T he Governmental AccountingStandards Board (GASB) issuedStatement Number 40,Deposits and Investment Risk

Disclosures in March of 2003, whichamends Statement Number 3,Deposits with Financial Institutions,Investments (including RepurchaseAgreements), and Reverse RepurchaseAgreements. This statement modifiesdisclosures for credit risk, includingcustodial credit risk, and also adds disclosure requirements for concentra-tions of credit risk, interest rate riskand foreign currency risk, which werenot addressed in Statement No. 3.These expanded disclosure require-ments thus offer a more completepicture of the various risks that invest-ments of state and local governmentsare exposed to. This statement is effective for financial statements for periods beginning after June 15, 2004(i.e., fiscal years ending June 30, 2005and thereafter) and is applicable for all state and local governments. Earlyapplication is encouraged.

General disclosuresStatement No. 40 first addresses

general disclosure principles, includingthe level of detail of disclosures anddeposit and investment policies. As ageneral rule, disclosures should beorganized by investment type (i.e. U.S.Treasury securities, U.S. Agency securi-ties, corporate bonds, etc.) Althoughthe statement specifically states thatdissimilar assets, such as U.S. Treasury

bills and U.S. Treasury strips, shouldnot be combined into one investmenttype, it does not define investmenttype, so professional judgment shouldbe used when categorizing investments.

Disclosures should generally bemade for the primary government,including its blended component units.This is usually sufficient if the govern-ment uses an internal investment pool.If an internal investment pool is notused and one or more funds holdinvestments of one issuer that repre-sents five percent or more of totalinvestments of that fund it may be necessary to make disclosures at thegovernmental and business-type activi-ties, individual major funds, nonmajorfunds in the aggregate, or fiduciaryfund types level. This requirementwould be most applicable for policeand fire pension plans or other singleemployer pension plans that arereported as part of the primary government as fiduciary funds.

Governments should also disclosetheir deposit and investment policiesrelated to the various risks required tobe disclosed by Statement No. 40. Ifno policy is adopted related to theserisks, then that fact should be disclosed.Since Illinois Compiled Statutes (ILCS)require investment policies for almostall units of government in Illinois andtheir component units, failure to havean investment policy in place couldrequire disclosure of a violation offinance related legal provisions.

Illinois government finance online at the all-new www.igfoa.org

@ Jobline: Browse through current job list-ings, find out how to post your own,and view past job listings in thearchives

@ Legislative Update: Read about thelatest legislation affecting local govern-ments in Illinois, and see commentsfrom the IGFOA Legislative Committee

@ Link to the online directory

@ And much, much more!

GASB Statement Number 40, Depositsand Investment Risk DisclosuresBy James R. Savio, CPA, Sikich Gardner & Co, LLP

The IllinoisGovernmentFinance

The Newslet ter of the I l l i no is Government F inance Off i cers Assoc iat ion • Spr ing 2004

Leader

continued on page 8

In this issueGASB 42 ........................................................2

IML on ethics statute ......................................2

Chicago Metro gathers Toys for Tots ................3

Customer service ............................................3

The case for a CAFR ........................................3

Beware Treasury Circular 230..........................4

Non-referendum funds pay alternative bonds ..5

New standard addresses fraud risk ..................5

Impact fees spur economic growth ..................6

Tax objections and appeals ............................10

Membership directory online ........................11

Calendar ......................................................12

Illinois Government Finance Leader is the membership publi-cation of the Illinois Government Finance Officers Association,suite 202 One S. Cass Avenue, Westmont, IL 60559

For more information, visit www.igfoa.org online, phone 630-663-0019, fax 630-663-0162 or email toinfo@igfoa.org.

GASB NEWS

ETHICS

GASB issues statement on asset impairment and insurance recoveries

T he Governmental AccountingStandards Board (GASB) haspublished Statement No. 42,Accounting and Financial

Reporting for Impairment of CapitalAssets and for Insurance Recoveries.It requires governments to report theeffects of capital asset impairment intheir financial statements when itoccurs. The guidance also enhancescomparability of financial statementsby requiring all governments toaccount for insurance recoveries in thesame manner.

In reflecting on the impact ofStatement 42, GASB Project ManagerRoberta E. Reese stated, “Because capital assets are long-lived, they areexposed to various risks, including therisk of diminished service utility that is caused by unexpected events or cir-cumstances. This statement will ensurethat government financial statements

report this loss of service utility whenit occurs, rather than over the remaininguseful life of the capital asset.”

The statement requires govern-ments to evaluate major eventsaffecting capital assets to determinewhether they are impaired. Those eventsinclude physical damage, changes in legal or environmental factors, technological changes or obsolescence,changes in manner or duration of useand construction stoppage.

Impairment will be measuredusing methods that are designed to isolate the cost of the capital asset’sservice capacity that has been renderedunusable by impairment.

The guidance includes several disclosure requirements that will assistusers of financial statements in under-standing the nature and impact ofimpairment of capital assets.

2

Disclosures are required for impairmentlosses that are not evident from theface of the financial statements, forimpaired capital assets that are idleand for insurance recoveries that are not evident from the face of thefinancial statements.

During the research and develop-ment of this statement, the GASBbenefited from collaboration with the Public Sector Committee of theInternational Federation of Accountantsas they also pursued development ofstandards for impairment of assets.

Statement 42 is effective forfiscal years beginning after December15, 2004. The statement may beordered by telephoning the GASBOrder Department at 800-748-0659.

