Do You Know the Real Value of Your Library?

By Thomas J. Hennen Jr.  Originally printed in Library Journal, 6/15/2001, Vol. 126 Issue 11, p48, 3p

See also the GASB 34 Frequently Asked Questions page.

This article focuses on accounting rules set by the Government Accounting Standards Board (GASB). It covers the details of GASB 34, the revised rules; how the revisions affect libraries; changes in public-sector auditing; valuation of books as capital assets; development of strategies by library financial directors to deal with the GASB 34 changes.

GASB 34 (pronounced to rhyme with The Great Gatsby) is a new set of accounting rules, considered by accountants to be the most monumental change in government financial reporting in U.S. history. The new rules begin for the largest jurisdictions in the next fiscal year (see sidebar, p. 49). They may prove hazardous or helpful to public libraries, leading libraries to better account for the value of their infrastructure (buildings, automation systems) and perhaps even their book collections as well.

The Government Accounting Standards Board (GASB) is a private group that sets the rules that accounting firms follow when doing public-sector audits. GASB 34 forces public-sector agencies to use accrual accounting. Traditionally, state and local governmental agencies have used cash or modified accrual accounting methods to report infrastructure assets like roads, bridges, and, of course, libraries. Under the old rules, the capital cost of an infrastructure investment appears only once in an agency's annual financial report: the year in which the cost of construction is incurred. The values of existing physical assets do not appear on financial reports.

Using those old accounting methods, the value of all physical assets is effectively off the books. In reality, physical assets such as roads, bridges, and library buildings continue to have value, though they, of course, depreciate. Under GASB 34, accrual accounting, the type required of most businesses, infrastructure assets stay on the books. This method provides a clearer sense of long-term needs and more transparently reveals the fiscal health of the enterprise.

Communities where elected officials have coasted for years by putting off needed infrastructure improvements will undoubtedly be terrified by this new accounting standard. Those communities aiming to hold down current taxes by not planning for infrastructure improvements may be in for a shock. Moreover, when crises hit, infrastructure like sewage plants or highways will likely get preference unless libraries prepare their cases well.

The new audit rules also will shine a spotlight on a community's poor planning and cost it dearly when municipal bonds are rated. Lower ratings mean municipalities must pay higher interest to borrow money for future projects--perhaps leaving less money for the library.

Library administrators must communicate the value of the components of the library. GASB 34 requirements could give them the edge in the annual capital improvement sweepstakes with competing departments, if they know the rules and play their cards right. Getting it wrong could cost dearly at budget time; the department that better communicates the value of its enterprise may be more likely to get the green light for funding.

Under a new section ("Management Discussion and Analysis") required by GASB 34 in the Comprehensive Annual Financial Report (CAFR) or annual audit, cities and other agencies must provide an "easy to read" assessment of the financial results for the entity for every audit. The intent is to require a plain English assessment of the government agency's financial condition. If the library is in disrepair, the collection inadequate, and the service sporadic, this should be noted in the municipality's audit. Will it be? Only if library staff are aware of the requirements and use them to their advantage.

This section will be subject to review by auditors, providing assurance that you are telling the truth about your financial condition. This may be the spot to make the case for a new building or automation upgrade. It could also be where library foes plant the doubts about the need for that new building or server.

Some better-managed libraries in the country have set up strategies to work with the new rules. Those that have not done so apparently believe that the bean counting rules don't matter much and are trusting that the city or county audit staff will set things right. The latter attitude may lead to disaster.

Library organizations have not yet rallied around this issue. Public Library Association Executive Director Greta Southard says, "Essentially, my advice to libraries is to consult a tax professional and obtain advice on the new audit rules and how they will affect the library."

The introduction of GASB 34 accounting regulations may remind some of the Y2K panic and whether there was real risk or not. If GASB 34 is a Y2K-type fizzle, will the library world be the worse if administrators heed a warning? It is possible that GASB 34 will have catastrophic effects for some libraries and some communities. GASB 34 may fizzle for libraries not because there was no inherent threat but because we came to the bean counting table well prepared.

Do you know whether your auditors will now consider books and magazines capital assets on the municipal balance sheet? Ask--this issue isn't resolved. The same holds true for automated circulation systems, workstations, and digitized collections. Proper valuation of the assets will raise a red flag in the audit if the municipality is not budgeting enough to replace the infrastructure of the library.

