Micah WintnerP ADM 523, Section 1Dr. Beckett-Camarata

MD&A Analysis

The Governmental Accounting Standards Board is a hodgepodge of people whose

various backgrounds all come together to form the basis for how a comprehensive annual

financial report should be presented.

David Vaudt, who is the chair of the GASB, worked at KPMG for 25 years, and then was

elected Iowa’s state auditor (Board members). The board is made up of six men and one woman,

and they’ve all held high level-responsibility jobs at either the state level or corporate executive

level. The GASB members aren’t difficult to contact (see appendix, Exhibit A), and this six

member board, and their accompanying staff, headquartered in Norwalk, Connecticut, under the

power of GASB statement No. 34, guide the hand of governmental accounting for all fifty

United States, including for the village of Buffalo Grove, Illinois.

Buffalo Grove, Illinois’ census numbers shows a village that is diverse and wealthy. The

median household income between 2010 and 2014 was $96,768 among a population of 41,701

people, compared to the $53,482 median income for the United States as a whole (QuickFacts).

Among Buffalo Grove’s 16,276 households, in 32.5 percent of them, the spoken language is

something besides English. Safewise, a home-security analysis team, called Buffalo Grove the

thirty-first safest city in Illinois: “The village is protected by a robust police department that

takes care of public safety needs from traffic control to providing resources to local schools and

special programs for Alzheimer’s patients. Their comprehensive approach seems to be working,

because Buffalo Grove was free of both murders and rapes in 2012” (The 50 safest cities in

Illinois). Money Magazine called Buffalo Grove the forty-sixth best place to live in in the United

States in 2013, citing the village’s economic stability and wide range of employment options as

factors (Best places to live 2013).

The village of Buffalo Grove’s website, www.vbg.org, touts news articles with titles like

“Standard & Poor’s (S&P), Moody’s assign highest credit ratings to village of Buffalo Grove,”

and, “Buffalo Grove symphonic band presents formal concert April 24 at Stevenson Performing

Arts Center.” Stevenson is one of the many local, geographically distributed high schools in the

area to which Buffalo Grove allocates funds to from its high property taxes, and its direct and

overlapping governmental activities responsibilities shared with the surrounding communities,

like Lincolnshire, Illinois, and Arlington Heights, Illinois.

But Buffalo Grove would not have gotten to be this way without a heavy governmental

presence guiding the community. The village has over fifty trustees operating on various

commissions and boards (The village of Buffalo Grove, Illinois). Scott Anderson is the village’s

director of finance, and also heads the police pension board. His name is on the cover of Buffalo

Grove, Illinois’ 2014 CAFR, whose Management’s Discussion and Analysis this paper will be

analyzing. Scott Anderson oversees the village’s accounting and financial reporting, finance

administration, treasury management, general services, and the office of the village clerk. He

signed the letter of transmittal in the 2014 CAFR, where he mentioned that, “GAAP requires that

management provide a narrative introduction, overview, and analysis to accompany the basic

financial statements in the form of a Management's Discussion and Analysis (MD&A).”

(Comprehensive annual financial report of the village of Buffalo Grove, Illinois, as of and for

the year ended December 31, 2014).

The MD&A narrative and analysis is in fact stipulated by GASB summary of

statement No. 34, which says the following about the important aspects of the MD&A:

MD&A should provide an objective and easily readable analysis of the government's

financial activities based on currently known facts, decisions, or conditions. MD&A should

include comparisons of the current year to the prior year based on the government-wide

information. It should provide an analysis of the government's overall financial position and

results of operations to assist users in assessing whether that financial position has improved or

deteriorated as a result of the year's activities. In addition, it should provide an analysis of

significant changes that occur in funds and significant budget variances. It should also describe

capital asset and long-term debt activity during the year. MD&A should conclude with a

description of currently known facts, decisions, or conditions that are expected to have a

significant effect on financial position or results of operations. (Summary of statement No. 34)

The village of Buffalo Grove, Illinois’ latest available MD&A analysis is in its 2014

CAFR. The MD&A analysis is 15 pages. It contains within it a look at the entity’s overall

financial position, significant variations between original and final budget amounts, a synthesis

of significant capital asset and long-term debt activity during the year, and a description of any

known facts, decisions, or conditions that would have a significant effect on the government’s

financial position.