Released by the Governmental Accounting StandardsBoard

T he General Assembly andGovernor Blagojevich agreed onseveral bills pertaining to ethicslegislation during the fall veto

session. The first bill, HB 3412 (asapproved by the Legislature beforeadjourning last summer), was substan-tially rewritten by the Governor in his amendatory veto. That veto wasconsidered in November during vetosession and was overridden in bothchambers and is now Public Act 93-615 effective November 19, 2003.In addition to this action, during theveto session, the Legislature approveda new ethics package in Senate Bill702. The Governor has signed this leg-islation into law: Public Act 93-617,effective December 9, 2003. Both billscontain language that is applicable tolocal governments.

House Bill 3412 contains manyprovisions concerning state officials

and employees of the state. In HB3412, local governments are coveredby Section 70-5, which requires theadoption of an ordinance no lessrestrictive than Section 5-15 pertainingto prohibited political activities ofemployees during compensated time.The Attorney General’s office is todraft model ordinances pursuant to SB 702 and HB 3412 three monthsafter the effective date of SB 702. Itthen requires local governments toadopt ordinances six months after theeffective date or three months after theAttorney General’s office has completedits work. Senate Bill 702 also rewritesthe State Gift Ban Act in Article 10and original Section 70-5 of HB 3412is amended in SB 702 applying thoserequirements to local governmentswith the same Attorney General’s provisions and same dates for

ordinance passage.

The third provision in effect nowpertaining to ethics is P.A. 92-853,which became effective on August 28,2002. That bill changed the StateGift Ban Act to define $100 as thenominal value of gifts in a calendaryear from a prohibited source (which is the same dollar amount as SB 702).In addition, P.A. 92-853 contains anamendment to the Criminal Codeon solicitation misconduct by localgovernment employees from a personengaged in a business or activity overwhich the person has regulatory authority.

The provisions in these new ethicsbills must be reviewed carefully andcertain actions must be taken by localgovernments to be in compliance.

From the Illinois Municipal League, http://www.iml.org

IML explains ethics statute

3

MEMBER NEWS

The Chicago Metro Chapter raised over $850—plus oodles of toys— for the Marine Corps’ Toys for Tots at theDecember 2003 Holiday luncheon.

Shown with representatives of the DuPage County Marine Corps League are at left, Jeff Martynowicz, ChicagoMetro’s Second Vice President, and Jon Batek, Chicago Metro’s President, third from left.

For information on Chapter meetings and events, visit www.igfoa.org.

Making the casefor a CAFR

E ric Dubrowski, Finance Director for theCity of Galena, reports that the followingone-minute synopsis was effective inconvincing the City of Galena Council

to authorize an audit contract including prepa-ration of a CAFR:

“A comprehensive annual financial report(CAFR) is a form of fiscal reporting that is performed in the spirit of full disclosure ofinformation. This information is a combinationof financial statements, demographics and sta-tistics. It is a way in which pre-existing datathat is currently scattered across departments in City Hall can be centralized into a usefulformat. This information is not only a refer-ence for the past fiscal year, but a historicalguide over the last 10 years. This allows forelected officials and city staff to make moreinformed decisions by being aware of datafrom past years. It allows for a macro view ofthe city’s finances and overall development asopposed to a micro level snapshot of the samedata. This form of financial reporting is com-pleted in a standardized format that follows therules and recommendations set forth by theGovernment Finances Officer’s Association. A CAFR is a progressive approach to govern-mental financial reporting that allows agovernment unit to obtain a more in depthlevel of data collection and analysis when com-pared to a standard reconciliation of financialstatements.”

Customer service is all about respondingCustomer service is all about how one responds to malfunctions in the

system. Take, for example, the following notice Village of Northbrook PayrollClerk Barb Solvig included with paychecks in December 2003 when direct depositwent awry:

Save the date forthe 2004 IGFOAAnnual Conference!Be sure to be in Moline September27–29 for the latest in Illinois government finance!

Find the agenda, programs, registra-tion & more at www.igfoa.orgbeginning May 1.

IMPORTANTDue to system inaccuracies, we have not deposited

your paycheck. Please note that this check must be

taken to your bank and deposited.

If this creates a hardship for you, please call me at

centrex 5319. I will do everything possible to help.

We examined every possible option to ensure a

timely and accurate paycheck. We have made every

effort to make sure funds are available and opted to

issue checks instead of direct deposit so that funds are

not delayed. if you encounter any problems, let me

know.

I apologize for any inconvenience and hope that

you have a happy holiday season.

Barb SolvigPayroll ClerkFinance Department

T o “regulate the practice of repre-sentatives of persons before theDepartment of the Treasury,” theU.S. Treasury long ago issued

rules of professional conduct governingthe practice of attorneys, CPAs, actu-aries and others before the InternalRevenue Service in Treasury Circular230. Those rules provide standards for giving “tax shelter opinions.”Circular 230 specifically excludedmunicipal bonds from its provisions. On December 30, 2003, proposedamendments to Circular 230 wereissued in the Federal Register con-taining a definition of “tax shelter”that did not exclude municipal bonds.In its current form, the proposedchanges to Circular 230 will takeeffect “on the date that final regula-tions are published in the FederalRegister.” No one can accurately predict that date.

This memorandum will brieflydiscuss how the changes in Circular230 will likely affect opinions of bondcounsel from the perspective of issuersand underwriters if adopted in its cur-rent form as well as some short-termand long-term consequences of itsapplication to municipal bonds.

It should be no surprise that themunicipal bond industry has objectedto the new rules. In any case, theTreasury has been asked to change theeffective date from date of publicationof the new rules to some reasonabletime after that so that the market canreact in a rational way to its adoption.

Changes in bond opinions as a result of Circular 2301. The opinion of bond counsel (and

the portions of the official state-ment describing it) will be longerand more detailed. A tax shelteropinion must (a) identify and con-sider all relevant facts, (b) relatethe applicable law to the relevantfacts, and (c) provide an overallconclusion.

