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6 Challenges for the Future I n carrying out its two missions of enhancing understanding of state and local government organization and operations and measuring their contribution to the national economy, the Census Bureau’s Govern- ments Division has struggled to maintain a balance in its programs while modernizing them over time. In the quinquennial Census of Governments, there has been a loss of programs, such as the taxable property value survey, because resources were devoted to key economic time series. With these exceptions, the census describes individual state and local governments and the relationships among them, and also provides detailed measures of their economic activity. For the quarterly and annual programs, except for the loss in detail in 2001 and 2003, the Governments Division has generally managed to preserve the ability to provide needed data for key economic time series, but has been forced to eliminate some value-added features, and has reduced service to users of information on individual governments and intergovernmental relationships. The reduction or elimination of analysis, background information, and derived measures from data releases on the Internet has undercut the usefulness of the information for a broad spec- trum of users. At the same time, the division has recognized the need for and begun a program of modernizing its data collection, processing, and dissemination procedures. At this time, the state and local government statistics program presents significant challenges for leadership, not only at the division level, but also the directorate and most senior management levels of the Census Bureau. Among these challenges are the need to develop a strategic view of the 107

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108 STATE AND LOCAL GOVERNMENT STATISTICS AT A CROSSROADS future, the need to build the user community and respond to user demands for data with which to understand important changes in state and local governmental structure and operations, and the need to take account of evolving standards for government financial accounting. These exist in a resource-constrained environment that must also provide the means for im- proving the quality and cost-effectiveness of data operations. Compounding these challenges is that, unlike many other activities of the Census Bureau, the state and local governments program involves voluntary data collection from both state government respondents that are sovereign entities and the local governments that are creatures of those sovereign entities. STRATEGIC PLANNING The state and local government statistics program is part of a larger set of Census Bureau economic programs that establish their context. As part of the Census Bureau’s Economic Directorate, the state and local govern- ment statistics program functions within a well-defined set of practices and rules for administration and data collection, including the requirement that all parts of the economy are subject by law to a full-scale census every five years. The government statistics program is small, representing only about 7 percent of the Economic Directorate budget for censuses and surveys each year over the past 10 years. Despite the importance of government statistics and all of the other economic statistics programs, these programs, like many other federal statistical programs, are facing increasing budget pressures. Compound- ing the budget problem is the need to generate funds on a cyclical basis to ramp up, and then back down, for the quinquennial Economic Census and Census of Governments. At present the Economic Directorate requires increased funds for the 2007 census cycle. To cope proactively with a dif- ficult budget climate, the directorate is conducting a systematic review of current programs to determine priorities. It is also seeking to streamline programs to the extent possible and to facilitate more efficient and higher quality reporting by better aligning data collection with government and corporate accounting standards and practices. Program Review by the Economic Directorate Setting Priorities The economic statistics programs have been ranked in terms of how they relate to four areas. In order of priority from first to last, the four areas are (1) benchmark measures, (2) principal economic indicators, (3)

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CHALLENGES FOR THE FUTURE 109 annual sectoral-level economic statistics, and (4) the remaining programs and infrastructure. The leadership of the Economic Directorate has stressed that meeting the needs of the Bureau of Economic Analysis (BEA) for information to sup- port the national income and product accounts (NIPAs) will always be the top priority for the Census Bureau’s economic statistics programs. Bench- mark measures include statistics from the Economic Census and Census of Governments that are used in the national accounts and other composite measures of economic activity, such as the index of industrial production, productivity measures, and the producer price index. Principal economic indicators, such as the source data for gross domestic product, closely fol- low the benchmark measures in the priority ranking. The Annual Survey of Manufacturers and the Annual Retail Survey are examples of the third priority of annual sectoral-level economic statistics. Rankings on User Feedback, Quality, and Cost In addition to identifying priority areas, the Economic Directorate is ranking 22 of the current economic statistics programs on six dimen- sions—two each for user feedback, data quality, and cost efficiency. The primary user feedback has come from BEA and the Federal Reserve Board (FRB), which ranked almost all of the economic surveys as critically impor- tant. The directorate has plans to expand feedback in the future to other users, and the National Association for Business Economics has offered assistance. The Economic Directorate has formed a separate staff to carry out quality audits of all of the economic statistics programs over a 5-year cycle. It is expected that the Governments Division programs will be audited un- der this new program. These Economic Directorate quality audits evaluate how well the Census Bureau is following Office of Management and Budget quality standards, whether the sample designs are appropriately probabi- listic, and how well procedures and processes are documented. The audits also determine whether there is adequate internal control of collection, pro- cessing, and other procedures and whether a reliable tracking system exists for verification and validation of data at each step of processing. Response rates and standard errors are used to determine data quality. In essence, the quality audits address most of the same key aspects of survey quality that have been addressed in this report. The directorate continues to refine the methodology to account for issues that have arisen, such as the fact that newer programs have fallen lower in rankings because, with start-up costs, they are not as cost-efficient as more established programs. The audit program is transparent and avail-

