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ILLUSTRATION 102 Indicator 35—Rate of Employment
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Page 414
Disaster Risk
The need to consider and plan for natural disasters is incumbent on all top governmental officials. As the past
few years have shown, no place is immune from such events, although some locations are more vulnerable than
others. The question that should be asked is: What would happen if a major earthquake or hurricane were to
strike or a terrorist attack were to occur? Related questions that need to be asked are these: (1) Does the city
have sufficient insurance and reserves to cover possible losses? (2) Does the government have sufficient
resources (and a plan) for evacuation, protection against looting, and cleanup? In addition to natural disasters, it
can be equally difficult to prepare and budget for manmade disasters, for example, oil or chemical spills from
industry.
Political Culture
This perhaps is the most difficult of all factors to measure but is certainly critically important to determining
how the administration will react to the other environmental factors in shaping the government's fiscal policy.
Political culture includes such factors as form of government (e.g., mayorcouncil—weak or strong, council
manager, commission) and the entity's economic, political, and social history. The entity's history may reveal
underlying community philosophies regarding willingness to support higher taxes, issuances of longterm debt,
and increased social services.
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Page 415
External Economic Conditions
No local or state government operates independently of the regional and national economy. Regional economic
activity affects local business activity, employment, and income by influencing the demand for manufactured,
agricultural, and service products as well as the levels of wholesale and retail sales. Similarly, inflation at the
national level influences regional and local prices, including wages and the cost of debt financing. A good
example of the impact of national events is the national subprime mortgage crisis, which negatively affected the
prices and number of home sales. Recently, the local housing markets in most areas have seen significant
improvements in both the price and number of home sales as the national economy overcomes the effect of the
mortgage crisis. Although consideration of external economic conditions is essential to assessing the local
economy, the linkages can be difficult to pinpoint and quantify.
Organizational Factors
As indicated by their pivotal location in Illustration 101, management practices and legislative policies play a
crucial role in determining fiscal policy in response to the environmental factors just discussed. Sound financial
management and the political will to resist easy solutions can minimize financial problems that might otherwise
result from factors such as economic downturns, plant closings, or natural disasters. Financial crises often build
over a number of years during economic recessions. Politicians may be either unwilling or unable to curtail
expenditures for services in response to revenue shortfalls. Results of past policies, such as heavy reliance on
debt or an excessive labor force, may make it difficult or infeasible to reduce expenditures sufficiently in the
short run. Shortrun solutions, such as deferring needed maintenance, curtailing capital expenditures, or
underfunding pensions, may lead to even more serious problems in the future. Thus, sound financial
management means planning for adverse environmental conditions or events and devising longrun solutions
when problems do occur. Although management practices and legislative policies are critical determinants of
financial condition, they are among the most difficult factors to measure. Evidence of mismanagement or
management practices that sustain an operating deficit include using existing fund balances, shortterm
borrowing, internal borrowing, sale of assets, or onetime accounting changes to balance the budget. Other signs
of deficient fiscal policies include deferring pension liabilities, deferring maintenance expenditures, failing to
fund employee benefits, and ignoring fulllife costs of capital assets.13
Financial Factors
Examples of governmental fund financial ratios typically used in assessing financial condition are shown in
Illustration 103. Although the ratios contained in Illustration 103 represent what the authors consider key
ratios, they are not intended to represent all ratios that might be useful in evaluating financial condition. In fact,
the ICMA handbook provides for a total of 27 financial indicators across the six financial factors shown on the
righthand side of Illustration 101. For those interested, the handbook provides worksheets and an electronic
spreadsheet that guides the user in defining the terms used in the ratios.
The data to calculate the financial ratios shown in Illustration 103 are readily obtainable from most CAFRs.
Except for population, which is usually disclosed in the statistical section, data for most of the ratios can be
obtained from the statement of revenues, expenditures, and changes in fund balances—governmental funds (see
Illustration A25) and the balance sheet—governmental funds (see Illustration A23). Data for the remaining
ratios usually can be found in the notes to the financial statements.