Just what is infrastructure to a library? The building and furniture are surely capital assets, but what of the computer equipment and the collection?

• For insurance purposes, books and periodicals are often considered capital assets, but for annual reporting purposes they are normally counted in the operating account. How does a library depreciate an asset it truly holds but which it has never listed as a capital expense?
• There is a growing trend for library bond issues to include capital funds to build materials budgets.
• Counterpoised to this trend is the growing tendency to count computer workstations as operating rather than capital costs.

It would seem difficult to convince an auditor that one should count the ongoing materials budget as an operating cost, as we have always done, when the recently passed bond issue treated it as a capital cost and the risk management team wants materials insured as capital.

When the city down the road puts its materials budget on the capital side of the ledger, your library may be next. When another city takes workstations off the capital item count but begins to capitalize the shared circulation system, your agency may be next. This could lead to a whipsaw effect for libraries in a state or region, causing their apparent audit values to fluctuate wildly. City council members may ask: Why did the library so much overvalue (or undervalue) its assets? Doesn't it know what it is doing? That's not a question you want asked even if you can blame the auditor.

Still, there seems to be no clear strategy regarding collections, as well as some other nontraditional capital assets. The National Association of State Auditors, Comptrollers and Treasurers' (NASACT) site indicates that library collections should be completely capitalized (www.sso.org/nasact/Comptrollers/NASC%5fRoundtable/tx%5fguide.pdf).

On the other hand, the Texas Comptroller of Public Accounts says, "The state's methodology for library books and materials will be to classify them as inexhaustible assets that should not be depreciated. Library books and materials have an economic benefit or service potential that is used up slowly and their estimated useful lives are extraordinarily long" (www.window.state.tx.us/comptrol/san/gasb/gasb34%2695qai11.html).

Library financial directors at forward-looking libraries around the country are developing strategies to deal with GASB 34 changes, but they too wonder about whether the new rules require that books be capitalized and depreciated in audits.

David R. Cramer, the senior administrative manager at Hennepin County Library, Minnetonka, MN, notes that the library's meteoric rise in public and staff workstations over the last several years had to be funded from capital budgets. The library is now migrating (over the course of three to ten years) those expenditures to the operating budget.

Adds Cramer,

Hennepin County is still evaluating the impact of
GASB 34. Like most governmental units, Hennepin
County hadn't been accounting for resources that
are being used up or consumed. However, teams have
now been established that will be examining
infrastructure reporting requirements and analyzing
the required changes to the Comprehensive Annual
Financial Report. We do not yet fully know if the
GASB 34 changes will require major reporting changes.
It will require us to think about how the collection
is "consumed," which we haven't historically needed to do.

Denver Public Library (DPL) Accounting Manager Richard Weinstock anticipates a smooth transition to GASB 34 accounting. "DPL is an independent agency within the government of the City and County of Denver," he notes. "The city requires all agencies, including the library, to maintain an Asset Management Database. The city auditor will use this database to fulfill the GASB 34 fixed-asset reporting requirements."

According to Weinstock, the Denver city auditor has no plans to classify books or other library materials costing less than $5000 as capital assets, even collection items purchased with library bond issue funds. DPL has an extensive rare book and Western art collection, with many items exceeding $5000 in value. "The city auditor will apply for an exemption, allowed in GASB 34, that will allow them to record the collection at value and not require depreciation," adds Weinstock.

For an example of a smaller municipality that has done its current CAFR using GASB 34, see the web site for Oak Park, MI (www.oakpark-mi.com/download.htm). The site refers to a spreadsheet for the library valuing the 90,000-volume collection.

Oak Park Finance Director James Ghedotte believes that GASB 34 requires the library to record books and materials "as capital assets and carry their value on our Statement of Net Assets (most people recognize this statement as a balance sheet). The standard does not give specific guidance on how to value the collection except that we are allowed to group our collection and estimate historical costs. Since most libraries have an inventory of what is on their shelves the first variable was easier to document than I thought. My head librarian gave me a count of the items in our library by group (i.e., adult hardcover, adult paperback, reference)."

Which is the right way to go? No one's sure yet. Even staff at GASB were unable to respond to questions quickly.

Libraries might face a game of hot potato regarding shared automation systems, unfunded pension liabilities, and book budgets in bond issues. Which level of government takes the blame or credit for an asset or liability may matter greatly in annual budget forays. Make sure you can use these rules to your advantage, or they may get used against you.