2. The opinion of bond counsel mustcontain certain disclosures. A taxshelter opinion must disclose that(a) it may not be sufficient for a

taxpayer to use for the purpose ofavoiding penalties under section6662(d) of the Internal RevenueCode and (b) taxpayers shouldseek advice from their own taxadvisors.

3. The opinion of bond counsel mustconsider and discuss all “materialfederal tax issues.” A “materialfederal tax issue” is defined as a“federal tax issue for which theInternal Revenue Service has areasonable basis for a successfulchallenge and the resolution ofwhich could have a significantimpact, whether beneficial oradverse and under any reasonablyforeseeable circumstance, on theFederal tax treatment of a tax-payer’s tax shelter item or items.”An important issue is whether, ina particular fact situation inwhich bond counsel would previously have rendered the traditional unqualified opinion as to the tax-exempt status of the interest on the bonds, bondcounsel will be able to concludethat the IRS has no “reasonablebasis for a successful challenge.”

4. If there are material federal taxissues discussed, bond counselmust state its conclusion as to thelikelihood that “the taxpayer willprevail on the merits with respectto each material federal taxissue.” The opinion must describethe reasons for its conclusion,including the facts and analysissupporting the conclusion. Howthe market will view an opinionthat discusses material federal taxissues, even if an unqualifiedopinion is rendered (i.e. “intereston the bonds is exempt”), is any-body’s guess.

Short-term issuesThe immediate problem occurs

when the new rules become effectiveafter the pricing of a deal but beforethe closing. In the usual underwrittentransaction, the form of bond counselopinion (a typical unqualified opinion)is attached to or described in the offi-cial statement, and the bond purchase

agreement provides that the delivery ofthat opinion is a condition to theunderwriter’s obligation to purchasethe bonds. If the new rules becomeeffective prior to closing, depending onthe actual content of the new rules andhow bond counsel answers some of thequestions raised in this memorandum,bond counsel may have to revise itsopinion. This could delay the closing.The underwriter would then need todetermine whether the opinion hasbeen changed in a material way so as to require the recirculation of theofficial statement (a “sticker”) andpotentially, a repricing of the bonds.

There have been some attempts todraft bond purchase agreements insuch a way that the underwriter wouldbe obligated to purchase the bondseven with a new form of opinionrequired by Circular 230 so long asbond counsel ultimately concludes thatthe bonds are tax exempt. Thisrequires specific disclosure in the offi-cial statement. We believe that thebetter approach is the one described inthe preceding paragraph which essen-tially permits the market to deal withthe situation in the normal course.

Long-term issuesIssuers, underwriters, credit

enhancers and other participants in the municipal market should informthemselves about Circular 230 inpreparation for what may be signifi-cant changes. Increased complexity intransactions caused by the opinion anddisclosure issues discussed above aswell as certain other provisions of pro-posed Circular 230 is likely to resultin higher transaction costs. Bond clos-ings may be delayed if they occur on ornear the effective date of final regula-tions. Practitioners are attempting tounderstand the difference in the stan-dards and necessary procedures forgiving the new style opinion, as com-pared with what was applicable in thepast. No one expects that the newstandards will be any less rigorousthan the old standards.

Reprinted from Chapman and Cutler’s Public Finance TaxUpdate, March 2004

Beware of Treasury Circular 230—Muni bonds as tax shelters

4

5

Non-referendumbonds can be used to pay alternatebonds by Heidi A. Katz, J.D. and Lynda K. Given, J.D.

Districts that use non-referendumgeneral obligation bonds as arevenue source for servicing thedebt on alternate bonds now

have an appeals court decision theymay use as a precedent to defend themselves against corporate taxpayersthat file tax rate objections in suchinstances.

The Illinois Second DistrictAppellate Court’s ruling stems from the case of Commonwealth Edison Co. v. People ex rel. John H.Coffman, County Treasurer and ex officio County Collector ofOgle County.

In that case, CommonwealthEdison argued that the Byron ForestPreserve District improperly used gen-eral obligation bonds to pay the debtservice on alternate bonds used tobuild an 18 hole golf course for OgleCounty residents and other membersof the public.

But the Ogle County Court and,just this spring, the Illinois AppellateCourt, rejected ComEd’s argument,saying that the Byron Forest Preserveacted within its authority as describedin the Local Government DebtReform Act (30 ILCS 350/1 et seq)and the Downstate Forest PreserveDistrict Act (70 ILCS 805/13).

Visit http://www.lib.niu.edu/ipo/ip030914.html for the full text of thearticle, in which the authors review thefacts of the case and theories advancedby Commonwealth Edison in objectingto the district’s tax levies, set forth theappellate court’s rationale for rejectingComEd’s argument, and discuss thedecision’s implications.

Author Heidi A. Katz of Robbins, Schwartz, Nicholas, Lifton &To/for, Ltd., and co-author Lynda K. Given’s colleague DavidT.B. Audley of Chapman and Cutler, LLP, represented theCollector as Special Assistant State’s Attorneys for Ogle Countyin the Coffman appeal.

Reprinted from Illinois Parks and Recreation magazine

A new auditing standard has beendesigned to increase the likeli-hood of finding unidentifiedmaterial fraud. The new standard,

SAS 99 (Statement on Auditing Standards)requires the auditor to identify and assessrisks due to fraud which could result inmaterially misstated financial statements.This new standard is now in effect.

Auditors are guided by professionaljudgment and follow a national set ofauditing rules known as “generallyaccepted auditing standards” (GAAS).No two governmental organizations arealike, and neither is the effort necessaryto render an audit opinion on theirfinancial statements. GAAS help provideconsistency in the audit effort, whichleads to more value for financial state-ment users. GAAS are contained indocuments known as “Statements onAuditing Standards” (SAS), developedby the American Institute of CertifiedPublic Accountants (AICPA).