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ILLUSTRATION 103 Selected Financial Ratios Based On CAFR Governmental Funds
Page 416
Information
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Page 417
The ratios displayed on Illustration 103 indicate whether all governmental funds or only the General Fund
should be used in the calculation. However, analysts differ on preferences with some preferring to utilize
General Fund data only, whereas others utilize combined data for all governmental fund types. This decision
depends, in part, on how large the General Fund is relative to all governmental fund types. In calculating
operating revenues, capital project fund revenues should be excluded since the capital project fund is not an
operating fund. For purposes of calculating revenues and expenditures in these ratios, other financing sources
are often added to revenues and other financing uses are often added to expenditures; although by definition
other financing sources and uses are not considered revenues and expenditures. The governmentwide financial
statements offer additional opportunities for analysis of financial factors relating to the governmental entity as a
whole and are discussed next.
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ANALYZING GOVERNMENTWIDE FINANCIAL
STATEMENTS
Page 418
The CAFR provides information about the government as a whole that should assist citizens, bond analysts,
governing boards, and other financial statement users to answer questions that are not easily answered with
disaggregated fund financial statements. The management's discussion and analysis and two accrualbased
governmentwide financial statements that focus on the flow of total economic resources in and out of the
government offer a level of analysis about the real cost of government services, the means of financing them,
and the financial condition of the government as a whole.
One firm that has developed a method to describe and report ratios designed to take advantage of aggregated
information is Crawford & Associates, P.C., a public accounting firm that developed a financial analysis and
rating tool to use in measuring a government's financial health and success. The firm suggests a number of
performance indicators that measure financial position, financial performance, and financial capability from
basic financial statements. A brief description of the questions best answered by some of these ratios is
presented here, along with Crawford & Associates’ “plain English” statement of the questions to be addressed
by the performance measure.14
Financial Position Ratios:
1. Unrestricted Net Position (Assets). How do our rainy day funds look?
2. Capital Asset Condition. How much useful life do we have left in our capital assets?
3. Debt to Assets. Who really owns the government entity?
4. Current Ratio. Will our employees and vendors be pleased with our ability to pay them on time?
5. Quick Ratio. How is our shortterm cash position?
Financial Performance Ratios:
6. Change in Net Position (Assets). Did our overall financial condition improve, decline, or remain steady
over the past year?
7. Interperiod Equity. Who paid for the cost of operating the city—current, past, or future tax and rate
payers?
8. Sales Tax Growth. What is the state of our local economy?
9. BTA SelfSufficiency. Did current year businesstype activities (BTA), such as utilities, pay for
themselves?
Financial Capability Ratios:
10. Revenue Dispersion. How much of our revenue is beyond our direct control?
11. Bonded Debt per Capita. What is our longterm general obligation debt burden on our taxpayers?
12. Available Legal Debt Limit. Will we be able to issue more longterm general bonded debt, if needed?
13. Property Taxes per Capita. What is our property tax burden on our taxpayers?
14. Sales Tax Rate. Will our citizens be likely to approve an increase in sales tax rates, if needed?
Illustration 104 provides additional descriptions of the above ratios, along with formulas for calculating
them. Other ratios that capture these dimensions are change in overall financial position, reported as a
percentage of total net position, and levels of reserves or deficits, employing expenses as a denominator instead
of revenues. Chaney, Mead, and Schermann suggest these ratios, as well as general revenues minus transfers as
a percentage of expenses, to measure financial performance. They also recommend change in net position plus
interest expense as a percentage of interest expense as an additional solvency measure.15
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ILLUSTRATION 104 Financial Indicators Using the CAFR
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Despite the complexity of evaluating governmentwide financial condition, there are
recognizable signals of fiscal stress. These include (1) a decline or inadequate growth in revenues Page 420
relative to expenses, (2) a decline in property values, (3) a decline in economic activity (such as
increasing unemployment, declining retail sales, and declining building activity), (4) erosion of capital plant,
particularly infrastructure, (5) increased levels of unfunded pension and other postemployment obligations, and
(6) inadequate capital expenditures. Warning signals such as these, particularly if several exist simultaneously,
may indicate a potential fiscal crisis unless the government takes action to increase revenues or decrease
spending.
USE OF BENCHMARKS TO AID INTERPRETATION
Regardless of how the ratios are calculated, the more difficult task is how to interpret the ratios to make an
informed judgment about a government's financial condition. Checking each ratio in Illustration 103 and 10–4
against a target or acceptable range is a critical step in the process of analyzing financial performance.
Benchmarking is a very useful tool in the continual process of monitoring performance of “the plan,” allowing
for identification of needed improvements in the delivery of government services.
