Tackling Long-Term Debt, Accounts Payable, and Accrued Liabilities in Governmental Agencies: Understand the What, How, & Why

LSL Webinar ‘Back to Basics | Lighten Your Year-End Load: Tackle Accounts Payable, Accrued Liabilities, and Long-Term Debt Reconciliations with Ease’ presented by LSL Manager Jayme Lambert, CPA, and Supervisor Monica Fernandez outlined how local government finance departments can start the new fiscal year with ease by staying ahead of the game by addressing challenges proactively.

In case you missed it – here, we guide you through the ‘what, how & why’ of Long-term Debt, Accounts Payable (AP), and Accrued Liabilities to help balance workload throughout the year, improve accuracy, and streamline the year-end process.

No matter if you’re new to this or simply need a quick reminder, you’re welcome to bookmark this post, save the link, or print out the steps for convenient reference in the future.

LONG-TERM DEBT
ACCOUNTS PAYABLE (AP), PAYROLL LIABILITIES, & OTHER LIABILITIES
COMPENSATED ABSENCES

Long-Term Debt

WHAT | Most Common Types of Long-Term Debt + Debt Covenants:

• General Obligation Debt
  • Definition: General obligation (GO) debt is backed by the full faith and credit of the issuing government entity. This means that the government pledges its full taxing power to repay the debt.
    • Municipal Bonds: These are often issued to finance public projects like schools, parks, and infrastructure improvements.
  • Revenue Debt
    • Definition: Revenue debt is secured by specific revenue sources rather than the general taxing power of the issuer. These debts are typically tied to income generated from specific projects or services.
      • Water Revenue Bonds: These bonds are repaid using revenues generated from water utility services.
      • Toll Road Bonds: Issued to finance the construction and maintenance of toll roads, with repayments coming from toll collections.
    • Special Assessment Debt
      • Definition: Special assessment debt is secured by assessments levied on properties that benefit from the specific improvements funded by the debt. These assessments are often related to public works projects that enhance property values in the assessed area.
        • Road Improvement Bonds: Issued to finance road improvements in a specific area, with the debt repaid by assessments on the properties that directly benefit from the improvements.
        • Sewer Assessment Bonds: Used to fund the construction of sewer systems in new or existing developments, with repayments sourced from property assessments in the serviced area.
      • Other Types: Including lines of credit, promissory notes, loans, and financing agreements.
        • Lines of Credit: Similar to a credit card for governments, providing access to funds up to a certain limit to manage cash flow needs.
        • Promissory Notes: Long-term debt instruments where the issuer promises to repay the borrowed amount with interest at a future date.
        • Loans: Traditional borrowing agreements, often from banks or other financial institutions, used for a variety of capital and operational needs.
        • Financing Agreements: These can include lease-purchase agreements, where a government entity leases equipment or property with the option to purchase at the end of the lease term.

Examples of debt covenant requirements:

• Cash reserve requirement
• Insurance policy in lieu of a cash reserve to guarantee payment
• Continuing disclosures
• Arbitrage

HOW | Most Common Types of Long-Term Debt + Debt Covenants:

• Debt proceeds should be recorded in the funds designated by the debt agreement.
• Deferred charges on refunding should be recorded in the same manner as the proceeds.
• As payments become due, debt expenses should be recorded using the same funds designated by the debt agreement.
  • If your Entity’s governing body elected to have the General Fund “cover” another fund’s debt obligation, this should be a transfer between funds. The principal and interest expenses should still be recorded in the same manner as the initial debt proceeds.

WHY | Most Common Types of Long-Term Debt + Debt Covenants:

Understanding debt agreements and covenants is essential for maintaining financial health and avoiding potential pitfalls. These agreements often include specific terms and conditions that must be adhered to, such as financial ratios, reporting requirements, and restrictions on additional borrowing. Failure to comply with these covenants can lead to serious consequences, including penalties, higher interest rates, or even default.

To mitigate these risks, it’s crucial to incorporate compliance checks into your monthly procedures. Don’t wait for the audit request list to remind you; regular monitoring will help you stay ahead and avoid any last-minute surprises.

Accounts Payable, Payroll Liabilities, and Other Liabilities

WHAT | Accounts Payable, Payroll Liabilities, and Other Liabilities

Managing liabilities requires capturing expenditures that apply to the fiscal year but are paid afterward. Reviewing post-year payments ensures services rendered within the fiscal year are accounted for. Regular reconciliation of accounts payable GL accounts to the subledger is crucial.

