is made to show the relationship between variables, i.e., which columns contain the subtotals and totals of amounts in other columns, and if so, of which other columns. The user is left to painstakingly infer every relationship.

What the California State Controller did, by eliminating these reports, was absolve their own office staff of the responsibility to analyze this data, something they had done for years. Instead they programmed an automated report generator that loads up pretty bar graphs with no explanation as to what is included or excluded in the totals, and no discussion about what any of it means. Then they offered access to the raw data as well, with the almost glib implication that if you don’t like our pretty graphs, dig through this.

To use the metaphor of an elephant to describe what has been lost, what we have today from the State Controller’s Office is a photograph of the elephant, along with a mountain of data describing each and every molecule in that elephant. What we used to have was a biology textbook, clearly explaining the various functioning parts of that elephant, and commenting on its overall health.

California’s state controller is not merely more delinquent than ever on delivering timely financial data on state and local agencies to taxpayers. For much of what it is tasked to analyze and report – cities, counties, special districts, and school districts – the office has cleverly created opacity in the name of transparency. For reporters looking for a quick number, or data miners with the time and the funding to do the state controller’s job for them, no problem. For anyone who wants to know how California’s state and local governments are doing without having to swim through a ocean of raw data, this is a disservice.

We must wonder how things would change if private sector standards were applied to the state controller’s office. How would they cope, if they were told to get their consolidated annual reports completed in six months instead of within 15 months, or more? It is a reasonable expectation.

There are profound differences between huge corporations and California’s state government agencies. But those differences shouldn’t be overstated. They are equally complex. Both contain huge bureaucracies. Both are subject to laws and incentives designed to create diversity in the workforce. Both have fiefdoms and infighting, waste and inefficiency. But there is one crucial difference.

The financial professionals working for the State Controller’s Office are represented by the various union affiliates of the California State Employees Association. Financial professionals working for ExxonMobil, or Walmart, or other mega corporations, do not belong to a union. It is left to the reader to speculate as to what impact union work rules have on the flexibility and accountability of unionized state agencies and their employees, including the Office of the California State Controller.