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110 STATE AND LOCAL GOVERNMENT STATISTICS AT A CROSSROADS able to staff so they may learn from the review of other programs and im- prove their programs before the audit process. Representatives of the program being reviewed have an opportunity to comment on the program’s evaluation, and continuous feedback on changes is encouraged. Most importantly, at the end of the audit process, program staff are asked to lay out what resources are needed for improve- ments. The final piece of the Economic Directorate’s improvement plans includes facilitating better reporting by following existing government and corporate accounting practices. Directorate staff have examined what items have the highest nonresponse and are working with accounting firms and the certified public accountants on staff to determine what some of the col- lection problems may be. Although cutting data items that are not being maintained in corporate or government accounting standards may be an unwelcome step for data users, such a step can potentially reduce follow-up resources from being used to collect hard-to-obtain or unavailable data. Program Improvement by the Governments Division The Governments Division has been developing its own strategic plan under the general rubrics outlined above for the Economic Directorate and addressing three areas for improvement: project management, documen- tation management, and knowledge management. The Census Bureau reports that project management training among the division’s managers has been completed, and the division has begun to offer that training to other staff. Documentation management—that is, managing materials that staff need to access on a regular basis— has begun to improve. Knowledge management is a special challenge. As the division, like many government agencies, faces high rates of staff retirement, it has begun to address how knowledge will be passed from one generation of employees and managers to the next. The division is tackling knowledge management issues with a three-pronged approach. First, the division evaluated its data storage and repository process and requirements for archiving documents and other materials related to the program using a web-based application, called the Document Manage- ment System, that supports project management, knowledge management, and cross-training. Second, the division reviewed its repository for storing programming code and, using a new tool called the Information Technol- ogy Repository, took steps to ensure that code is in a specific place and is quickly accessible to all staff. Third, the division is moving to the use of  Stephanie Brown, chief of the Governments Division, discussed the history and future plans of the division and addressed its strategic plan and the relationship to the planning process for the Economic Directorate at the panel’s first meeting in January 2006.

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CHALLENGES FOR THE FUTURE 111 electronic records as a one-stop repository for its interagency agreements, budget documents, and similar materials. This step was given priority in part because the Census Bureau, in moving to a new headquarters building, has been reducing paper and increasing use of electronic records across the board. In addition to these steps, the division provides training opportunities for newer staff. Also, it has developed a skills database to identify staff holding key knowledge and a division-specific wise elders program based on the Census Bureau-wide wise elders program. This program involves seminars on topics of interest given by retirees or employees with long experience. As the division moves closer to meeting its goals in the areas of project, documentation, and knowledge management, the next step is to finalize its strategic plan. The division branch chiefs have developed branch-specific business plans that articulate the goals and objectives for each branch, and these will be linked back to the strategic plan. The division-wide strategic plan adopted five of the six goals from the Economic Directorate, which include improving the relevance, timeliness, and usefulness of its data; in- creasing the use and accessibility of the data; reducing burden and simpli- fying reporting; improving data processing systems; and undertaking staff development. A sixth Economic Directorate goal—promote innovative use of microdata—addresses microdata release for research purposes that are under confidentiality restrictions and does not apply to the Governments Division programs, in which all microdata are released. The strategic plan includes a section on marketing the division’s data to improve visibility and accessibility, increase the division’s sponsor base, promote the products among influential users, and develop relationships with educational institu- tions and think tanks. This initiative should help expand the reach of the Governments Division to fulfill the needs of users other than BEA and FRB for detailed data below the national level. Conclusion and Recommendation The panel supports the Governments Division’s actions to improve project, documentation, and knowledge management and the Economic Directorate’s across-the-board initiatives for all of its programs to obtain user feedback, undertake quality audits, and better align reporting systems with respondents’ accounting practices. There is much work to be done to modernize aspects of data collection, processing, and estimation for the Governments Division census and surveys. The panel also supports the strategic planning efforts of the Gov- ernments Division and the Economic Directorate more broadly. We are concerned, however, that the directorate’s, and therefore the division’s,

