By establishing financing authorities—separate legal entities empowered to issue debt, build municipal facilities and lease them to a city—some cities have been able to acquire water, sewer, parking and other facilities without disclosing on their own balance sheets any of the debt incurred in acquiring these assets. Now, however, much of the undisclosed debt associated with municipal lease financing is about to be disclosed.
The Financial Accounting Standards Board’s Statement No. 13 on accounting for leases requires, not only capitalization of certain leases, but also disclosure of associated lease rental debt. Compliance with Statement No. 13 will be encouraged by a new provision in the federal revenue sharing program requiring that all municipalities receiving $25,000 or more in federal funds have an independent audit. In addition, Standard & Poor’s has announced that it will consider failure to prepare municipal statements in conformance with generally accepted accounting principles a negative factor in rating a city’s bond issues.
To get some indication of how many cities have wholly or partially undisclosed lease financing, the authors analyzed the disclosure practices of 18 Pennsylvania cities. They found 35 long-term leases with municipal financing authorities—10 disclosed on balance sheets, nine disclosed in footnotes and 16 not disclosed anywhere in the financial statements. They also found that capitalizing the undisclosed leases would change dramatically the cities’ rankings by such traditional criteria as long-term debt per capita and long-term debt to market value of taxable property.