COVID 19 AND THE CARES ACT – THE EFFECT

ON STATE AND LOCAL GOVERNMENTSAGA Phoenix Chapter November 2020

SELECTED STATE SHORTFALLS PER MOODY’S

-50.00% -45.00% -40.00% -35.00% -30.00% -25.00% -20.00% -15.00% -10.00% -5.00% 0.00%

Arizona

California

Colorado

Idaho

Iowa

Minnesota

Nevada

North Dakota

Oklahoma

South Dakota

Texas

Utah

Washington

Moody's Severe Moody's Baseline

Fiscal shock = revenue shortfalls plus

increased spending for public health less

reserves. National average is -9.7% to -

14.8% of 2019 revenues. Shortfall

measured through 2021.

Worst case is Alaska – 66.8%

to -80.6%

Key driver is diversity of

revenue.

ARIZONA TAX REVENUE

ARIZONA TAX REVENUE

TAX REVENUE

• Anticipate state and local sales and income

tax to decrease

• Property tax

• Property values decrease – little

immediate effect on revenue

• There is little immediate correlation related

to drop in home prices vs. assessments

• Great recession

• property values decreased

• assessments increased

• potentially see an affected property

tax revenue 2-3 years later

BALANCING THE BUDGET

• Culture of Frugality• Agree to look at programs

• Delay or cancel non-critical projects

• Delay or cancel programs or events that are low priority

• Cut back on office equipment – especially those that are considered perks

• Delay or end the replacement of vehicles

• Publicly acknowledge and celebrate people who find ways to cut costs

BALANCING THE BUDGET• Securing financial position

• Cash flow forecasting and monitoring

• Control system

• Identify sources of liquidity

• Be data-driven and Results-Oriented

• Make managers manage

• Give timely accurate and understandable

information about spending

• Help departments manage unexpected

and unavoidable spending

• A budget should be formulated in a way

that is data-driven and results-oriented

• Compile key indicators of financial

condition and benchmarking data.

BALANCING THE BUDGET

▪ Control personnel costs

▪ Vacancy control

▪ Monitor and limit overtime use

▪ Address health care costs

▪ Review the use of consultants and

temporary staff

▪ Enhance purchasing practices

▪ Many small opportunities add up

▪ Review ongoing expenditures

▪ Audit routine expenditures

▪ Investigate risk management

practices and workers’

compensation claim patterns

GO ELECTRONIC

• Electronic routing and workflow instead of paper forms

• Look for opportunities within your existing software

• Electronic time sheets

• Electronic forms tools

• eSignatures

• Direct Deposits for payroll

• Electronic payments to vendors

• Accept electronic payments

• Create electronic accounts receivable/billing

BALANCING THE BUDGET

▪ Pooling resources and partnering▪ Cooperate with other governments to achieve economies of scale▪ Pool department resources▪ Look for ways to partner with private organizations and citizens

▪ Better manage capital spending equipment costs and debt▪ Better align capital financing with project schedules▪ Use long-term capital improvement planning to make better near-term decisions▪ Develop an equipment replacement schedule▪ Improve fleet management▪ Review opportunities to refinance debt at lower interest rates

▪ Enhancing revenues▪ Obtain federal and state aid▪ Examine fees for services▪ New taxes with strong connection to a desired service▪ Improving billing and collection methods▪ Audit tax revenue sources

BALANCING THE BUDGET

▪ Cautionary techniques

▪ Wage freeze

▪ Hiring freeze

▪ Reduce hours and pay

▪ Layoffs

▪ Defer and/or cancel capital projects, maintenance or

replacement

▪ Restructure debt

▪ Small and/or temporary across-the-board budget cuts

▪ Centralize financial management and human resources

activities

▪ Outsource services

▪ Divest

▪ Better return on idle cash

BALANCING THE BUDGET

▪ Inadvisable Treatments▪ Underfund accrued liabilities like pensions

▪ Pension obligation bonds

▪ Default on debt

▪ Shift operational costs into capital budgets

▪ Dilute/dismantle internal controls

▪ Use accounting manipulations

▪ Have an asset “fire sale”

GOVERNMENTS HAVE A HUGE OPPORTUNITY TO MONETIZE

ASSETS…IF THE TRANSACTION IS RIGHT

• Underutilized property can be leased (office space, cell tower space)

