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Christ continues to push experimental balance sheet, seeks input

(Jan. 04, 2013) Despite eliciting mostly blank stares – or, at best, vague nods of approval – from the elected body, local property owner and fiscal activist Tony Christ continued last week with his endeavor to create a balance sheet for the city’s government that, while not necessarily adherent to normative accounting standards, he believes is more representative of the city’s economic future.

Christ presented his draft ‘Trial Balance Sheet’ for the Town of Ocean City to the City Council, and requested its feedback to improve his project.

“I’d like to do this as a trial, to see if this is a benefit to you all,” Christ said. “And as a volunteer, I’d like you to help me come up with better numbers.”

Like a typical balance sheet, Christ’s listing separates assets – what the city has – from liabilities – what it owes. But, unlike most balances, these two basic elements are then divided into “current” – meaning those assets that can be drawn upon as needed, or liabilities that must be paid for as they arise – and “noncurrent” – meaning those that project long-term obligations or illiquid assets.

The relevance of this division, Christ has said, is that the vast majority of the city’s financial data exists as book-entry, line-by-line accounting that it done on an accrual basis, meaning that only the city’s actions that have had a tangible, monetary impact on its accumulation of wealth or debt over the past year are listed.

But in Christ’s reckoning, this is not where most of the city’s fiscal fate lies. What is more important, he asserted, are the long-term commitments that the city has already made, but will not begin to affect its balances until a number of years out. Many of these, Christ said, cannot be included on a traditional accounting balance sheet.

By creating a two-page, four-section record sheet, Christ said the city’s financial challenges become much easier to see. By this method, the city is actually $60 million in the hole, not $148 million in the black.

“I suggested that maybe we don’t know where the relevant numbers are,” Christ said. “So I tried to migrate numbers onto two sheets of paper.”

Even though many of the problematic costs that Christ lists on his balance sheet are inexact future estimates, they are no less of a reality than the more concrete, book-entry items, he warned.

“What I would like you to recognize is that these are real expenses,” Christ said. “They deserve to be there, because they’re real.”

For instance, one of the city’s major continuing expenses is the maintenance and repair of roads, drainage systems and beach infrastructure. But because these things are paid for as they come up, future needs are not part of the city’s balance sheet. However, Christ’s experimental tallies include the next 10 years of such work as a “noncurrent liability,” estimated to the tune of $54 million.

The economic picture is further skewed, Christ said, because what the city has already accrued on an annual basis in terms of infrastructure is listed in its assets. The town’s Annual Comprehensive Financial Report tallies a total of $198.5 million in capital assets. But this use of accrual accounting, Christ said, gives the false impression that these are available assets that can be used to leverage the city’s expense.

In reality, the vast majority of the figure consists of buildings and machinery, most of which is highly specialized and whose value on the open market is grossly overstated. Thus, these assets are listed as “noncurrent.”

The biggest change that Christ desired the council to recognize was the inclusion of future pension and medical costs as noncurrent liabilities, an obligation that Christ estimates to raise the city’s total liability by $218 million over the life of the city’s current workforce.

This is much more of an immediate liability than is typically shown in the pension funds’ value, Christ said, given that 2014 accounting guidelines changes by the Government Accounting Standards Board will affect the smoothing process for pension investments.

Estimated gains or losses of the funds’ value are phased in over five-year periods, to keep the contributions levels from fluctuating wildly. But this also masks, according to the GASB, investment market drops that may not be fully accounted for by the time the fund money is needed to pay for retirements.

With a large percentage of Ocean City’s workforce nearing retirement age, the city may be paying out of a pot whose paper value is overstated.

“I’m trying to capture the commitments you’ve made that go beyond just a year, as far as the liability is concerned,” Christ said.

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