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112 STATE AND LOCAL GOVERNMENT STATISTICS AT A CROSSROADS planning efforts are driven too much by the negative factor of constrained resources and the likelihood that resources will continue to be constrained. While pressures on budgets may indeed continue and may result in at least real—and possibly even nominal—cutbacks, the panel thinks that the Governments Division must develop and articulate a strategic plan that has two tracks: one for the situation of constrained resources and the other on the premise that increased awareness of the importance and usefulness of its data may result in additional resources becoming available. Without increased resources, the Governments Division cannot continue to provide as much of the rich detail on individual state and local governments that is needed for the many important research, policy making, and public under- standing purposes. Moreover, constraints on such detail can adversely affect the ability to maintain the quality of the high-priority data that are needed to inform key economic time series produced by federal agencies. In this sense, the Governments Division is at a crossroads. It can con- tinue down the path of cutting back, not only on data series, but also on explanatory material and derived measures to accompany data releases on the Internet. Continuing to follow this path may cause users to turn to other data series of lesser quality and respondents to become even less willing to answer the division’s inquiries. The end result could be to undercut the division’s key role and stellar past performance as an honest broker that is the only source of consistent, comparable data for comparative analysis among governments and over time. Alternatively, the Governments Division can begin to think construc- tively about ways to enhance its data series and the information it provides to users on the Internet. A welcome step in this direction is the inclusion in the division’s strategic plan of an initiative to market its data so as to increase their visibility and increase the division’s user base. For the divi- sion to take positive steps along these lines and in other ways to increase outreach to and feedback from users, it will need the wholehearted support of the Economic Directorate. Conclusion 6-1: The current strategic planning for the Census Bureau’s Economic Directorate is predicated on the likelihood of continued constrained budget resources and the need to give highest priority to providing data to support the national income and product accounts and other key economic time series. Consequently, the Governments Division is compelled to give priority to the publication of aggregated data on state and local government finances over the analysis of data on individual governments, intergovernmental relations, and the structure and operations of governments. The panel reiterates its recognition of the necessity of high-quality ag-

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CHALLENGES FOR THE FUTURE 113 gregate estimates of state and local government finances and employment to feed the NIPAs and other key economic time series that are generated by the federal government. It cautions, however, that too narrow a focus on this use not only slights other important uses that require detailed information with which to understand the operations and finances of individual state and local governments along with the financial flows among governments at different levels, but also runs the risk that not enough detailed information will be collected to validate the key economic aggregates. Recommendation 6-1: The Governments Division should include two tracks in its strategic plan: one track that plans for an environment of constrained resources and a second track that identifies ways to build support over time for enhancing the division’s data series and the infor- mation provided to users on the Census Bureau website. The Economic Directorate and, by extension, senior Census Bureau management, should support the Governments Division’s planning efforts in this re- gard and should make available some resources to begin implementing one or more aspects of the second track of the division’s plan. BUILDING THE USER COMMUNITY AND OBTAINING USER INPUT The panel has identified three high-priority interests of users of the Governments Division’s data: timeliness is the highest priority, followed closely by maintaining time series and providing more detail in areas in which important changes are occurring in the provision of services, sources of revenues, types of expenditures, and types of operations of state and lo- cal governments. The panel recognizes the impossibility of satisfying all of the specific requests of users for additional data and recommends that the division develop a working paper of options and solicit input over the next 2–3 years from users to identify preferred options to implement with the next Census of Governments in 2012 or before, if resources permit. Given constrained resources, the options spelled out in the recom- mended working paper are likely to include a mixture of new detail and cutbacks in traditionally collected detail on topics that appear to be less relevant. It is also likely that, in providing their input, users will make a case for much more new detail than existing detail. In its assessment of user needs, the division will have to take practical account of resource limita- tions. In the end, the goal should be to identify a few areas that could be included in budget initiatives to put forward to the Census Bureau, the De- partment of Commerce, and the Office of Management and Budget. Simply the process of working with users should help build a base of support that can be helpful in justifying and obtaining resources for these initiatives.