• Using historically low interest rates:• Public – private partnerships can be engaged for capital projects for

horizontal or vertical infrastructure and other revenue generating property • But has to make economic sense

• Consider going ‘green’

• Shared services could also work

• Sale / leasebacks are common – but may not make economic sense

• Consideration before such opportunities• Laws, regulations, grant agreements

• Stability of revenue source

• Financial viability / breakeven analysis

• Political fallout

• ‘One-time’ solutions vs. long-term solutions

CONSIDER WHERE ASSETS CAN BE TURNED INTO RESOURCES

Common Assets Possibilities

Land Solar panels, low income housing, income producing agriculture, cellular

Infrastructure Public-private partnerships, asset sales

Buildings Solar panels, sale / leaseback, leasing of underutilized space, cellular,

public-private partnerships

Furniture /

equipment

Auctions of underutilized property / equipment

POTENTIAL CONSIDERATIONS FOR CASH FLOW

• Fee revenue impact will vary based on type of fee• Building permit revenue may be greatly slowed based on level of

construction

• Parking metering may be suspended

• Speeding tickets may still occur

• Convention centers / stadiums…well…

• Utility revenue• Depends on jurisdiction as some governors have waived shutoffs or late fees

• In some ways, revenue could not be heavily impacted due to essential nature

or customers may want to negotiate level payments

• Sales taxation, hotel / motel and other discretionary could see

multiple years of correction

COVID-19 GASB

COVID AND FINANCIAL

REPORTING

• USE GASB’s FREE Toolbox on their

webpage – content on:• Discontinued operations

• Contingencies

• Debt restructuring

• Disposals of operations /

combinations

• Extraordinary / special items

• Fair value measurement

• Going Concern

• MD&A

• Property taxes

• Revenue and Expense Recognition

• Subsequent events

• Termination benefits

MD&A may be your government’s

most important source of

information to governance on

COVID!!

WHAT’S IN THE GASB’S TECHNICAL

BULLETIN – ACCOUNTING AND FINANCIAL REPORTING ISSUES RELATED TO THE CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT (CARES ACT) OF 2020 AND CORONAVIRUS DISEASES?(2020-1)

6 QUESTIONS ON CARES ACT AND COVID-19

1. Are resources received from the Coronavirus Relief Fund (CRF) subject to

eligibility requirements or to purpose restrictions? When should those resources

be recognized as revenue?

• To receive CRF - must have eligible expenditures as identified by US Treasury –

voluntary nonexchange transaction• Resources received are liabilities until eligibility requirements are met, then becomes

revenue [GASB Cod. Sec. N50 (GASB-33, as amended by GASB-65)]

2. Provider Relief Fund (PRF) can be used to address healthcare entities loss of

revenue. Should loss of revenue be considered an eligibility requirement?

• Yes – same revenue recognition provisions as Q&A 1.

3. If amendments are passed to the CARES Act after year end, but prior to

issuance of financial statements, should the government reconsider recognition?

• No – doesn’t meet the test for a subsequent event (see previous). Just note disclosure

if material.

6 QUESTIONS ON CARES ACT AND COVID-19

4. A governmental entity receives a PPP. The entity determines the loan will be

forgiven next year. Should the governmental entity report the loan as a

liability?• Yes. It’s a liability until legally released from the debt [GASB Cod. Sec. N30 (GASB-70)]

5. Should the PRF, the Higher Education Emergency Relief Fund (HEERF), CARES Act

Airport Grants and FTA Transit Grants be reported as nonoperating revenues in

enterprise funds (business-type activities)?• Yes, except the resources provided that are representative of a contract for services,

which would be in the PRF’s uninsured program – payments for care

6. Should the outflows to slow the spread of COVID or the implementation of

‘stay-at-home’ orders be extraordinary items?• No – doesn’t match the provisions of extraordinary items, nor special items. Viruses are

not unusual nor infrequent.

• Technical Bulletin effective immediately – Category B GAAP

GASB-95 TO THE RESCUE!

• GASB-95 Postponement of the Effective Dates of Certain

Authoritative Guidance:

• Intended to provide relief due to the impact of COVID-19.

• One year delay on GASB Statement Nos. 83 – 93 with related

implementation guidance.