The auditing standards state thatthe auditor is to obtain reasonableassurance that the financial statementsare free of material misstatement. In thepast, the standards did not distinguishbetween errors and fraud when consid-ering this important goal. Now theauditor must specifically identify andassess risks due to fraud that may resultin materially misstated financial state-ments. (The auditor does not have thesame responsibility for errors or fraudwhich are not material to the financialstatements.) Management is still respon-sible for establishing the appropriatecontrols to prevent, deter, and detect fraud.

SAS 99 outlines the followingprocess to accomplish its objective:1. Discuss, among the audit team, the

client’s risk of fraud in relation tothe financial statements.

2. Obtain information needed to identify risks of material misstatement due to fraud.

3. Identify risks that may result in amaterial misstatement due to fraud.

4. Assess the identified risks aftertaking into account an evaluationof the organization’s antifraud pro-grams and controls.

5. Respond to the results of theassessment.

6. Evaluate audit evidence.7. Communicate to management

about possible fraud.

How does this impact your organ-ization? As auditors, we still have thesame responsibility for detection ofmaterial financial misstatement due tofraud. Now we will be more focusedon how to do that, and are required todocument the seven steps listed above.You will see this in the questions weask. The audit team will bring a newlevel of professional skepticism to theaudit. The new standard will benefityou and the public with financial state-ments that are more useful andaccurate, with less risk of unidentifiedfraud occurring. But even a properlyplanned and completed audit may notdetect a material fraud because decep-tion and concealment are a naturalpart of any fraud. Auditing standardsclearly state that it is management’sresponsibility to design and implementprocedures and controls to prevent,deter, and detect fraud. The new stan-dard should result in an improvedaudit, including an assessment of yourantifraud controls, and reduce the riskof fraud within your organization.

Don Rahn is a partner with Virchow Krause. He can bereached at drahn@virchowkrause.com.

Introducing SAS 99 New standard addresses fraud riskby Don Rahn, CPA

Seminar: SAS 99 Consideration of Fraud in Financial Reports

Thursday, April 29 9:30 – 11:30 am Algonquin Village Hall

SAS 99 requires auditors to follow a more rigorousprocess to assess the risk of fraud. Beginning thisyear, auditors will conduct more in-depth inquiriesand analysis of the entity’s potential for fraud. LindaAbernethy, McGladrey & Pullen, LLP will review thetypes of fraud, auditors’ responsibility to detectfraud, & implications for your upcoming audit.Presented by IGFOA and IMTA.

To register, visit www.igfoa.org/seminars.html oremail info@igfoa.org.

FROM AROUND THE NATION

6

A n unpopular reaction is oftenthe result any time a local gov-ernment attempts to increase its funding of infrastructure by

raising fees, taxes, etc. The implemen-tation or increasing of impact fees is no different. However, while generallyopposed by developers and home-builders, impact fees are typicallysupported by current citizens. That is because impact fees shift the costburden associated with new facilities to new residents. For this and otherreasons, impact fees are a widely usedinfrastructure-funding source that has been opposed by developers as adeterrent to economic growth.

Growth brings to the communityincreased property and sales tax rev-enues, and jobs that further contributeto the demand for government-pro-vided services. Although there aremany who oppose impact fees underthe premise that they limit or restrictgrowth and economic development,there is little empirical or quantitativeevidence to support this conclusion. In fact, there is some evidence thatimpact fees can act as a precursor orimpetus to growth, especially if imple-mented appropriately and with carefulconsideration of their application.

This article provides a summaryof two relatively current research documents on the question of whetherimpact fees deter growth.

Impact fees and economic growthA report by The Milken Institute1

ranked the largest 200 cities and met-ropolitan areas based on economicgrowth. The report does not measurespecific business costs or cost-of-livingcomponents. Instead, it focuses on out-comes such as job creation, wage andsalary levels, and technology growth.

Each year, Milken’s report listsfactors that were associated with citiesthat had strong growth. These factorsinclude: government employment,service-based industries, healthcare

related services, and population-drivengrowth. One can deduce from thisreport the following: if an area has theresources and cultural amenities tomeet the demands of new citizens, thenbusinesses will locate in such areasprovided their employment needs aremet and key resources are available ata reasonable price.

One of the requisites for growth,therefore, is to understand what typesof entities can best be supported by a location, and making the locationattractive by providing the appropriateservices.

In order to assess whether theremay be a correlation between impactfees and growth, a comparison wasmade of impact fees in the top threehighest and lowest ranked cities. The results of these comparisons aresummarized in Table 1. Comparisonsshown in Table 1 include fees forparks and recreation, water, sewer,roads, and schools.

In addition, a compar-ison was made of impact feesfor the three cities that movedup in ranking the most, to thecities that moved down inranking the most. Based onthese results, there appears tobe no clear correlationbetween high impact fees andlow growth, or low impactfees and high growth.Furthermore, discerningwhich characteristics led togrowth is not simple, as onemight expect. The reader isreferred to the Milken reportfor the detailed explanationsthat contribute to a commu-nity’s growth.

The topic of whetherimpact fees impede growthhas also recently beenresearched by the BrookingsInstitute2 which found thatrather than impede growth,impact fees may serve as a

catalyst for growth, or at least do notdeter growth. In their study, 67 coun-ties in Florida were analyzed using aquantitative approach designed to assessthe association of impact fees with jobgrowth. The results indicate that therewas no direct correlation there orimplied cause-and-effect relationship.