A benchmark, broadly defined, is any target, range, or “red flag” that provides an analyst with a basis for
comparison in order to draw conclusions about whether performance indicators suggest good or bad news.
Appropriate benchmarks for comparisons can be found inside or outside of the government. Internal monitoring
of trends over time within an organization is the most common method of assessing whether the government
has performed better or worse than prior years. According to the Government Finance Officers’ Association
(GFOA), a government's past performance is usually the most relevant context for analyzing currentyear
financial data16 and, at a minimum, five years of data should be compared. The ICMA's Financial Management
Trend System is a good example of a tool that has been used by many governments as a way to compare
currentperiod ratios to those of prior years for a variety of performance indicators. Illustration 105 shows the
use of timeseries trend monitoring by the City of Columbia, Missouri, for one indicator of financial condition
—Excess of Revenues over Expenditures for the General Fund over a 10year period. A narrative description of
the ratio is provided as well as the mathematical formulation of the ratio. Graphical display of the trend in
addition to data tables assists the analyst in drawing conclusions about the government's performance. Providing
a “warning trend” helps the reader understand whether increasing or decreasing trends are positive or negative
signals. Illustration 105 also presents benchmark information from outside the government. A section called
“Credit Industry Benchmarks” provides metrics and ranges that reflect credit analysts’ assessment of what is
appropriate for a government of this type.
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ILLUSTRATION 105 Indicator 16—Excess of Revenues over Expenditures: General Fund
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Page 422
Illustration 106 presents a comprehensive look at all the financial and economic indicators the City of
Columbia, Missouri, tracks over time with a rating of whether the indicator has improved, declined, or remained
the same from the prior year. Additionally, an indication is provided as to whether the trend is stable/improving,
in need of close attention, or poorly performing (warning). A caveat to keep in mind in using external
benchmarks is that comparison groups may not always be appropriate. A good example is that in a few states,
local school districts are legally part of the government of the city in which they are located, whereas in most
states school districts are independent governments. In some governments population may be the best
denominator for a per capita ratio and in others households are more appropriate.
In addition to analyzing ratios, one should evaluate the stability, flexibility, and diversity of revenue sources;
budgetary control over revenues and expenditures; adequacy of insurance protection; level of overlapping debt;
and growth of unfunded employeerelated benefits. Socioeconomic and demographic trends should also be
analyzed, including trends in employment, real estate values, retail sales, building permits, population, personal
income, and welfare. Much of this information is contained in the statistical section of the CAFR; the remainder
can be obtained from the U.S. Bureau of the Census publications available from its Web site, www.census.gov.
Sources of Governmental Financial Data
Currently, there are no comprehensive benchmark values based on uptodate financial data available for easy
touse comparisons. Raw data, such as that compiled by the GFOA in its Financial Indicators Database from
CAFRs submitted to the Certificate of Achievement for Excellence in Financial Reporting program, must be
converted to useful geographic and population strata benchmarks.
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ILLUSTRATION 106 FY 2013 Columbia Financial Trend Monitoring System—At a Glance
Page 423
Electronic Municipal Market Access
In 2009 a new source of municipal financial information was provided to the public. Through the Municipal
Securities Rulemaking Board (MSRB), the Electronic Municipal Market Access, or EMMA, was established.
EMMA is an online service that investors and others interested in the municipal securities market can access to
obtain information about state and local governments who have issued debt. The MSRB indicates that EMMA
serves as a resource to users who want to learn more about the municipal securities market; evaluate the features
and risks of a specific municipal bond; and/or monitor municipal securities investment. EMMA provides a
wealth of information about individual securities. In addition to the official statement, which is issued when a
new bond or other debt offering is made to the public, other types of information provided include: the type of
debt, initial offer price, the interest rate, the size of the debt issue, and the credit rating for the debt. After a
government issues
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debt, it is required to provide continuing disclosures to the market. Among the required
continuing disclosures is the CAFR. The best way to understand EMMA is to access it through
its Web site at http://emma.msrb.org.
