Last week, a federal bankruptcy judge ruled that the city of Stockton, California is eligible for bankruptcy protection. The ruling is widely expected to prompt more municipal bankruptcy filings in challenged jurisdictions. The jury is still out, so to speak, as this case may not finally be decided until it reaches the Supreme Court. But it is now more likely than not that financially troubled jurisdictions will be considering when and how to file for bankruptcy. That gives city managers, employees, taxpayers, bondholders, the media and citizens more generally some more homework to do.
One of those assignments is in the area of financial reporting. In December 2009, the Governmental Accounting Standards Board issued a standard explicitly dealing with issues of municipal financial reporting. GASB Statement #58 is titled “Accounting and Financial Reporting for Chapter 9 Bankruptcies.” The statement deals with changes in reporting required for governments after, not before, they file for bankruptcy, but it remains relevant for anyone interested in learning about this area of growing interest. That statement is available here.
As a part of the project leading to this statement, GASB produced some background reading on the history of financial reporting associated with municipal bankruptcies. That history is available here.
GASB is not the sole source of wisdom on this score, however. In recent years, jurisdictions that have filed for bankruptcy did so in important part because they were facing crushing debts that GASB’s accounting standards did not require to be reflected on the balance sheet.