Overall Financial Position

The MD&A provided a condensed statement of net position, which shows a minor

decrease in net position between 2013 and 2014. One factor the MD&A analysis says has an

impact on net position is “net results of activities,” and water and sewer expenses increased by

$200,000 from 2013 to 2014, according to page 9 of the 2014 MD&A. This could be because

Buffalo Grove, Illinois, derives its water from the Northwest Water Commission, which is

responsible for distributing Lake Michigan water to the Illinois villages of Arlington Heights,

Buffalo Grove, Palatine, and Wheeling (Comprehensive annual financial report for Northwest

Water Commission, for year ended April 30, 2012). There are several factors in the water

commission’s CAFR that can account for Buffalo Grove’s increase in water and sewer expenses:

first, the water commission estimates its budget needs for ten years ahead, which is a long range

for estimating needed capital. Also, the commission says that it is undertaking major initiatives:

1. Continuation of the development of a strategic plan addressing the needs for system

redundancy and continued operation for the next 100 years.

2. Entered into an engineering agreement for the development of system looping and an

increase in system storage. This is the first project of this nature since initial construction of the

Commission.

3. Entered into an engineering agreement for the study of costs and possible route of an

additional source of Lake Michigan water from the City of Evanston either by pipeline or by

tunnel.

4. Continuation of a Corrosion Control Program to reduce lead and copper levels in

members’ water supply.

5. Assistance given to member communities in obtaining the necessary technical and

statistical information to complete the required EPA Consumer Confidence Report.

(Comprehensive annual financial report for Northwest Water Commission, for year ended April

30, 2012)

These are all reasons that Buffalo Grove’s water costs might have increased: for the

continued participation in the Northwest Water Commission, which has a capital asset plan all on

its own. Back to Buffalo Grove’s MD&A, it says point blank that the net decrease in net position

for governmental activities was “due to the depreciation for capital asset” (MD&A page 10).

Variations between Original and Final Budget for General Fund

Buffalo Grove’s 2014 CAFR, MD&A analysis, has a chart of budget to actual revenues

and expenditures (see appendix, Exhibit B). The variations are less than five percent variance

between budgeted revenues and expenditures. The actual change was a $902,000 increase in

revenues, after accounting for revenue sources and expenditure outlays (MD&A page 16). The

MD&A shows that property tax was the biggest receivable for governmental-activities, at over

$14 million, and that could explain Buffalo Grove’s favorable variance with its budgeted

revenues.

Illinois’ property tax looks like it will continue to be a highly lucrative source. According

to the Illinois Policy Institute, the state of Illinois has the second highest property tax rate among

states at 1.93 percent, and the institute also found that Lake County, the county in which Buffalo

Grove resides, has the seventeenth highest property tax in the nation among all counties (Illinois

has the 2nd-highest property taxes in nation). Buffalo Grove’s MD&A analysis says this:

The governmental activities of the Village include public safety (police and fire), public

works, streets and sidewalks, building and zoning, and general government. Property taxes…

finance the majority of these services. (MD&A page 5)

With property taxes being the village’s largest source of revenue, and itself being at a

fixed rate and taxable to easily estimable property values, the budgeted income from property tax

should not have much variance. That being said, pension levies account for 39.2 percent of the

property tax levy (MD&A page 10), and Illinois already has pension problems. Keith Staats, JD,

wrote in the Illinois CPA society’s Insight Magazine that, “local pension costs are another

ticking time bomb. If local pension costs aren't reduced, property taxes will rise or pension funds

will run the risk of becoming insolvent.” (Ugly numbers).

Going forward, it’s clear that pension obligations can impact the amount of property tax

revenues collected, which might affect the stability the budget in the future.

Synthesis of Significant Capital Asset and Long-Term Debt Activity

The MD&A analysis has a whole host of information on pages seven through ten on its

capital asset and long-term debt activity; it lists four things that normally affect capital assets:

Net Results of Activities – which will impact (increase/decrease) current assets and

unrestricted net position.

Borrowing of Capital – which will increase current assets and long term debt

Spending Borrowed Proceeds on New Capital – which will reduce current assets and

increase capital assets. There is a second impact, an increase in invested in capital assets and an

increase in related net debt which will not change the invested in capital assets, net of debt.

Reduction of Capital Assets through Depreciation – which will reduce capital assets and

net investment in capital assets. (MD&A page 7).