Thus, there is little evidence thatimpact fees significantly influence anentity deciding on where to locate. The recent evidence uncovered for this article seems to support this conclusion, and is consistent with the Brookings Institute findings.Specifically, impact fees can send amessage that a community is planningfor and securing the financing of infrastructure to meet the demands of new development.

Impact fees: A vote of confidence for economic growth?by Joel R. Theis and Richard D. Giardina

Table 1: Residential Impact Fees

Category of Growth (1) Fees (2)Top Three in GrowthFayetteville, AK $0Las Vegas, NV $9,043Fort Meyers-Cape Coral, FL $6,805-$10,523

Bottom Three in GrowthFlint, MI $0Youngstown-Warren, OH $0-$2,496Gary, IN $0

Three Most ImprovedSavannah, GA $1,000Des Moines, IA $1,668Newburgh, PA-NY $0

Three Greatest DeclineSanta Cruz-Watsonville, CA $4,556-$31,099Boston, MA 0Portland-Vancouver, OR-WA $5,748-$8,888

(1) As ranked in “Best Performing Cities: Where America’s JobsAre Created,” The Milken Institute, July 2003.

(2) Fees for parks and recreation, water, sewer, roads, and schoolsas tabulated by RGA.

continued next page

7

Where to locateWhat factors do businesses con-

sider when deciding where to locate?A review of the literature and variousnews media suggests that any numberof factors could influence an entity’sdecision to choose a given area or city. Yet, no definitive surveys havebeen uncovered.

High priority characteristics of arelocation or expansion decision mightfocus on proximity to competitors andtransportation, both of which may be ahigher priority than the cost-of-livingor one-time relocation costs. Some ofthe factors entities consider in choosinga location involve infrastructure andassociated services such as those listedin Table 2. The factors influencing arelocation or expansion decision areoften business specific. However, it islikely that any number of the factorslisting in Table 2 would take higherpriority than the impact fees that mightbe paid, but it is difficult to determinewhich ones, if any, consistently rankhigher than the others.

In short, financial timing consid-erations and how businesses balancemany objectives influence their decisionson where to locate. These considera-tions include the current economicenvironment and business activity.

Advantages of impact fees One of the advantages of impact

fees is the credibility and fairnessaspect that can coincide with theprocess associated with developingimpact fees. Fairness can be ascribed toimpact fees by carefully identifying the

facilities that growth will require, andcalculating the fees from reasonablecost estimates so that those paying thefee receive “value” for the promisedservice (e.g., parks, roadways and utili-ties). In contrast, implementing salestaxes or property taxes to finance“growth-related” facilities, often shiftscost responsibility based on factorsother than who the facilities were constructed for (i.e., property value or sale volume).

Credibility is gained with impactfees through a public approval processthat relies on demonstrating how thecosts of growth are determined. Citycouncils and county boards can beshown through a properly conductedimpact fee calculation who pays howmuch and why. Whereas, in the case ofimplementing a sales tax to pay fornew facilities needed to meet growth,only general correlations can be madebetween who pays and who benefitsfrom the facilities. As such, withimpact fees there is a link between costcausation and revenue; links typicallynot found in sales and property taxes.

While it can be difficult as apublic finance director to win favora-bility by marshaling an effort to obtainmore revenue from those viewed asbringing “growth and prosperity” tothe community (i.e., developers andhomebuilders), there are clear advan-tages associated with impact fees.These include:

✒ Impact fees are a one-time pay-ment, not a recurring paymentlike most taxes.

✒ Impact fees are often not notice-able to the end-user (in manyinstances the fee, in part or inwhole, is paid by the land owner,developer or home builder), butwhen they are, they can have clearpurposes and can be supported bya comprehensive impact fee study.

✒ Impact fees are targeted for spe-cific projects, and are restricted to funding those projects from aseparately managed fund.

✒ Considering the alternativesources of funding, there is lesschance of biases and inequities if impact fees are used.

Conclusion In summary, with careful plan-

ning, impact fees can provide thefunding source to maintain servicelevels in a growing community. Theyrepresent an affordable one-time entrancefee into a highly desirable place inwhich to live and conduct business.

They can also be encouraging for certain types of entities in terms ofproviding a funding source for infra-structure. In this way, instead of beingviewed as a deterrent to growth, impactfees may actually support growth.Notes1 “Best Performing Cities: Where America’s Jobs Are

Created,” The Milken Institute, July 2003.2 “Paying for Prosperity: Impact Fees and Job Growth,” The

Brookings Institute, Center On Urban and MetropolitanPolicy, June 2003.

Joel R. Theis and Richard D. Giardina are with Rick Giardina& Associates, Inc. Reprinted from Colorado GFOA Footnotes, December 2003

Table 2: Influential factors for choosing a locality Governmental Policies

Business Environment Resources Public Services and Regulation

Business activity related State and local taxes Educational institutions Parks and recreation regulations

Growth and development Cost-of-living Natural resources Water and wastewater services policies

Competition/business Location Financial resources Public transportation Environmental regulations

Geographic location Police and fire protection Zoning restrictions

Workforce characteristics Information technology services Air, water, and land transportation access Health services

Social, recreational, and cultural amenities Electric power

Credit risk

CustodialAs noted previously, Statement

No. 40 amends Statement No. 3 andwas influenced by the federal bankreforms adopted since the release ofStatement No. 3, including theGovernment Securities Act of 1986and the repeal of the Glass-SteagallAct by the Financial ModernizationAct of 1999. The following amend-ments are made to Statement No. 3.

Statement No.3 requireddeposits (and investments with modifi-cations) to be categorized in thefollowing categories of credit risk:

1. Insured or collateralized withsecurities held by the govern-ment or the government’s agentin the government’s name.

2. Uninsured, with collateral heldby the pledging financial insti-tution’s trust department oragent in the government’s name.