A city with a library that has a standalone automation system probably does not now carry the initial cost or long-term replacement cost of that system on its CAFR. GASB 34 will require it to do so. The situation is fairly simple and straightforward, though it may cause some financial headaches depending on where the library is in the replacement cycle.

But what happens when a number of municipalities share a system? According to David R. Bean, GASB director of research, GASB 34 doesn't change the rules for apportioning assets among entities in a shared enterprise. But it seems likely that there will be renewed scrutiny of the cost-sharing arrangements in shared systems.

Layered on top of this uncertainty is the multiyear nature of the GASB 34 implementation schedule. Larger communities will need to book the shared automation system costs sooner than smaller ones. Although the rules for apportioning capital assets for a shared automation system have not changed from the previous accounting standards, there will be added scrutiny because of the GASB 34 changes. Librarians will want to be sure that bylaws and contracts have anticipated the "proper" apportionment of assets and liabilities.

It is difficult to find anyone who wants to speculate on whether GASB 34 requirements will pose a problem for reporting and disclosure of commitments for post-retirement healthcare and unfunded pension liabilities. Numerous current municipal or library audits make disclosures on these issues now, but questions remain. Should current resources that could go to materials today be diverted to stanch tomorrow's compounding hemorrhage of unpaid pension liabilities? The longer the wait, the larger the future bill.

A colleague of mine in accounting notes that just having government audits and accounting systems at all was a major triumph of progressive politics in the early part of the 20th century. The progressives sought to hold the Boss Tweed--type financial shenanigans at bay, but the reformers were stalled. What we got for the best part of the last century was modified accrual accounting for larger units of government or cash basis accounting for smaller units. Since the financial reforms of the stock market after the Great Depression, no corporation could get listed on the stock exchange employing the accounting methods that are currently used in government. GASB 34 simply asks governments to do the same type of accounting that private enterprise has been required to do for generations.

There is a great computer simulation game called SimCity. It has a very sophisticated set of rules that require you to manage a city using the right combination of taxation, long-term investment, tax, and so forth. During the course of the game, you can skimp on a service (including libraries), but, in the long run, if you don't maintain the right mix and manage carefully, your city will melt down. The new audit rules should help real-world managers avoid such meltdowns.

Library management teams need to be in the forefront to assure that their parent municipalities are properly reporting library data. Special purpose library districts will need to work closely with auditors to assure that correct consideration is given to the unique requirements of the library enterprise.

Librarians should remember that the people who invest in the stock market have always read balance sheets and audit reports and watched for the warning signs of mismanagement. Those who watch government activity, and invest in municipal bonds, are becoming just as savvy about municipal financial indicators. The new rules give them better and more balanced indications of the financial health of a municipality or library district. Think about how bond investors will read the report of your library's section of the CAFR being filed under the new GASB 34 rules. Will the picture presented help or hinder your library's efforts to achieve its mission?

The American Library Association and state library associations should be issuing guidelines on how to deal with specific issues raised in this article and in their states. So far those groups have been rather quiet. It's time to wake up.

Governmental Accounting Standards Board (GASB) is not a government agency but rather a nonprofit agency. It issued its first concept statement regarding accrual accounting in 1987 and unanimously adopted this new financial reporting model on June 10, 1999, after ten years of development. The organization operates with donated funds collected on its behalf by the Financial Accounting Foundation (FAF) and supplemented with proceeds from sales of its documents.

The new standard will take effect in three phases depending on the size of state and local budgets:

• Phase 1, beginning in fiscal years after 6/15/01, affects states and cities with budgets with $100 million or more in annual revenue;
• Phase 2, beginning in fiscal years after 6/15/02, affects states and cities with at least $10 million but less than $100 million in revenues; and
• Phase 3, beginning in fiscal years after 6/15/03, affects municipalities with less than $10 million in revenue.

The GASB staff have developed a series of guides to financial statements designed especially for financial information users. Three guides focus on specific governmental entities (local governments, state governments, public school districts) and are aimed at a wide range of readers, from the average citizen to the experienced, nonfinancial public manager. A fourth guide covering all three types of governments is intended for analysts and other regular users. All four guides are posted at accounting.rutgers.edu/raw/gasb/pub/index. html. An electronic mailing list on GASB 34 is at www.gfoa.org/gfoa2000/gasbfrum.htm.

Added information on the GASB issue can be found on the author's web site at: http://haplr-index.com/gasb34faq.htm

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