Then, the MD&A analysis presents how these factors impacted the current year:

At the end of the current fiscal year, the Village reported positive balances in all three

categories of net position, both for the government as a whole, as well as for its separate

governmental and business-type activities. Within the governmental activities, the Village

increase in “Current and Other Assets” of $2.2 million is attributed to an increase in grant

revenue. The Village has received funding for capital improvements from the State of Illinois

Department of Commerce and Economic Opportunity. These funds are designated for street and

bridge improvements, “Current and Other Assets” for business-type activities increased $0.1

million over the prior fiscal year. The excess revenue was derived from an increase in the water

and sewer rate for those services. The Village has adopted a philosophy of funding capital

improvements to a large extent on a pay-as-you –go basis, and retires debt obligations quickly,

resulting in positive net position calculations. Declines in “Capital Assets” are primarily as a

result of depreciation. (MD&A page 8)

The chart to which the previous paragraph’s numbers are referring to is Appendix, exhibit

C, and the increase in revenue for business type activities related to water and sewer expenses

was mentioned earlier, when discussing the Northwest Water Commission.

The MD&A on page 16 says the village had a combined total capital assets in 2014 of

$91.52 million between buildings, streets, storm sewers, and equipment. The MD&A mentioned

that the most significant capital activity was the continued progress on the Weiland Road

Corridor Study, lift station improvements in the Water Fund, and scheduled vehicle replacements

made during the year as part of a systematic funding and replacement program for all village-

owned vehicles (MD&A page 17).

The Weiland Road Corridor study is a good example of how individuals still have a say

in how their municipality spends money. A brochure, back from 2010, which invited villagers to

come to a meeting regarding the road improvements, said:

The Village of Buffalo Grove, the Lake County Division of Transportation and the Cook

County Highway Department welcome you to this Public Information Meeting for improvements

under consideration to the Weiland Road corridor from Buffalo Grove Road to IL Route 22 and

the Lake Cook Road corridor from Buffalo Grove Road to Hastings Lane. We invite you to view

the exhibits on display and talk with study team members. Your comments and opinions are an

important part of this study. You are encouraged to provide comments in writing or speak with

the Court Reporter. In order for your comments to become part of the project record, we ask that

they be postmarked by December 31, 2010. (Brochure: Public Information meeting, Weiland

Road and Lake Cook Road Phase I Study)

Appendix, exhibit D is a calendar of the road corridor study schedule from the brochure,

which is an example of how municipal projects are a combination of requiring a lot of time,

requiring the consent of the local residents, and budgetary considerations. Regarding the

village’s long term debt policies, the MD&A says:

The Village maintains assigned “AAA” ratings on its general obligation bonds

respectively from both Moody’s Investor Services and Standard and Poor’s Corporation. The

total per capita general obligation (GO) debt for the community stands at $251.27 and

represents .72 percent of the percentage of equalized assessed valuation of the Village. The

Village, under its home rule authority, does not have a legal debt limit. (MD&A page 17)

Facts, Decisions, Conditions, that affect the Government’s Financial Position or Operations

In the letter of transmittal, Buffalo Grove Director of Finance Scott Anderson said the

village aims to keep 25 percent of next years budgeted expenditures held up in an “unassigned

fund balance.” This is probably the most significant impact on Buffalo Grove’s operations. And

generally, they’ve been able to exceed that 25 percent by at least 10 percent (letter of transmittal

page iii). This kind of planning, with keeping at least a fourth of next year’s budget available in

the current year, and with Buffalo Grove’s relatively clear propensity to bring in revenue, can

have a very positive impact on its financial position and operations. There were many tax

considerations in 2014 that affected the government’s financial position:

Property taxes increased by $0.05 million. The increase in the corporate agency tax levy

collected in 2014 was 3.5 percent or $.27 million. The Fire Protection portion of the corporate

levy received the largest increase of $.12 million (44.4 percent). The total tax levy increased 0.35

percent in total with decreases in the IMRF and Debt Service levies of 2.37 percent and 16.63

percent respectively. The pensions levy increased .98 percent. Sales tax increased by $.65

million compared to the previous year. The growth in sales tax was 8.4 percent. Utility taxes are

up $.19 million, or 7.2 percent. The region experienced a very cold winter, leading to higher

natural gas consumption than average. Income taxes continue to decrease, down $.6 million from

FY 2013 and $1.4 million since FY 2012. Property transfer taxes were the highest, $.79 million,

since 2006 when that tax generated $.98 million. The Village expects the property transfer tax to

continue its upward trend (MD&A page 11).

The MD&A seems to launch into a detailed account of fund policies, and fund revenues

and expenses, and what impact the fund has on the overall financial position of Buffalo Grove.