3. Uninsured, with collateral heldby the pledging financial insti-tution, but not in its trustdepartment or by its agent, inthe government’s name.

OR

Uninsured, with collateral heldby any of the above, but not inthe government’s name.

OR

Uninsured and uncollateralized.

Statement No. 40 essentiallyeliminates any distinction betweenCategory 1 and Category 2 depositsand investments. During GASB’sresearch, they noted no recent losses in investments and deposits in either of these two categories. As a result,exception based reporting is now usedand only deposits and investments thatfall under Category 3 are required tobe disclosed, along with the reasonwhy they are considered Category 3. If all of a government’s deposits andinvestments fall under Category 1 or 2, then no disclosure of credit risk isnecessary.

Statement No. 40 also eliminatesthe activity disclosure requirements ofStatement No. 3. Under StatementNo. 3, disclosures were required whencustodial credit risk was greater duringthe year than at year end. These disclo-sures are no longer required, with thefocus being put more on potentialfuture losses, not on what has occurredin the past.

Finally, Statement No. 40 elimi-nates fair value disclosures, since bookvalue in most instances equals fairvalue as a result of GASB StatementNo. 31, Accounting and FinancialReporting for Certain Investments andfor External Investment Pools.

Credit quality ratingsStatement No. 40 now requires

governments to disclose the creditquality ratings of investments in debtsecurities as described by a nationallyrecognized statistical rating organiza-tion (rating agencies) as of the date ofthe financial statements. Examples ofacceptable rating agencies includeStandard and Poor’s, Moody’sInvestors Service and Fitch Ratings.Obligations of the U.S. Governmentand obligations explicitly guaranteedby the U.S. Government are excludedfrom this disclosure requirement.Obligations implicitly guaranteed bythe U.S. Government must have theircredit ratings disclosed. Credit ratingsof external investment pools, moneymarket funds, bond mutual funds andother pooled investments of fixed-income securities should be disclosedas well. If a credit quality rating for an investment is required but thatinvestment has no rating, that factshould be disclosed.

Concentration of credit riskStatement No. 40 now requires

governments to disclose, by amountand issuer, investments in any oneissuer that represents five percent ormore of total investments based on the level of detail previously discussedin the “General Disclosures” section.As with Credit Quality Ratings, U.S.Government securities and securitiesexplicitly guaranteed by the U.S.Government are exempt from this dis-closure. Also exempt are mutual funds,external investment pools and other

pooled investments which are, bynature, diversified.

Interest rate riskStatement No. 40 now requires

all governments to disclose the interestrate risk of debt securities by using oneof the following methods.

Segmented time distributionUnder this method, investments

are disclosed by type and fair value.Each investment type’s fair value isthen categorized by maturity date, with separate categories for less than 1 year, 1-5 years, 6-10 years, etc. This method will probably be the most used in practice.

Specific identificationSpecific identification discloses

each individual investment, its matu-rity date and fair value.

Weighted average maturityWeighted average maturity dis-

closes each investment type and fairvalue. A weighted average maturity inyears or months is then calculated foreach investment type. The calculation isbased on dollar weighting the maturityof each investment within the invest-ment type, thus giving more weight to larger investments. The dollarweighted maturities for each invest-ment are then summed to arrive at aweighted average maturity for theinvestment type. The portfolio’s overallweighted average maturity is thenderived by dollar weighting theweighted average maturity for eachinvestment type.

DurationDuration is the measure of a debt

securities’ cash flows using presentvalues, weighted for cash flows as apercentage of the investment’s fullprice. Duration models are oftenincluded as part of an investment soft-ware package and are fairly complex.There are several duration models used in practice and Statement No.40 does not recommend one modelover another.

Simulation modelSimulation models analyze the

changes in an investment’s fair value

GASB 40continued from front

continued next page

8

based on hypothetical fluctuations ininterest rates. Statement No. 40 doesnot recommend one model or techniqueover another. Normally, a portfolio’sfair value would be disclosed at yearend and the fair value would beadjusted for each change in basispoints (100 points, 200 points, etc.).

Statement No. 40 recommendsthat governments use whichever of thefive methods above they use in prac-tice. Once a method is selected, allassumptions made regarding thatmethod should be disclosed (e.g., calldates, interest rate changes, etc.). Also,if any investment terms are notaddressed in the method selected, theyshould be disclosed (e.g., benchmarkindexes, reset dates, embedded options).

Foreign currency riskStatement No. 40 requires the

disclosure of U.S. dollar balances ofdeposits and investments that areexposed to foreign currency risk. Thesedisclosures should be organized by currency denomination and investmenttype, if necessary. Disclosures should alsoinclude maturity dates and fair value.

Sample disclosuresAppendix C of Statement No.

40 contains numerous sample note disclosures for both deposits withfinancial institutions and investments.Furthermore, the appendix providesillustrative disclosures using each ofthe five methods for disclosing interestrate risk.

Potential issuesGovernments that manage, track

and account for their own investmentportfolios will find that the disclosures

GASB 40continued

9

that are required by Statement No.40 can be readily prepared and per-haps even incorporated into the regularreporting of investment balances to thegoverning board. Governments thatrely on entities outside the governmentfor these services, or with singleemployer pension plans, may find thatadditional information will be requiredthat may not be readily available orthat additional fees may be required toprepare the additional information fordisclosure. Accordingly, the disclosurerequirements of Statement No. 40should be communicated to the outsideentities and pension funds as soon aspossible to ensure that the require-ments will be met on a timely basis.