• 18 month delay on GASB-87 and related implementation guide:

• Minor problem in GASB Implementation Guide Update 2020 with GASB-

87 issuance date may be fixed in next year’s Implementation Guide

Update

OUR PLANNING CALENDAR PRIOR TO GASB-95

Dates Beginning After GASB Pronouncements

June 15, 2018 GASB-83, Certain

Asset Retirement

Obligations

GASB-88, Certain

Disclosures Related to

Debt, Including Direct

Borrowings and Direct

Placements

Implementation

Guide 2018-1

December 15, 2018 GASB-84, Fiduciary

Activities

GASB-90, Majority

Equity Interests

Implementation

Guide 2019-2

June 15, 2019 Implementation

Guide 2019-1

December 15, 2019 GASB-87, Leases GASB-89, Accounting

for Interest Costs…

Implementation

Guide 2019-3

June 15, 2020 GASB-92, Omnibus

(most provisions)

GASB-93, Replacement

of Interbank Offered

Rates (most provisions)

December 15, 2020 GASB-91, Conduit

Debt Obligations

OUR NEW PLANNING CALENDAR AFTER GASB-95

Dates Beginning After GASB Pronouncements

June 15, 2019 GASB-83, Certain

Asset Retirement

Obligations

GASB-88, Certain

Disclosures Related to

Debt, Including Direct

Borrowings and Direct

Placements

Implementation

Guide 2018-1

December 15, 2019 GASB-84, Fiduciary

Activities

GASB-90, Majority

Equity Interests

Implementation

Guide 2019-2

June 15, 2020 Implementation Guide

2019-1

December 15, 2020 GASB-89, Accounting

for Interest Costs…

June 15, 2021 GASB-87, Leases AND

Implementation Guide

2019-3

GASB-92, Omnibus

(most provisions)

GASB-93,

Replacement of

Interbank Offered

Rates (most

provisions)

December 15, 2021 GASB-91, Conduit

Debt Obligations

ADDITIONAL…

• Delays already included in:

• GASB Statement No. 94, Public-Private and Public-Public Partnerships and Availability

Payment Arrangements

• GASB Statement No. 96, Subscription-Based Information Technology Arrangements

• Both - fiscal years beginning after June 15, 2022

• Implementation Guide Update 2020-1:

• Most dates for periods beginning after June 15, 2021.

• Leases dates (problem) currently beginning after December 15, 2021.

• Deferral of IGU 2019-2 questions 4.3, 4.5 and 4.6 immediate (but stay tuned):

• Three questions related to potential fiduciary component unit relationships.

WHAT TO DO?

• If you have not finalized implementation of GASB-83 and 88, now’s the time.

• If you have already implemented GASB-84 –GREAT, you’re ahead:

• Might be a good idea to get going on GASB-87.

• If you have the resources, keep going on original dates:

• Will benefit you in the years to come with:

• Financial reporting model improvements.

• Revenue and expense recognition.

• Do NOT implement GASB pronouncements piecemeal:

• Include all related guidance, including Implementation Guide applicable questions:

• Implementation Guide questions are authoritative.

COVID-19

COMPLIANCE

SUPPLEMENT

COVID-19 FUNDING OVERVIEW

• Coronavirus Preparedness and Response

Supplemental Appropriations Act.

• Families First Coronavirus Response Act.

• Coronavirus Aid, Relief, and Economic Security

Act (CARES Act).

• At least 20 new programs.

• Many programs received supplemental funding.

• Many have significant flexibilities and waivers:

• Communicated individually by grant or federal

agency.

• Refer to M-20-21Appendix A handout (only

current as of May 21, 2020 but a good place to

start and includes ~150 programs).

LARGEST COVID-19 FUNDING

• NOT Subject to Single Audit

• DOES NOT go on SEFA

• Double dipping risk still applies

Paycheck Protection Program (> $600B), CFDA 59.073

• Subject to Single Audit

• Includes For-Profits AND other entities that bill Medicare/Medicaid (i.e. NPO’s and Gov’s as well)

• Significant SEFA recognition questions

Provider Relief Fund ($175B), CFDA 93.498

• Subject to Single Audit

• Significant judgment involved, many FAQ’s and updates

Coronavirus Relief Fund (CRF - $150B), CFDA 21.019

• Subject to Single Audit

• Many individual programs denoted by various letters – considered 1 program for major program determination

Education Stabilization Fund ($30.75B), CFDA 84.425

2020 COMPLIANCE SUPPLEMENT – 1ST RELEASE

• Regular updates of parts (not related to COVID-19).