In conclusion, the general fund’s revenues and expenditures were so described:

The General Fund’s revenues increased by $3.2 million in 2014. Sales tax revenue

expanded generally through inflation. The housing market continued to recover in 2014 as

revenues were similar to the uptick the Village saw in 2013, with more of the traditional, non-

distressed type of housing transactions. Property taxes increased $1.5 million, while

Miscellaneous Income grew $.7 million and Other Taxes grew $.37 million. Charges for service

increased 27 percent over 2013, growing by $.27 million. Interest grew 47 percent over 2013

while Fines and Fees and Licensing and Permits both decreased in 2014 from the previous year

actuals. The overall growth in the General Fund of 9.14 percent is a positive indicator that the

Village has been able to generate adequate revenues. The under-performing revenues also give

the Village an opportunity to re-evaluate those sources if there is a trend emerging or if it was

related to a short term aberration. General fund expenditures increased by $3.9 million or 11.8

percent. The surplus of revenues over expenditures was $1.4 million. Adding in the Other

Financing Sources (Uses), the net change to fund balance resulted in an increase of $.9 million.

Public Safety Expenditures increased $.8 million, 3.62 percent, in FY 2014. Public Works and

General Government were able to reduce their expenditures $.4 million and $1 million

respectively (MD&A pages 13-14).

Appendix

Exhibit A: List of GASB Board and Staff and their emails and phone numbers

Source: (http://www.gasb.org/cs/ContentServer?c=Page&pagename=GASB%2FPage%2FGASBSectionPage&cid=1176156722469)

Exhibit B:

Source: (http://www.vbg.org/DocumentCenter/View/2428) MD&A page 16

Exhibit C:

Source: (http://www.vbg.org/DocumentCenter/View/2428) MD&A page 7

Exhibit D

Source: http://www.vbg.org/DocumentCenter/Home/View/511

Bibliography 1. Anderson, Scott. "COMPREHENSIVE ANNUAL FINANCIAL REPORT OF

THE VILLAGE OF BUFFALO GROVE, ILLINOIS As of and for the Year Ended December 31, 2014." The Village of Buffalo Grove, Illinois. N.p., n.d. Web. <http://www.vbg.org/DocumentCenter/View/2428>.

2. "Best Place to Live 2013." Money Magazine. Time Inc., n.d. Web. 16 Apr. 2016. <http://time.com/money/2791464/46-buffalo-grove-il/>.

3. "Board Members." GASB. GASB, n.d. Web. 16 Apr. 2016. <http://www.gasb.org/jsp/GASB/Page/GASBSectionPage&cid=1176156726930>.

4. "Brochure: Public Information Meeting, Weiland Road and Lake Cook Road Phase I Study." N.p., n.d. Web. 16 Apr. 2016. <http://www.vbg.org/DocumentCenter/Home/View/511>.

5. "Comprehensive Annual Financial Report Northwest Water Commission Fiscal Year Ended April 30, 2012." (n.d.): n. pag. Web. 16 Apr. 2016. <http://gfoa.net/cafr/COA2012/NorthwestWaterCommissionIL.pdf>.

6. Costin, Brian. "Illinois Has the 2nd-highest Property Taxes in Nation." Illinois Policy. Illinois Policy, 15 Feb. 2013. Web. 16 Apr. 2016. <https://www.illinoispolicy.org/illinois-has-the-2nd-highest-property-taxes-in-nation/>.

7. Edwards, Rebecca. "The 50 Safest Cities in Illinois - SafeWise." SafeWise RSS. Safewise, 26 Mar. 2014. Web. 16 Apr. 2016. <http://www.safewise.com/blog/50-safest-cities-illinois/>.

8. "QuickFacts." United State Census Bureau. US Department of Commerce, n.d. Web. 16 Apr. 2016. <http://www.census.gov/quickfacts/table/PST045215/00,1709447>.

9. Staats, Keith. "Ugly Numbers." Illinois CPA Society. Illinois CPA Society, 2014. Web. 16 Apr. 2016. <http://www.icpas.org/hc-insight.aspx?id=24956&terms=pension>.

10. "SUMMARY OF STATEMENT NO. 34." GASB. GASB, n.d. Web. 16 Apr. 2016. <http://www.gasb.org/st/summary/gstsm34.html>.

11. "The Village of Buffalo Grove, Illinois." N.p., n.d. Web. 16 Apr. 2016. <http://buffalogrovevillageil.iqm2.com/Citizens/Board>.