Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Notes & Samples

NOTE 20 – Deficit Fund Balances/Net Position

Deficit fund balances are disclosed in the notes when they are material, along with an explanation of the underlying causes and the agency’s plan for remediation.

Governmental Funds – Deficit Fund Balances

The fund balance represents the net financial resources of a governmental fund (assets plus deferred outflows of resources, less liabilities and deferred inflows of resources) and is reported in accordance with GASB 54. A deficit fund balance occurs when a governmental fund’s total liabilities and deferred inflows of resources exceed its assets and deferred outflows of resources at fiscal year-end. Deficits most commonly arise in individual funds — often special revenue or capital projects funds – due to the timing of expenditures relative to the availability of financial resources.

In accordance with GASB 54, only the negative portion of fund balance is reported as an unassigned fund balance. This requirement applies to governmental funds other than the general fund; however, the presence of a deficit does not eliminate disclosure of other applicable fund balance classifications (restricted, committed, or assigned) for positive amounts within the same fund.

Common Causes of Governmental Fund Deficits (Modified Accrual Basis)

• Expenditures incurred in advance of related revenues (particularly for reimbursement-based grants).
• Project costs incurred prior to the receipt of bond proceeds or other financing sources.
• Timing differences associated with interfund transfers or reimbursements.
• Expenditures that exceed the legally available restricted, committed or assigned resources.
• Short-term cash flow imbalances within specific funds.

Proprietary Funds – Deficit Net Position

In government-wide financial statements and proprietary fund statements, net position is reported in accordance with GASB 34, as amended by GASB 63, which established the current presentation of net position and introduced deferred outflows and deferred inflows of resources as separate elements of the financial statements. Net position represents the residual of all elements presented in the statement of net position (assets plus deferred outflows of resources, less liabilities and deferred inflows of resources). A deficit net position exists when this residual is negative.

Deficit net position balances are reported on the face of the statement of net position and disclosed in the notes when material.

Common Causes of Deficit Net Position (Full Accrual Basis)

• Recognition of long-term liabilities in excess of related assets.
• Pension and other postemployment benefit (OPEB) liabilities recognized under applicable GASB standards.
• Issuance of debt to finance capital assets (particularly in early years before asset depreciation is offset by revenues).
• Sustained operating losses in enterprise activities.
• Recognition of environmental remediation liabilities or litigation-related obligations.

Evaluation and Corrective Actions

Agencies evaluate deficit balances as part of its ongoing financial monitoring process. In many cases, deficits are the result of timing differences and are expected to be eliminated in subsequent periods as revenues are received or financing sources are realized.

Clarify whether the deficit is:

• Temporary (timing/reimbursement driven)
  –OR–
• Structural (ongoing mismatch between revenues and obligations)

Where deficits are structural in nature, agencies implement corrective actions that may include:

• Adjusting spending levels to align with available resources.
• Securing additional funding sources or reimbursements.
• Revising budget allocations or program priorities.
• Evaluating and adjusting fee structures in proprietary activities.

Agencies expect these actions to reduce or eliminate identified deficits over time.

Disclosure Requirements

Agencies must disclose when:

• A fund reports a material deficit fund balance or net position
  –AND–
• The cause is not obvious from the financial statements alone

Agencies must organize the note as follows:

1. Identify the Fund
   Agencies must disclose the:
   • Name of the fund
   • Fund type (governmental, proprietary or component unit)
   • Amount of the deficit
2. Explain the Cause

   Disclosure language must be specific. Avoid vague language like “timing differences” without context.

   Strong examples:

   • Debt issued without corresponding asset ownership (example — financing entity)
   • Accrual of long-term obligations (example — interest, pensions, interfund loans)
   • Program structure (example — legacy loan programs no longer originating revenue)
   • External events (example — natural disasters impacting insurance entities)
3. Component Units
   Disclosures for component units:
   • Clearly identify whether presenting blended or discretely.
   • Explain the relationship to the primary agency.
   • Focus on why liabilities exceed assets, especially:
     • Debt structures
     • Lack of asset ownership
     • External risk exposure (example–insurance pools)

Submit a copy of the agency’s Note 20 from its published AFR through the ONDSS web application. The required format is a Microsoft Word document (latest version: docx) with header information that includes: agency name/number and note number/name. If Note 20 does not apply, do NOT submit a note to indicate “not applicable.”