• 6-requirement mandate maintained, some changes:

• Review each of your programs as appropriate.

• ONLY for non COVID-19 funds, more discussion on this

later.

• Added programs:

• 14.275, 21.016, 93.356, 93.686.

• Removed Part 3-1 (Pre Uniform Guidance):

• Also removed DOT Cross-Cutting, except for wage rate

requirements (Davis Bacon).

• Errors noted in DOT programs that still reference past

cross-cutting requirements.

• Appendix VII – Audit Advisories:

• Includes COVID-19 considerations among others.

ADVISORIES – COVID-

19

COVID-19 IDENTIFICATION• MUST identify awards as COVID-19 on

SEFA and DCF (example to follow).

• Should be listed in the grant awards BUT:

• Due to the immediacy, cash was sent without application or assistance listing (there may not be a grant award in some cases with the Federal agency other than a listing of terms and conditions).

• Nonfederal entity was required to agree to terms and conditions or return funds.

• There should always be grant awards with the State (if acting as the pass-through entity):

• State was required to identify non-COVID-19 vs COVID-19 in the subawards.

• When in doubt (specifically for programs listed in M-20-21), inquire of the grantor.

COVID-19 SEFA EXAMPLE

• Required for both new and existing programs.

• On a separate line by CFDA with COVID-19 as the prefix.

• Likely some entities will include with an added letter in the CFDA or

grant award as well (does not appear to be prohibited, disclosure

recommended in these instances).

Example:

COVID-19 Temporary Assistance for Needy Families 93.558 $1,000,000

Temporary Assistance for Needy Families 93.558 $3,000,000

Total Temporary Assistance for Needy Families $4,000,000

COVID-19 DATA COLLECTION FORM EXAMPLE

WHAT ABOUT AUDIT

REQUIREMENTS? 2ND

RELEASE?Expected New Programs (non-authoritative list):

16.034 Coronavirus Emergency Supplemental ($850M)

21.019 Coronavirus Relief Fund ($150B)

32.006 Telehealth Program ($200M)

84.425 Education Stabilization Fund ($30B)

93.498 Provider Relief Program ($175B)

93.461 Uninsured Testing Portal ($2B)

93.697 Rural Health Clinic Testing ($225M)

WHAT ABOUT AUDIT REQUIREMENTS? 2ND RELEASE?

Expected Existing Programs with Supplemental Guidance (non-

authoritative list):

14.218 Community Development Block Grant ($5B)

14.231 Emergency Solutions Grant Program, Homelessness Assist. ($4B)

14.862 Indian Community Dev Block Grant ($100M)

93.153 Coordinated Services and Access to Research for Women, Infants, Children,

and Youth ($5M)

93.914 HIV Emergency Relief Project Grants ($26M)

93.917 HIV Care Formula Grants ($24.5M)

93.918 Grants to Provide Outpatient Early Intervention Services with Respect to HIV

Disease ($30M)

WHAT ABOUT AUDIT REQUIREMENTS? 2ND RELEASE?

• Required to evaluate through Part 7, just like normal.

What about all the other COVID-19 programs?

• DOES NOT APPLY to COVID-19 funding, including the supplemental funds on existing programs.

• Required to assess direct and material determinations on COVID-19 funding (just like we used to before the 6 requirement mandate).

6 requirement

mandate

REQUIREMENT BREAKDOWN

• Documentation is more important than ever – could have the

following:

• Pre-COVID, regular funding, subject to 6 requirement mandate.

• During COVID, regular funding with waivers/flexibilities.

• During COVID, supplemental funding, subject to different requirements all

together.

• Advisories and alerts issued after the funds were advanced but still required.

• Findings must include COVID-19 identification, if applicable

• Consider carefully:

• Internal controls, separate populations and sample sizes.

• Waivers, flexibilities, FAQ’s, and audit alerts/advisories – check federal agency

website for your major programs

• Direct and material determinations.

AS AN EXAMPLE – DOL’S UNEMPLOYMENT DIRECTIVES

RESPONSE

• General lack of clarity on many of these programs (for example):

• CRF has significant open questions regarding requirements.