James R. Savio, CPA is a manager with Sikich Gardner & Co,LLP based in Aurora, Illinois. Over the last ten years, Jim hasdevoted most of his professional career to working with stateand local governments on a variety of accounting, auditingand financial reporting issues.

CONTINUED

Find it all atwww.igfoa.org!

Here are just two examples of the hundreds of pages of information available to you at www.igfoa.org.

Shown above is the Jobline page, where current and archiveddetailed job listings are available.

Shown at right is the Legislative Committee’s page, completewith alerts, descriptions of current legislation and links to the full text of the bills.

W ith all the limitations publicentities have on increasingtheir revenues, they areoften distressed to find that

the amounts they receive from thecounty for their levies have been fur-ther reduced by settlements for taxobjection claims or from tax assessmentreductions. For many governmentalbodies, property taxes represent thelargest single source of revenue.Understanding how assessment com-plaints, objections and appeals differand how each should be handled is keyto avoid reductions in tax revenues.

Challenging the tax levy Generally, property owners fight

property taxes in two ways: by chal-lenging the validity of the tax levy orby challenging their property’s valua-tion. When a taxpayer challenges thelegal or procedural aspect of a tax levy,he or she objects to the manner inwhich the taxing district exercised itstax levy power. Such objections mayinclude allegations that the levy wasnot authorized by statute, that theentity did not properly follow the pro-cedure for levying the tax or exceededthe statutory levy limits, that the pur-pose for the levy was not specificallystated in the levying ordinance, or thatthe entity failed to comply with IllinoisTruth in Taxation Law. This type oftaxpayer complaint is referred to as atax objection or a rate objection.

A taxpayer initiates a tax objec-tion by filing a formal complaint in thecircuit court. The complaint names thecounty collector as a defendant, speci-fies the tax year at issue, and lists all ofthe objections against each taxing dis-trict that has levied on the objector’sproperty. While the state’s attorney willappear on behalf of the county col-lector, each affected taxing district isalso notified so that it may intervene tocounter the objector’s allegations.Depending on the county, the initial

notice may or may not include a copyof the complaint. If not included, thetaxing district should obtain a list ofthe specific objections against the dis-trict and the grounds upon which theyare based as soon as possible.

Tax objection proceedings can belengthy and will generally involve alead objector and several other tax-payers/ objectors who will oftenconform their arguments to that of thelead objector. Large enterprises thatown expansive tracts of land andindustrial and commercial buildingswill scrutinize the tax levies of all ofthe districts taxing their property everyyear, and may file objections as to theentire tax rate extended by a taxingdistrict or against any one or more ofthe district's funds.

To minimize any possible liability,you should have legal counsel reviewthe objections. As soon as a taxing dis-trict receives notice of a tax objectioncomplaint, it should immediately for-ward the notice to its attorneys so thatthey may investigate the allegations,file an appearance on behalf of thetaxing district, and prepare the appro-priate responses. It is not uncommonfor a tax objector to either withdrawhis complaint based upon the argu-ments of counsel or agree to asettlement of the tax dollars at issue.Most tax rate objections settle beforetrial, often with a small reduction intaxes which will be deducted by thecounty from the entity’s next levyamounts. If a taxing district does notappear, it may lose valuable tax dol-lars. If the taxing district hascommitted a serious error in the taxlevy process, it can, on rare occasions,lose its full tax levy for the year, butonly as to those properties which havefiled and successfully pursued a rateobjection.

A LEGAL PERSPECTIVE

Demystifying the taxing world of tax objections, assessment complaints and tax appealsby Keri-Lyn Krafthefer

Challenging property valuationEvery year, the county board of

review receives hundreds of complaintsfrom residential, commercial andindustrial property owners reacting toan increase in the annual assessmentplaced on their property. Under 35ILCS 200/16-55, if property ownersbelieves their property has been incor-rectly assessed, they can file a writtencomplaint challenging the assessmentwith the county board of review. Whena complaint is filed, the board mustreview the assessment and correct it ifjustified.

In all counties except Cook, theinitial complaint is filed directly withthe county board of review. In CookCounty, the assessor has the authorityto unilaterally revise the property’sassessment based on documentationsubmitted by the property owner. If theowner still disagrees with the assessor’sfindings, a formal complaint is thenfiled with the board of review.

Whenever a property owner seeksto reduce his or her property’s assess-ment by $100,000 or more, all taxingdistricts shown on the last available tax bill are notified that a complaint hasbeen filed. This gives taxing districts anopportunity to intervene.Unfortunately, the statute only requiresthat the notice be sent at least 14 daysprior to the hearing. Therefore, it isvery important to immediately reviewand take action on these notices. If thetaxing district misses the hearing, itmay not have another chance to voiceits objections to an assessment reduc-tion unless the taxpayer files an appealbefore the Property Tax Appeals Board.

While legal counsel should alwaysbe consulted, a quick calculation canhelp expedite the decision whether tointervene: Multiply the differencebetween the assessor’s valuation andthe petitioner’s valuation by the state

continued next page

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multiplier and then by your individualtaxing district’s tax rate. The result willyield the potential tax dollars that maybe lost if a full assessment reduction isallowed. If the district’s tax rate hasnot been determined or the state multi-plier is not available, use the prioryear’s rates to arrive at an estimate.

Let’s consider two examples—onea large industrial complex and theother, a “mom and pop” retail busi-ness. Suppose a public entity’s tax rateis 4% and the state multiplier is 2.3.The assessor has placed an assessmentof $3,750,000 on the large industrialcomplex, but the owner believes$2,375,000 is more accurate basedupon a recent appraisal. Here, thepotential loss revenue to the entitycould be as high as $126,500 calcu-lated as follows: $3,750,000-2,375,000 = 1,375,000 x 2.3 =3,162,500 x.04=$126,500. For asecond example, let’s suppose theassessor has valued the retail propertyat $1,400,000. Mom and Pop petitionfor a reduction to $1,250,000 basedupon the price they just paid:$1,400,000-1,250,000=150,000 x2.3=345,000 x .04=$13,800.

