SENATE BILL REPORT

SB 5606

BYSenators McDermott, McDonald and Rasmussen; by request of Office of Financial Management

Revising budget and accounting procedures.

Senate Committee on Ways & Means

Senate Hearing Date(s):February 25, 1987

Majority Report:  That Substitute Senate Bill No. 5606 be substituted therefor, and the substitute bill do pass.

      Signed by Senators McDermott, Chairman; Gaspard, Vice Chairman; Bauer, Bluechel, Cantu, Craswell, Deccio, Fleming, Hayner, Kreidler, Lee, Moore, Rasmussen, Talmadge, Vognild, Williams, Wojahn, Zimmerman.

Senate Staff:Gary Benson (786-7441)

                  February 26, 1987

AS REPORTED BY COMMITTEE ON WAYS & MEANS, FEBRUARY 25, 1987

BACKGROUND:

Senate Bill No. 4504, passed in 1984, directed the Office of Financial Management to maintain a comprehensive budgeting, accounting and reporting system in conformance with "generally accepted accounting principles" (GAAP).  The Governor's budget document was to be in conformance with GAAP, commencing with the 1987-89 biennium.

"Generally accepted accounting principles" refers to a set of highly detailed standards for accounting and financial reporting established at the national level.  Accountants recognize GAAP as the authoritative standard for the profession.  The basic functions to which GAAP's standards will be applicable in Washington State are financial reporting, accounting and budgeting.  While GAAP was mandated in 1984, not all state laws were amended at that time to be in conformance with GAAP.

Historically, the state operating budget was based on a "modified cash" accounting approach.  Appropriations were made for a two-year period (e.g., July 1, 1985 through June 30, 1987).  State agencies have a 25th month (e.g., July 1987) to pay bills or debts incurred in a prior fiscal year.  For debts incurred in the biennium that were not billed or paid by the close of the 25th month, it was necessary to reappropriate the funds to pay the bills in the next biennium. (This occurred predominantly in Department of Social and Health Services.)

For several major revenue sources (e.g., sales tax and B&O tax), money collected from July 11, 1985 through July 10, 1987 was counted as if collected during the 1985-87 biennium.  This is called the "ten-day chargeback".  Prior to this biennium the collection period ran from August 11 through August 10 two years later.  The July 11 through August 10 period was characterized as the "25th month".  This practice was ended during the 1983-85 biennium.  For other revenue sources, state agencies still have one month after the close of a biennium to close their books.  For example, the revenues from the motor vehicle excise tax collected by counties in June and remitted to the Department of Licensing in July after the close of a biennium, are counted as if collected during the previous biennium.

GAAP recognizes "pure cash" and accruals.  "Pure cash" are actual disbursements made or revenues in hand within a period certain (e.g., July 1 through June 30); accruals are debts that were incurred during the period certain for which payment has not been yet made, and also taxes due that can be reasonably forecasted to be collected within a time certain (GAAP allows different time periods for different taxes.).  Thus, under GAAP there is no need to reappropriate agency funds for items that were incurred, but for which payment was not made during the biennium.  The initial appropriation is sufficient.  Under GAAP the "ten-day chargeback" is not recognized, only cash in hand by the end of the biennium, plus forecasted accruals, would be counted.  Motor vehicle excise tax money collected by a county in June and remitted to the state in July would be treated as an accrual, not cash.

SUMMARY:

The original bill was not considered by the Committee.

EFFECT OF PROPOSED SUBSTITUTE:

Definitions, allotment reduction procedures, revenue collections and revenue forecasts are brought into compliance with GAAP.  The GAAP statements to be used by the Office of Financial Management (OFM) are to be published by OFM in the Accounting Procedures Manual.  The Governor's budget proposal is to be based on estimated cash receipts.  Allotment reductions are to be based on estimated cash receipts compared to estimated disbursements to avoid cash deficits.  Cash deficits are when disbursements exceed cash receipts plus beginning cash surpluses.

The ten-day chargeback for several of the Department of Revenue collected taxes is eliminated.

The Economic and Revenue Forecasting Council is to provide revenue estimates in accordance with GAAP (cash receipts plus accrued revenue).

Revenue:    yes

Fiscal Note:      available

Effective Date:August 1, 1987

Senate Committee - Testified: No one