Page 424
Credit Analyst Models
As discussed earlier in this chapter, credit analysts are concerned with assessing a government's ability to pay
interest and principal when due. Credit analysts typically examine the same kinds of information that internal
managers use in evaluating financial condition. Of course, internal managers have access to all information
generated by the government for as far back as data have been retained, whereas credit analysts have access
only to what management provides or what they require from management. Thus, internal managers have an
informational advantage with respect to their own government. Credit analysts with the major bond rating
agencies (FitchRatings, Moody's Investors Service, and Standard & Poor's) or with companies that insure bonds
against default may have an informational advantage with respect to benchmark information, in that they have
data from thousands of entities whose bonds are rated or insured. Moreover, these analysts develop extensive
multipleyear libraries, including budgets and CAFRs, for the entities whose bonds are rated or insured, and
they often visit the entity for discussions with management. Analysts with investment firms (underwriters and
brokers) tend to collect and process much less information than do bond rating and insurer organizations.
Rather, these analysts rely in part on agency ratings to help them properly determine the credit risk of municipal
bonds.
The rating agencies are recognized as one of the primary groups of users of governmental financial reports,
particularly, comprehensive annual financial reports (CAFR). They use financial measures discussed earlier in
the chapter built on audited numbers in the governmentwide and fund financial statements, management's
discussion and analysis, notes to the financial statements, and statistical information in the last section of the
CAFR. Rating agencies have recently revised their rating criteria for general obligation municipal debt issues.
In part the rating criteria adjustments have been made in response to concerns that rating agencies tended to
underrate governments’ overall credit quality when considered relative to nongovernment entities.17 The three
major ratings agencies (FitchRatings, Moody's Investor Service, and Standard & Poor's) focus on similar
criteria in conducting their rating analyses; however, the weight given to qualitative and quantitative data varies
among the agencies. In making adjustments to their processes, rating agencies have focused on the development
of more quantitative tools, such as scorecards, for assessing credit risk. The development of quantitative tools
has the benefit of making the rating process more transparent to investors and issuers. However, the ability to
assess credit risk still relies heavily on the ability to use forwardlooking and qualitative factors in the ratings
assignment process.
FitchRatings uses four factors when conducting its ratings assessment—economy, debt and other longterm
liabilities, finances, and management. Since FitchRatings considers the factors interactive, it uses a dynamic
weighting process in its assessment.18 In January 2014, Moody's Investor Service issued revised rating criteria
for assessing credit risk related to local government general obligation debt. The scorecard developed by
Moody's includes four rating factors that are assigned a factor
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weighting. The broad factors and their weights are economy/tax base (30 percent), finances
(30 percent), management (20 percent), and debt/pensions (20 percent). Each of the broadly Page 425
identified rating factors has several subfactors that are considered in the rating process.19
Standard & Poor's identifies seven factors it considers in assessing credit risk. These factors and their associated
weights are: economy (30 points), management (20 points), budgetary flexibility (10 points), budgetary
performance (10 points), liquidity (10 points), debt and contingent liabilities (10 points), and institutional
framework (10 points).20 Similar to Moody's, Standard & Poor's has subfactors that are considered in its rating
process. You will notice that Moody's and FitchRatings have a different number of factors than Standard &
Poor's, but the factors generally cover the same performance areas.
It should be noted that bond ratings are often viewed, particularly by investors, as crude indicators of long
term financial condition. For example, a Standard & Poor's AAA rating indicates a city is likely in better
financial condition than a city with a BBB rating (the lowest investment grade rating) but a user is unable to
tell how much better from the ratings. Furthermore, ratings assigned to general obligation (GO) bonds often
apply to all GO bonds of the same issuer, although GO bonds issued with state credit backing or other credit
enhancement may carry a higher rating than the ordinary GO bonds of the same issuer.
This chapter describes the evaluation of financial condition. Continued sound financial condition indicates
quality financial management and good financial performance. Achieving strong financial performance,
however, does not ensure efficient and effective operating performance. Although it is difficult to provide an
adequate level of services without sufficient financial resources, achieving efficient and effective use of
productive resources requires innovative budgeting and management techniques. We defer discussion of these
techniques until Chapter 12. In reading Chapter 12, keep in mind the importance of maintaining sound financial
condition if service levels are to be sustained.
Key Terms
Benchmarking, 420
Budgetary solvency, 409
Cash solvency, 409
Economic condition, 410
Financial condition, 409
Financial position, 409
Fiscal capacity, 410
Longrun solvency, 409
Service capacity, 410
Servicelevel solvency, 409
Selected References
Berne, Robert. Research Report, “The Relationship between Financial Reporting and the
Measurement of Financial Condition.” Norwalk, CT: GASB, 1992.