In the first example, the potentialloss of over $100,000 in revenue is sig-nificant and a public entity may decidethat avoiding such an outcome out-weighs the legal costs necessary tointervene (e.g., attorneys’ fees and thecosts for an independent appraisal ofthe property). The public entity couldalso contact the other affected taxbodies (e.g., municipality, township,park district;, school districts) and see if they would like to join efforts,sharing costs, in order to protect theirindividual revenues.

In the second example, while theloss to some taxing districts may stillbe sizeable, one must balance it againstnot only the costs to intervene, but also the likelihood of prevailing. Theproperty owner has just acquired theproperty and has the best indicia ofvalue—the actual price paid for it. Inthis instance, the taxpayer has a goodchance of obtaining the reduction heseeks, so the taxing district may chooseto not intervene.

Appealing the board of review’s actionWhen things don't go well for the

property owner at the county board ofreview level, he can appeal the board’sdecision to the Illinois Property TaxAppeals Board (PTAB) within 30 days.As in assessment complaints, all taxing districts affected by an appealinvolving a reduction in valuation of$100,000 will receive notice.

The taxing district should eval-uate the potential loss in tax dollarsbased upon any lowered assessmentthat may have been made by the boardof review. Again, taxing districts maywant to form a consortium to collec-tively oppose any reduction and sharecosts. This joint effort is particularlyattractive when the property involves alarge industrial or business complexand a successful defense will involvesignificant legal and independentappraisal fees.

If a taxing district decides tointervene, it must do so within 30 daysfrom the date of the notice of appeal.The request to intervene must beaccompanied by a resolution author-izing the intervention. Thus, again it is

2004 IGFOA Directory onlineThe IGFOA Membership Directory is available to all IGFOA members round-the-clock at www.igfoa.org.

Choose Members Login from the main menu and enter your username and password. To see the entire direc-tory, select View All from the Directory menu.

If you prefer to have a hard copy directory at your fingertips, go to the Print Center from the Directory menuand choose the ˆprint template to print your own directory. (Hint: don’t be shy in hitting the refresh button onyour browser to view the directory in the print format). You can use the Simple or Advanced Search options totailor your listing to a specific category of member. Public sector members and Sponsoring firms may also usethe Export Center from the Directory menu to download the entire or any portion of the directory in a .csvspreadsheet format.

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Be sure to update your own profile frequently to ensure our directory is current, and so that you don’t miss any news!

Uncertain about your username and password? Try your first initial and last name as the user name andfollow the instructions to have your password e-mailed. Still not working? E-mail info@igfoa.org or call IGFOAat 630-663-0019 to retrieve your login information.

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important to act quickly to allow timeto place the resolution on the agendafor the next board meeting, act on itand prepare and file the request tointervene within the 30-day time period.

PTAB’s decisions are based uponthe equity and weight of the evidencepresented and are binding. While anappeal is pending, the extension oftaxes on the disputed assessment is not delayed. If the appeal results in anassessment reduction, any overpaidtaxes are abated and the amounts disbursed to the taxing district arereduced accordingly. Decisions of thePTAB can be appealed to the courtsystem but such appeals are rare.

Remember, a taxing district’s mostimportant act upon the initial receiptof a tax objection, an assessment com-plaint, or a PTAB appeal is to contactits legal counsel immediately so thatthe taxpayers’ challenges may be evalu-ated and acted upon within the stricttimeframes imposed by statute.

Reprinted from Ancel, Glink, Diamond, Bush, DiCianni &Rolek, P.C. Local Government News Fall 2003

One south Cass AvenueWestmont Centre Suite 202Westmont, IL 60559

ADDRESS SERVICEREQUESTED

I l l i n o i sG o v e r n m e n tF i n a n c eO f f i c e r sA s s o c i a t i o n

Inside:

GASB 40…

New ethics statute explanation…

New auditing standard on fraud risk…

Tax appeals… and more!

2004 IGFOA calendarApril 15 Downstate Chapter Spring Conference

April 16 Illinois Public Pension Institute

April 21-22 Public Investors’ Financial Symposium

April 29 SAS 99 Consideration of Fraud in Financial Reports

May 5-6 Illinois & Wisconsin GFOA: Intermediate Investing Conference

May 13 TARC meeting

May 21 Chicago Metro Chapter Luncheon Meeting

June 13 GFOA Conference Reception with Wisconsin, and MinnesotaGFOA, 4 to 6 pm, Milwaukee Ale House, Milwaukee

June 25 South Metro Chapter Golf Outing, Bolingbrook Golf Club Contact Kenneth R. McConnaughay 630-245-6088,kenneth.mcconnaughay@morganstanley.com

July 15-16 Downstate Chapter Summer Conference

July 29 Chicago Metro Chapter Networking Day

Aug. 8 South Metro Chapter Meeting, House of Hughes, Crestwood

Visit www.igfoa.org/calendar for details, or contact IGFOA at info@igfoa.orgor 630-663-0019.

Did you know? There are 864 TIFs in 353 munici-palities in Illinois.

Statewide salaryand benefits database on the wayThe Illinois Municipal League, in partnership with TheWaters Consulting Group, Inc. (WCG) is undertaking the development of an online, statewide database ofemployee salary and benefits information.The annualsubscription rate for participants is $350. Subscribe at www.watersconsulting.com/iml/subscribe.asp