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114 STATE AND LOCAL GOVERNMENT STATISTICS AT A CROSSROADS In addition to the recommended working paper, the panel thinks that the division should go even further by developing a continuous process of identifying, evaluating, and following through on the most important needs of its users in both the short and longer terms. Not only can such a process help guide the division’s program in the most beneficial way, but it can also help increase the user base for the division’s data and build support for additional budget resources. The division should not be diffident about seeking to build its base of users; by so doing, it will increase the return on taxpayer dollars that are invested in data collection and production. Central to the division’s ability to reach out to and obtain input, not only from major federal users with whom it is in close contact, but also from public interest groups and research users, is to establish an ongoing advisory group. The Governments Division does not have its own advisory group. Instead, it must rely on the Census Bureau Advisory Committee of Professional Associations—consisting of members of the American Eco- nomic Association, the American Marketing Association, the American Statistical Association, and the Population Association of America—or the Federal Economic Statistics Advisory Committee, which the Census Bu- reau sponsors along with the Bureau of Labor Statistics and BEA. Neither of these advisory committees has membership drawn from the domain of public administration, public accounting, or financial policy. (The advisory committee to BEA has two public finance experts.) Although topics related to government statistics can be vetted with either one of these two committees, the record shows that such vetting has rarely been done. The Federal Economic Statistics Advisory Committee, which was established in 1999, has never discussed the Governments Divi- sion program, and the long-standing Census Bureau Advisory Committee of Professional Associations has discussed the Governments Division program on only two occasions since 1995: • In 1996, the division presented a paper to the advisory commit- tee that described the major aspects of the program and discussed briefly four possible areas for the committee to consider regarding future data needs for the public sector: contracting out, devolution, downsizing, and acquisition of capital goods. There is no indica- tion that the committee discussed the paper in open session. • In 2000, a Governments Division staff member presented a plan to the advisory committee for temporarily restructuring the an- nual finance survey. The plan suggested developing a more limited sample of local governments for 2001 and 2003 that would pro- duce only national totals instead of the normally larger sample that yielded local government totals by state. The advisory committee concurred with the plan to gather only national totals as a useful

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CHALLENGES FOR THE FUTURE 115 way of saving resources with a small compromise in data quality, provided that the switch would be only temporary, for a specified definite duration (U.S. Census Bureau, 2000b, pp. 32-33, 83). It is not surprising that the Census Advisory Committee of Professional Associations has had little time to devote to state and local government statistics, given that it lacks members with relevant subject-matter expertise, that it meets only twice a year, and that it must of necessity focus on the major Census Bureau programs, such as the decennial census, the Economic Census, and the American Community Survey. Conclusion 6-2: The Governments Division lacks vehicles for obtaining continued input from data users and methodological researchers with relevant experience and expertise. Such input is necessary to guide the development of statistical programs that are intended to provide data for public use. The Governments Division needs a committee that is dedicated to its special issues and subject matter. The process of establishing federally chartered advisory committees is governed by the Federal Advisory Com- mittee Act (FACA). FACA guidelines limit new advisory committees to “the minimum necessary” and indicate that they must be “essential.” The Department of Commerce guidance echoes FACA, stipulating that advisory committees must be “essential to the conduct of the Departmental busi- ness.” It would be difficult to establish a new government statistics advisory committee under FACA, but there are other ways to accomplish the same goal. For example, some statistical agencies, such as the Bureau of Justice Statistics and the Energy Information Administration, have small groups of experts, constituted under the auspices of the American Statistical Associa- tion, who meet periodically to review their programs. The Governments Division could follow this model by asking an in- terested professional association or other body, such as the Section on Intergovernmental Administration and Management of the Society of Pub- lic Administration or the National Academy of Public Administration, to establish a committee of experts in government administration and finance to meet regularly with division staff. Meetings at least twice a year would be needed to provide continuity and develop good working relationships between the division staff and the committee members. Under this model, the sponsoring organization establishes the committee with funding from the statistical agency for travel and meeting costs. In addition, the Census Bureau could have the American Economics Association component of the Census Advisory Committee of Professional Associations add one or two experts in finance and plan to hear from the

