Starting next year, cities and towns throughout Maine and elsewhere in the U.S. are going to start counting money they don’t have.
Specifically, they’ll start totaling tax breaks given with the promise of economic benefits, or tax abatements for the purpose of economic development. The figures will be shared in financial statements completed in 2017.
The new requirement comes from a group you may not have heard of — the Governmental Accounting Standards Board — and ends a long wait for rules that promise to shed more light on how much tax revenue municipalities forgo in the name of jobs and economic returns at the state and local levels.
“The new standards are going to improve quite a bit the disclosures of abatements, especially as it relates to economic development programs,” said Greg Chabot, a public accountant with the Buxton-based RHR Smith and Co., which audits the financial statements of many Maine towns and the state’s unorganized territories.
The standards will help inform a long-running conversation. A 2014 study of Maine’s economic development incentives, to be updated in 2016 and 2018, suggested reforms and found the batch of incentives under the state’s Pine Tree Development Zone program ” is very costly to the state of Maine.”
The report is the most comprehensive and recent look at Maine’s incentive programs, commissioned by the Legislature. But even that review had a problem, which was getting access to regular, annual reports for some incentive programs.
The new regulations promise to deliver regular, annual accounting for incentive programs at the local level, where tax expenditures can be more elusive still than in state budgets.
And there also is a matter of perspective: the new standards call for the incentives to be represented in an annualized figure, allowing them to be compared to other types of annual spending in local budgets. They also require disclosing the commitments made by the party receiving the tax break.
“By having to disclose those economic development abatements that are granted, the taxpayer or reader of the financial statement is able to assess the validity or the value of that as opposed to using those funds for something else,” Chabot said. “There’s never going to be a right answer to something like that, but by fully disclosing that at least people have the information.”
And incentive spending at the local level can be big money. The Maine Center for Public Interest Reporting found last year that 125 towns had tax increment financing districts that were on track to divert about $2.8 billion from local property taxes, with as much as $1.2 billion set to go right back to businesses.
TIF districts can freeze property taxes on a parcel for up to 30 years, on the thinking that higher taxes are no way to encourage investment in a piece of land. The difference between the old tax rate and the rate on the improved land — the “tax increment” — is usually split between the municipality and the business, with the business required to reinvest the money in some way.
The center noted its analysis based on state data likely overestimates that total, as initial TIF agreements and changes are both reported, which may have resulted in double-counting.
The Governmental Accounting Standards Board approved its Statement No. 77 earlier this year, after starting an inquiry in 2008. Throughout, it expressed concern about inconsistency in tax abatement reporting.
“Although many governments offer tax abatements and provide information to the public about them, they do not always provide the information necessary to assess how tax abatements affect their financial position and results of operations, including their ability to raise resources in the future,” the Governmental Accounting Standards Board wrote.
Pola Buckley, Maine’s state auditor, said she was pleased when she read the new standard.
“I’m always in favor of public disclosure especially when there’s lost tax revenue,” she said.
What’s the benefit of disclosure? Greg LeRoy, head of the national economic development incentive watchdog group Good Jobs First that advocated for stricter Governmental Accounting Standards Board rules, said “having more eyes on the store” creates a public benefit.
“States and cities spend an estimated $70 billion a year for economic development, most of it through tax expenditures,” LeRoy said in an August news release. “But we could only estimate because [the Governmental Accounting Standards Board] has never before called for standardized reporting.”
The group had called for more detail in the standard, showing company-level data or how many separate deals were involved in a given abatement program. The rule states a government can provide the information individually or aggregated.
At the national level, LeRoy said his group is still trying to figure out how much of a challenge it will be to mash together this information, included in the notes of comprehensive annual financial reports — or CAFRs — for municipalities.
“We’re sitting here trying to figure that out, with more than 90,000 local bodies of government,” LeRoy said. “We’re internally debating what the smart model is and we’re trying to answer these questions.”
And there are questions at the local level, too. Within the confines of the new rule, Chabot said there is some latitude for the preparer about what to include, but he said programs such as tax increment financing districts are on the list.
“I think the big impact is going to be on municipalities that have tax increment financing districts,” Chabot said.
The rule specifically calls for disclosure of any reduction in tax revenue in which the individual or entity getting the tax break “promises to take specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or citizens of those governments.”
Those agreements, it said, can be in writing or “implicitly understood,” and may not be legally enforceable.
The rule does not name programs fitting this bill, stating that “a transaction’s substance, not its form or title” determines whether it’s subject to disclosure. That includes such agreements between a person or entity and another level of government that affects local tax revenue.
While the new standards raise questions in an area of public accounting, Chabot said he doesn’t think the new disclosures should pose a burden for cities and towns.
“All that stuff is public information, it’s just getting it into the financial statements,” Chabot said. “I would see it as a positive, and I don’t say that about all the [Governmental Accounting Standards Board] standards, either.”