• PRF has significant questions on lost revenue and SEFA recognition.

• Some States are still playing catch up and awarding funds backdated.

• Due to this uncertainty/audit risk:

• Non-federal entities should not issue SA’s with COVID-19 major programs

until receive the addendum (should not means do not).

• At this time – there is no indication that COVID-19 programs will be

presumed to be high-risk:

• Engagement teams need to evaluate this carefully during major program

determination.

• May need to dual date.

SEFA RECOGNITION

• Expected guidance from the GAQC to come shortly (unlikely that OMB will issue any guidance - expected high level summary from GAQC as follows):

• Requirements to include expenditures on the SEFA (for FY20):

• Allowable FY20 expenditures that have been identified and applied to the grant regardless of when they were identified.

• Grant award signed and entered into prior to 6/30/20.

• Some direct funding may not have a grant award, but see when the presumptive terms and conditions were communicated with cash advanced.

• Expected many pass-through funds from State will fall to FY21 due to timing on the subawards.

• Revenue recognition does not equal SEFA recognition

• Notes the SEFA for PRF – lost revenue is a significant estimate

• HC team will be communicating more shortly

• Lost revenue tool and use of a specialist

SUBRECIPIENT

• Identify subrecipients

• Provide subgrant information

• Assess risk for each subrecipient

• Monitor subrecipients

• Review required reports

• Develop data collection system

UNIFORM GUIDANCE

CHANGES

EFFECTIVE DATES

• All awards issued after

November 12, 2020 (current

award recipients, including

CARES Act recipients will follow

pre-November 12 guidance).

SUMMARY OF CHANGES

Expanded applicability of Federal Funding

Accountability and Transparency Act (FFATA)

reporting to include other financial assistance

such as loans, insurance, contributions, and

direct appropriations.

Removed paragraph references for each

definition. Now all 2 CFR 200.1

Had to clarify again!! Must indicates

requirement and should/may is best practice.

Federal award performance goals are now

a required term and condition.

SUMMARY OF CHANGES

2 CFR 200.216:

• New regulation, prohibition on certain telecommunications and video surveillance services or equipment.

• No procuring, extending, renewing contracts for applicable equipment/services:

• Huawei Technologies Company or ZTE Corporation (or any subsidiary of affiliates).

• Hytera Communications Corporation, Hangzhou Hikvision Digital Technology, Dahua Technology Company.

• Others that Secretary of Defense and FBI believe to be an entity owned or controlled by the government of a covered foreign country.

• Must transition away from any current contracts with these entities.

SUMMARY OF CHANGES

2 CFR 200.318:

• General procurement standards

were re-worded to emphasize

an entity must have and use its

own procedures.

• They must conform to federal

procurement.

• They must also conform with

applicable state, local, or tribal

laws.

• Clarified use purchasing

alliances (or other similar cost

sharing strategies)

SUMMARY OF CHANGES2 CFR 200.320 – Micro purchase threshold.

• Entity can determine its own appropriate threshold based on internal controls, risk, and documented procedures (must be consistent with applicable laws).

• Now tied directly into FAR (this changes frequently), currently $10K.

• Can increase above FAR and up to $50K if any of the following are met (must be documented, certified, and identified with justification):

• The entity is a low risk auditee (based on latest single audit);

• An annual internal institutional risk assessment is performed to identify, mitigate, and manage financial risks; or

• For public institutions, a higher threshold consistent with State law.

• Can increase above $50,000 but must be approved by cognizant agency for indirect costs.

SUMMARY OF CHANGES

Updated pass-through entities regulations

Direct Costs

“If directly related to a specific award,

certain costs that otherwise would be

treated as indirect costs may also be

considered direct costs. Examples include

extraordinary utility consumption, the cost

of materials and supplied from stock or

services rendered by specialized facilities,

program evaluation costs, or other

institutional operations.

This presentation is presented with the understanding that the information contained does not constitute legal, accounting or other professional advice. It is not intended to

be responsive to any individual situation or concerns, as the contents of this presentation are intended for general information purposes only. Viewers are urged not to act

upon the information contained in this presentation without first consulting competent legal, accounting or other professional advice regarding implications of a particular

factual situation. Questions and additional information can be submitted to your Eide Bailly representative, or to the presenter of this session.

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