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116 STATE AND LOCAL GOVERNMENT STATISTICS AT A CROSSROADS Governments Division periodically. The Census Bureau could also have the American Statistical Association (ASA) component establish a regular schedule for considering methodological issues from the Governments Divi- sion. The ASA component has members whose expertise in survey design, reducing nonresponse, adjusting for nonresponse, estimation, and other methodological topics is relevant to the division’s surveys, even though the members may not be familiar with the particular subject matter. Recommendation 6-2: The Census Bureau should empower the Gov- ernments Division to organize a committee of experts in public admin- istration and state and local government finance under the auspices of a relevant professional association or consortium of organizations. The committee should meet regularly to review the division’s program. In addition, the Census Bureau should ensure that methodological issues for the Governments Division program are regularly brought before the American Statistical Association component of the Census Advisory Committee of Professional Associations and consider adding one or two experts in public finance to the American Economic Association component of that committee. ROLE OF STANDARDS Several sets of standards and guidelines currently exist for report- ing financial and other information on state and local governments. The International Monetary Fund and the United Nations set international standards for classifications and functions of governments which provide a template for BEA to use in developing gross domestic product estimates. At the national level, the Government Accounting Standards Board (GASB) produces standards and guidelines that state and local governments follow in reporting financial information and promulgates them in two standards that have direct bearing on the record-keeping practices of the reporting governments: GASB Statement 34 and Statement 44. The GASB standards and their impact are discussed in this section. Although not covered in this section, the standards set by other federal agencies also influence the ability to standardize data between the Census Bureau and the other agencies. Users have reported difficulty in relating Department of Education K-12 finance information to that reported by the Governments Division, despite the fact that the division collects much of the education data for the Department of Education. Similar lack of standardization affects the ability to directly relate Governments Division data on health and social services spending to information about Medicaid and Temporary Assistance for Needy Families that are provided by other departments.

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CHALLENGES FOR THE FUTURE 117 These standards that are set by outside bodies pose a challenge for the Governments Division and for the Economic Directorate as the Cen- sus Bureau seeks to determine the appropriate role for its staff to play in coordinating with standards-setting bodies, influencing their decisions, adopting their guidelines, and adjusting their collection and compilation procedures. International Standards The Government Finance Statistics Manual (GFS Manual) prepared by the International Monetary Fund (IMF) provides a comprehensive concep- tual and accounting framework for analyzing and evaluating fiscal policy of the general government and public sectors. The framework is harmonized with the corresponding international accounting standard to the extent consistent with the goal of supporting fiscal analysis. These accounting standards are the System of National Accounts 1993, the Balance of Pay- ments Manual, 5th ed., and the Financial Statistics Manual. The GFS manual also draws heavily on the United Nations Classification of Func- tions of Government (COFOG). COFOG, a classification system developed by the Organisation for Eco- nomic Co-operation and Development and published by the United Nations Statistical Division, is primarily used in the U.S. government by BEA to organize the government consumption expenditures and gross investment estimates in the national income and product accounts. COFOG can be ap- plied to government expenses and the net acquisition of nonfinancial assets. Its three levels of detail are divisions, groups, and classes. The divisions can be considered as the broad objectives of government, and the groups and classes detail the means by which these broad objectives are achieved. BEA uses the COFOG classifications to organize the Census Bureau state and local government data into nine basic functions. To date, the Governments Division has not made use of the IMF or COFOG standards in its data collections. The Center for Medicare and Medicaid Services has indicated a desire for the division’s surveys to recog- nize the detailed COFOG classifications in the area of public health. While the panel was not able to investigate the COFOG classification scheme in depth, it seems that the Governments Division should investigate the extent   Available: http://unstats.un.org/unsd/sna1993/introduction.asp   Available: http://www.imf.org/external/np/sta/bop/BOPman.pdf   Available: http://www.imf.org/external/pubs/ft/gfs/manual/.   Available: http://unstats.un.org/unsd/cr/family2.asp?Cl=4.   For further information on COFOG, see United Nations Statistical Division (2007).