Accrued amounts related to employee compensation and benefits need careful management. This includes preparing calculations for accrued salaries using payroll distribution reports and ensuring accurate monthly reconciliations for benefits payable. Adjustments for accruals or prepayments at fiscal year-end are necessary for accurate financial reporting.

Managing other liabilities involves preparing schedules or reconciliations for items such as liabilities due to other governments, retention payable, and customer deposits.

HOW | Accounts Payable, Payroll Liabilities, and Other Liabilities

Let’s say you’re closing the books for the month of July, and the A/P ledger shows an ending balance of $150,000. However, when you reconcile this with the General Ledger, it reflects a balance of $148,000 for July. This $2,000 discrepancy suggests that something is off, prompting further investigation. Upon reviewing the transactions in the A/P ledger, you discover that a $2,000 invoice dated for July was accidentally posted to the month of August instead. Because of this mistake, the invoice is missing from July’s A/P ledger, even though it should have been recorded in that period.

To fix this, you adjust the A/P ledger by moving the $2,000 invoice back to the correct period (July). After making this correction, the ending balance in the A/P ledger for July is adjusted down to $148,000, which now matches the General Ledger.

WHY | Accounts Payable, Payroll Liabilities, and Other Liabilities

Regular reconciliations ensure that the financial records are always audit-ready. This not only simplifies the audit process but also demonstrates a commitment to good governance and financial management. By ensuring that all liabilities are accurately recorded, reconciliations provide a true picture of the government’s financial obligations. This information is essential for making informed decisions about budgeting, spending, and resource allocation.

Compensated Absences

WHAT | GASB 101

The Governmental Accounting Standards Board (GASB) is introducing GASB Statement No. 101, which will bring significant changes to how governments recognize and report liabilities associated with compensated absences. The most notable change under GASB 101 is the shift from recognizing only those absences that are likely to be paid at termination, to including those that are “more likely than not” to be used or paid out in the future. This new threshold for liability recognition is set at over 50%, meaning governments will need to estimate liabilities not only for payouts at termination but also for future use of earned time off.

Under the previous standard, liabilities were only recorded for absences that were considered “probable”—essentially, those that were guaranteed to be paid out at the end of employment. GASB 101 lowers this threshold to “more likely than not,” requiring governments to account for absences that have a greater than 50% chance of being used or paid out, based on historical data. This change will likely result in larger reported liabilities on the financial statements.

HOW | GASB 101

To comply with GASB 101, governments will need to make estimates based on their specific policies, historical patterns of leave usage, and current and anticipated eligibility criteria. This will require detailed analysis and, in some cases, significant adjustments to the way compensated absences are tracked and reported. For example, rather than simply disclosing additions and deductions in a footnote, the new requirement is to disclose a net change in liabilities. Furthermore, it is no longer required to specify which funds are typically used to pay out these compensated absences.

While GASB 101 does not mandate the estimation of future pay rates for accrual purposes, it does require the inclusion of salary-related payments, such as the employer’s share of payroll taxes and required contributions to defined contribution plans (like 401k or 457b), but not pensions. The complexity of this new standard largely hinges on gathering accurate underlying data, which will vary depending on each government’s unique circumstances and historical trends.

For instance, under the new standard, the liability for vacation time would remain straightforward—if an employee has earned $600,000 in vacation time, the entire amount is recorded as a liability. However, for sick leave, which may not be paid out at termination, the government must now estimate the likelihood of that time being used in the future. If historical data shows that 50% of sick leave is typically used before termination, then the government would recognize a liability for 50% of the earned sick leave.

WHY | GASB 101

Overall, GASB 101 represents a significant shift in the way governments must approach the accounting for compensated absences, aiming for a more accurate reflection of the financial obligations these absences represent.

Conclusion

Understanding the what, how, and why of long-term debt, accounts payable, and compensated absences is critical for governmental agency finance departments to ensure financial stability, maintain transparency, and uphold public trust. By having a firm grasp on these key financial components, finance departments can effectively manage resources, plan for future obligations, and avoid fiscal pitfalls.

For best practices and key workpapers needed, check out ‘Preparing for Auditors: Best Practices and Key Workpapers for Long-Term Debt, Accounts Payable, and Accrued Liabilities’.