Chaney, Barbara A., Dean M. Mead, and Kenneth R. Schermann. “The New Governmental Financial
Reporting Model,” Journal of Government Financial Management, Spring 2002, pp. 27–31.
Governmental Accounting Standards Board. Concepts Statement No. 1, “Objectives of Financial
Reporting.” Norwalk, CT: GASB, 1987.
Mead, Dean M. What You Should Know about Your Local Government's Finances: A Guide to
Financial Statements. Norwalk, CT: GASB, 2011.
———. An Analyst's Guide to Government Financial Statements. Norwalk, CT: GASB, 2000.
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———. What You Should Know about Your School District's Finances: A Guide to
Page 426
Financial Statements. Norwalk, CT: GASB, 2012.
Maher, Craig, S., and Karl Nollenberger. “Revisiting Kenneth Brown's ‘10Point Test’.” Government
Finance Review, October 2009, pp. 61–66.
Nollenberger, Karl. Evaluating Financial Condition: A Handbook for Local Government, 4th ed.
Washington, DC: ICMA, 2003.
Questions
101.
Describe some typical causes of municipal financial crises. How could an effective
monitoring system reduce the risk of a financial crisis?
102.
The GASB indicates that economic condition is composed of three components. Identify
and define the three components of economic condition.
103.
The International City/County Management Association (ICMA) describes four types of
solvency within the concept of financial condition. Identify each type and explain why
each is important to the longterm financial health of a government.
104.
Identify some of the characteristics of a government's citizens that can affect the
government's financial condition. Explain how the characteristics affect financial
condition.
105.
When conducting a financial analysis, ratios based solely on governmental fund financial
statements would not be considered sufficient for assessing economic condition. Explain
why this statement would be true.
106.
Explain how organizational factors, such as management practices and legislative policies,
affect a government's financial condition.
107.
Should citizens be concerned if the funded ratio for pension plans decreases over time?
Why?
108.
Illustration 104, adapted from Crawford and Associates, lists several ratios under the
heading Financial Position. Which of the ratios listed most closely aligns with the GASB
research study definition of financial position provided on page 409? Explain why the
ratios you selected align with the definition of financial position.
109.
What is EMMA and when would someone want to use EMMA?
10
10.
Identify factors that the rating agencies use in determining bond ratings. Which of the
factors identified is beyond management control and how could this factor affect the
government's finances?
Cases
10
11
Research Case—EMMA. Electronic Municipal Market Access (EMMA) provides
investors and others interested in state and local government debt and financial information
an excellent resource. By accessing EMMA an individual is able to learn about what type
of debt is outstanding for a government of interest, and he/she is also able to learn about
the debt's characteristics along with the financial performance of the entity. Access EMMA
(http://emma.msrb.org) and using the Education and Browse Issuers sections complete this
case.
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Required
Page 427
a. Use the Education Center to help answer the following questions:
1. What is a credit rating and when is a credit rating issued?
2. What is an official statement and what financial information is required in an
official statement?
b. To answer the following questions, use the Browse Issuers, click on a state (your
home state might be of interest to you), and then click on a city of interest. Finally,
look for a debt issuance, while a general obligation issuance is preferred, any long
term debt issue should provide the information needed to answer the following
questions. Be aware that not all governments will have outstanding debt issuances.
1. Is a credit rating provided for the debt issue you selected? If so, who issued
the rating and what is the rating?
2. Was the debt initially issued at a premium or a discount?
3. Click on a CUSIP for your debt issue and indicate what financial information
was included with the official statement. Check for continuing disclosures
(there is a continuing disclosures button)—are CAFRs provided under
continuing disclosures?
10
12
Municipal Credit Analysis.* In the 2010 CAFR, Detroit indicated that its general
obligation debt rating had been downgraded by Moody's Investors Services from a Ba2 to
a Ba3. Based on its fourth quarter Performance Dashboard1, Detroit was subsequently
downgraded to junk bond status as of the fourth quarter of 2012 by all three rating services
(Caa2, Moody's; CCC, Standard & Poor's; CCC, Fitch). The audit of the 2011–2012
financial reports resulted in the following statement from its auditor, KPMG:
“The City has an accumulated unassigned deficit in the General Fund of $326.6
million as of June 30, 2012, which has resulted from operating deficits over the last
several years. The deficits raise significant liquidity risks regarding the City's ability to
meet its financial obligations as they come due without raising revenues, cutting costs
of services provided, and effectuating financial restructuring.”2
As Detroit indicates in its 2012 CAFR report, the city faces socioeconomic factors that
make it difficult for the city to regain its financial footing:
The City of Detroit is the largest City in Michigan and the 18th largest City in the
United States. However, as documented in the 2010 Census, the City's population
continues to decline, which contributes to the declining property and income tax base.