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118 STATE AND LOCAL GOVERNMENT STATISTICS AT A CROSSROADS to which COFOG categories should be recognized in the Census of Govern- ments and annual surveys and at what level of detail. GASB The most important U.S. standards-setting body for classifying and accounting for state and local government finances is the GASB, which is a nongovernmental organization that has assumed responsibility for issuing standards for public-sector accounting. GASB is changing the nature of state and local government reporting, as governments increasingly look to it and want to be in compliance with generally accepted accounting prin- ciples (GAAP). GASB is one of three bodies that set such standards. The two other bodies designated by the American Institute of Certified Public Accountants to disseminate generally accepted accounting principles are the Financial Accounting Standards Board for the private sector and the Federal Accounting Standards Advisory Board for the federal government. GASB’s mission is “to establish and improve financial reporting stan- dards for state and local governments that they would use in their general purpose external financial reports, the objective of which is to provide in- formation that meets the needs of the users of those financial statements.” GASB follows generally accepted accounting principles to set standards for state and local government financial reporting, which have the potential to help the Governments Division with issues of classification at a broad level. GASB users—those who prepare, audit, and use state and local govern- ment financial statements—fall into three groups: (1) the investor-creditor community; (2) executive, legislative, and oversight bodies; and (3) the citizenry, its representatives, and intermediaries, such as the media. Since GASB began in 1984, it has issued 47 statements, 6 interpretations, and 3 concept statements. Statements 34 and 44 pertain to financial reporting. GASB Statement 34 Statement 34 is a recent and dramatic new statement that overhauls many of the principles for external reporting of financial condition by state and local governments. It encourages governments to make the transition from the traditional fund-based accounting model to an accrual-based   The National Center for Education Statistics establishes accounting standards for school district financial reporting.   At the panel’s June 2006 workshop, Ken Schermann, representing GASB, provided an overview of its role in setting standards for local and state government financial statements, specifically the roles of Statements 34 and 44.

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CHALLENGES FOR THE FUTURE 119 model, while also retaining the traditional reporting. Statement 34 newly requires a government-wide statement and also that results on this state- ment be prepared on a full accrual basis. Prior to Statement 34, full accrual- basis reporting was used only for business-type activities of governments. This method adds new information while preserving the elements of the older model, including fund-based statements prepared on a modified ac- crual basis, recognizing revenues when they become available and measur- able and expenditures as they are made. The full accrual basis of accounting recognizes revenues as soon as they are earned and expenses as soon as a liability is incurred, regardless of the timing of related cash inflows and outflows, If the Governments Division were to adopt the full accrual basis used in the new government-wide statement, rather than the modified ac- crual approach used in the fund statements, the Governments Divisions state and local government finance data would change dramatically The Governments Division is concerned that the burden placed on governments to provide data in this format might be enormous, because all governments would not necessarily have full-accrual data at the level of detail required by the Governments Division. In the process of developing Statement 34, GASB conducted user stud- ies, sponsored academic research, and followed due process, which included three standard proposing documents, task force meetings, 25 public hear- ings and user focus groups, and field tests in 20 state and local governments to develop the statement and the new financial reporting model. Statement 34 lays out the minimum requirements for a state or local government’s basic financial statements to be in compliance with generally accepted accounting principles. The new reporting method adds government-wide statements and a requirement to include the Management’s Discussion and Analysis (MD&A). The Comprehensive Annual Financial Report (CAFR) typically includes much more information than this required minimum, including required supplementary information and optional information. The data that state and local governments provide to the Governments Division in annual surveys and 5-year censuses are drawn from the same record-keeping systems that the CAFR draws on, but there are many differ- ences between the ways in which the CAFR summarizes, supplements, and presents this information and the ways in which the Governments Division summarizes, supplements, and presents the information. The MD&A is unlikely to be a producer of data for statistical purposes; however, the government-wide statements, which focus on the government as a single economic unit rather than as a collection of independent funds with varying fiscal years, and on costs of services rather than expenditures, will affect data classification and collection by the Governments Division. The statement of activities and the statement of net assets use the economic resources and accrual-based measurements to provide the background in-

