The purpose and focus of a local government agency or quasi-public organization (local auditee) is to take in enough revenue to fund its operations, and to maintain a modest reserve in case of emergencies. If a local auditee, particularly a local government, is able to consistently maintain a large unreserved equity balance in relation to its revenue, this may be an indication that the local auditee is charging too much for its services.

On the other hand, a local auditee that consistently reports a deficit in its equity accounts may have difficulty meeting its current obligations; including payroll and related taxes, or vendor accounts payable. It may borrow money from its restricted funds, board members or executive director to fund its operations. It may not be able to pay its bonded debt.

Significant deficits are one of the indicators that Louisiana Legislative Auditor (LLA) staff look for in their desk review of local auditee reports, to determine if a local auditee is experiencing financial hardship. LLA may take action regarding deficits, up to and including referral to the Fiscal Review Committee to determine if appointment of a fiscal administrator is advisable.

LLA classifies a deficit as significant if it meets the following criteria:

  • For local governments – in the fund financial statements, are any governmental funds reporting an unassigned fund balance deficit that is greater than 5% of the revenue reported in the fund?
  • For local governments – are any proprietary funds reporting an unrestricted net position deficit that is greater than accumulated depreciation plus net pension liability plus 5% of the revenue reported in the fund?
  • For nonprofits – is the nonprofit reporting a deficit in net assets without donor restrictions that is greater than accumulated depreciation plus 5% of reported revenue?

LLA requires a local auditee that is reporting a significant deficit, as defined above, to include in their annual financial report an explanation of what is causing the deficit; and management’s plan of corrective action to eliminate the deficit. This information is usually included in the notes to the financial statements. This information is over and above what is required by generally accepted accounting principles or GAAP, but LLA believes that it is beneficial information for the users of local auditee reports.

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