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120 STATE AND LOCAL GOVERNMENT STATISTICS AT A CROSSROADS formation for these government-wide statements, offering a longer term perspective than the traditional reporting methods. The statement of activities, or operating statement, is the centerpiece of the new model. The model starts with expenses rather than revenues and uses the net cost format, which shows the cost of services and how the government pays for them. The expenses are broken down by function or program rather than by fund, allowing comparison across governments re- gardless of the different fund accounting systems. Revenues are divided into four categories: charges for services, operating grants and contributions, capital grants and contributions, and general revenues, with a provision to identify special increases from transfers or other one-time sources. The statement of activities matches costs incurred to program-specific revenues raised, and the balance is the net cost, which is paid for through general revenues. Although this methodology involves more work on the part of a state or local government, GASB has found that the users of the financial statements are obtaining long-awaited information. The statement of net assets is the new balance sheet, and it focuses on the residual difference between the government’s assets, including infra- structure, and liabilities. Although the historical component of infrastruc- ture is still inexact due to a lack of records, GASB expects this number to become increasingly accurate as older assets are replaced. The Governments Division agrees that Statement 34 adds some in- formation without taking away what was already included in previous versions of CAFRs. The division has considered how to use some of the information as indicators to estimate other variables, given that some gov- ernments historically have chosen to send their financial documents rather than fill out the division’s surveys. If all 87,000 governments sent all of their financial documents, the division would have a great deal of informa- tion but also a tremendous workload in parsing out needed data from the reports, especially if they are in paper form. Furthermore, while these data might hold out the promise of helping to estimate national totals for total expenditures and total revenue, it is highly unlikely that they could provide any information on details, such as spending by function or revenue by major category. The division is also making an effort to determine if there is useful information from the government-wide statements that it is not currently collecting. For example, BEA is interested in the valuation of as- sets, which the division does not collect but which is included in Statement 34 requirements. One major difference between GASB and Governments Division finan- cial reporting is that the former relies more on accrual accounting. This difference does not present a problem, however, because all accounting systems, including accrual-based systems, include detailed cash flow state- ments. The division makes use of the underlying cash data and largely

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CHALLENGES FOR THE FUTURE 121 ignores the accrual-based overlays. BEA may have some interest in the full-accrual measures in the future—for example, it is studying increasing the use of accrual accounting for the national income and product accounts (U.S. Bureau of Economic Analysis, 2005). Like the Governments Division, GASB has the objective of standardiz- ing the accounting of funds and enforcing consistency across governments. However, a major difference between the two is in the detail collected. The division collects data on more detailed functions than is required by GASB. Reliance solely on GASB classification would result in virtually complete elimination of detail, which would severely erode the quality of BEA es- timates and make Governments Division finance data nearly worthless to many other users. With that said, there are reasons for the Governments Division to coordinate with GASB and to seek changes that would serve both organizations (see below). Insofar as it affects state central collection programs, GASB’s Statement 34 holds both potential promise and peril for the Governments Division data collection efforts. The promise is the availability of a wealth of new data on capital valuation; the peril is that, as the GASB standard increas- ingly defines the data that are available at the state and local level, there could be a loss of detail, primarily at the functional level, that would jeop- ardize the historical continuity and limit the usefulness of the Governments Division data (Wulf, 2005, p. 15). GASB Statement 44 Statement 44 outlines requirements for optional reporting of a statisti- cal section of a government’s financial statement. The statistical section is composed of five parts: financial trends, revenue capacity, debt capacity, demographic and economic data, and operating information. Financial trend information typically comes from 10-year comparative financial state- ments and includes information on net assets, changes in net assets, fund balances, and changes in fund balances. Information on a government’s most significant own-source revenue is captured under the revenue capacity category. Four types of information that are comparable over the historical period are reported: revenue base, direct and overlapping rates, principal real property taxpayers (top 10 taxpayers), and levies and collections. Debt capacity information includes ratios of total debt outstanding, ratios of gen- eral debt outstanding, overlapping debt, debt limits, and pledged-revenue coverage. Two types of information are included in the demographic and economic data section and are generally obtained from other federal statis- tical sources: demographic and economic indicators and principal employ-   BEA, Response to Committee Questions, July 26, 2006.

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122 STATE AND LOCAL GOVERNMENT STATISTICS AT A CROSSROADS ers. Finally, government employment, operating indicators (demand or level of service), and capital asset indicators (such as volume, usage, or type) make up the operating information. While GASB develops the standards, compliance is voluntary, and GASB has no method for enforcement. The enforcement of these standards comes from the users of the financial statements, such as state govern- ments and municipal bond rating organizations. GASB has commissioned an academic survey to find out how many and which states require GAAP reporting by which levels of government. Statement 44 is not required for GAAP compliance, but it is a requirement for a full CAFR. The CAFR is the bond rating community’s primary tool for determining the ability of the borrowing government to repay the debt. Census Bureau Coordination with GASB In view of the apparently growing influence of the GASB standards as the defining standard for the development and maintenance of state and local government financial records, it is important that the Governments Division stay in communication with the GASB rule-making process and play an active role to the extent possible. The body that ensures advisory representation in the GASB process is the Governmental Accounting Stan- dards Advisory Council (GASAC). The GASAC is responsible for consult- ing with GASB on technical issues on the board’s agenda, project priorities, matters likely to require the attention of GASB, selection and organization of task forces and such other matters as may be requested by GASB or its chairman. The council has more than 25 members who are broadly rep- resentative of preparers, attesters, and users of financial information. The federal government is officially represented on the GASAC by the Govern- ment Accountability Office. The assistant division chief of the Governments Division currently serves in an at-large seat on this body. It would be very helpful for the Governments Division to have a permanent seat as an orga- nizational member of the GASAC. Recommendation 6-3: The Census Bureau’s Governments Division should continue to stay engaged in the Government Accounting Stan- dards Board standards-setting process in order to ensure maximum consistency between the GASB and Census Bureau definitions. To ensure close coordination with this activity, the division should seek to obtain status as an organizational member of the Governmental Ac- counting Standards Advisory Council. The panel discussed the role of GASB in standards setting at length and how much benefit the GASB standards could offer the Governments

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CHALLENGES FOR THE FUTURE 123 Division. In the short term, GASB rules do not appear likely to provide the division with much opportunity to streamline its data collection. One important reason for this is that GASB does not specify which spending functions governments should list in their CAFRs, and when governments do publish information by functions, GASB does not specify how those functions should be defined. Governments generally publish the categories they choose to, and they define them the way they think makes sense for their purposes. Consequently, there is neither uniformity nor comparability. The requirements for functional reporting in GASB Statement 34, as noted above, are in terms of very broad categories. Still, having a standards-setting body with considerable prestige, if not outright authority, could create enormous opportunities for streamlining the Governments Division data collection over the longer term, particularly if GASB defines or suggests definitions for expenditure categories. There are many problems that would result from simply turning over definition- making authority to a third party, but that concern should not deter the Governments Division from exploring possible opportunities. If at some point in the future, it were possible to combine GASB and census catego- ries with technical methods that would allow governments to “tag” their data with these definitions when they first create them, delivery of data to the division in a form that is useful might become nearly automatic. The obstacles to this would be great, but the benefits would also be great. Recommendation 6-4: The Census Bureau’s Governments Division should lead a long-term research effort, with the Government Account- ing Standards Board, the Government Finance Officers Association, and other organizations as appropriate, to explore the development of advisory guidelines and data definitions in a way that would allow the collection of reasonably uniform detailed finance data from a very large number of state and local governments on a regular basis. CONCLUSION The Governments Division’s data collections play a critical role not only for the national income and product accounts and other economic indicators, but also for important research and policy analysis uses that re- quire detailed, consistent, and comparable data for individual governments over time. Constrained resources have compelled the division to cut back progressively on its data collections and valuable background information for users. On the positive side, the division has begun to modernize its op- erations, improve its website, and develop systems for project, documenta- tion, and knowledge management. Moreover, the Economic Directorate of which the division is a part has undertaken welcome initiatives to evaluate

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124 STATE AND LOCAL GOVERNMENT STATISTICS AT A CROSSROADS all of its programs, to apply best statistical practices throughout the direc- torate, and to require strategic planning. At this critical juncture, the Governments Division is poised to take either a limited view of its future or, as the panel strongly recommends, a proactive, positive view in which it seeks opportunities to build its user community and respond to user needs for more timely, relevant, and higher quality data. The division will require the unstinting support of the senior Census Bureau management and, in particular, the leadership of the Eco- nomic Directorate to move forward. Senior management should charge the division to develop a two-track strategic plan—one track that plans how to adapt to a constrained resources environment in the most cost-effective and user-responsive manner and a second track that looks to opportunities to develop grow the division’s program for the future. Senior management should also empower the division to establish an advisory group for con- tinuing user input and should encourage it to work proactively with stan- dards-setting bodies. These steps are critical to keep the division’s data in the mainstream of international and national thinking and to maintain the division’s well-earned reputation as honest broker and provider of impec- cable information for measurement of state and local government activity. Finally, the Economic Directorate should continue to strengthen its efforts to bring modern survey design, data processing, and statistical estimation methods to all of its programs, including the state and local government statistics program. Progress toward implementing a forward-looking, opportunity-seeking strategic plan for the Governments Division may of necessity be slow and halting. Nonetheless, it should begin so that the federal agencies and the policy and research communities have the information they need to track the economic contributions of state and local governments and their chang- ing structures, operations, and relationships and how these affect the nation and its people.