In addition, the City faces continued high unemployment (18.9% in October 2012),
which hinders personal income tax collections. Resident home foreclosures and
delinquent property tax levels are another financial concern. The weak economy has
had an adverse impact on the State's budget resulting in cuts of revenue sharing to
local governments. The City's revenue sharing for the year ended June 30, 2012 was
$173.3 million or $66.0 million less than the year ended June 30, 2011.
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Although the City's current economic condition is poor, the future
outlook for recovery and improvement is positive. Businesses are
transferring employees from suburban cities to the City of Detroit. New
residents are moving into the City's midtown area.
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Following are selected financial indicators from Detroit's CAFRs, which provide financial
data that can be used to help identify financial trends the city has experienced with regard
to its economic condition.
In July of 2013 Detroit filed for bankruptcy.3 Since its bankruptcy filing, numerous events
have occurred that impact the city's economic condition.
Required
a. Using the information provided in the case, the information provided in the
Illustrations 103 and 104, and the information provided in the Credit Analyst
Models section of the text provide an analysis of factors that would lead to the
downgrading of the debt rating.
b. The City of Detroit's Finance Department provides quarterly performance indicators
on financial sustainability and some economic indicators along with service
performance. Additionally, the Emergency Manager for the bankruptcy provides
quarterly filings on the Detroit Web site. These quarterly reports provide a status
update on Detroit's financial situation. Using the information provided by the
Finance Department and the Emergency Manager, assess the city's economic
condition. As part of the assessment indicate whether you believe the city's condition
has improved, worsened, or remained the same since 2012.
10
13
Financial Analysis.* In 2010 the city had failed to honor its guarantees on The Harrisburg
Authority (THA) debt. (THA is a component unit of the city.) In 2011 Harrisburg filed for
bankruptcy; however, the bankruptcy petition was denied by the court. The State of
Pennsylvania appointed a receiver for the City of Harrisburg in 2011 to help with the city's
economic recovery. The
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following three paragraphs are taken from the mayor's transmittal letter in
the 2012 CAFR report. Subsequent to the three paragraphs are two bar
charts providing 10 years of information on General Fund balance and net
position and a table providing 5 years of debt performance information.
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For perspective, 2009 was the year the City went from a 2008 statement of net
position, where assets exceeded liabilities by $46,178,883, to a deficit in 2009 of
$227,092,975. It was the year in which the contingent liability for The Harrisburg
Authority Resource Recovery Facility debt guarantees of approximately $264 million
would be recorded on the City's financial statements due to payment defaults on that
debt.
As of December 31, 2012, the City's liabilities exceeded its assets by $277,261,834,
representing a further decrease of net position of $28,092,042. As of December 31,
2012, the City's governmental funds (General Fund, Grant Programs, Debt Service and
other NonBusiness Type Funds) reported combined ending fund balances of
($76,414,768), a decrease of $23,421,231 from 2011.
The General Fund is the City's primary operating fund and the largest source of day
today service delivery. The Fund Balance of the General Fund decreased by
$23,569,137 for the year ending December 31, 2012, from the prior year, primarily due
to a significant dropoff in departmental earnings resulting from a $7 million decrease
in administrative service charge revenue from the Water and Sewer Funds, higher
expenditures incurred from a writeoff of approximately $5 million of Incinerator
amounts receivable from under guarantee agreements for principal and interest
previously paid by the bond insurer, and an $11.2 million accrued liability associated
with the settlement of reimbursable sewer related amounts owed to several suburban
municipalities.
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Page 430
Required
a. Using your library's resources, locate Craig S. Maher, and Karl Nollenberger.
“Revisiting Kenneth Brown's ‘10Point Test’.” Government Finance Review,
October 2009, pp. 6166. The City of Harrisburg has a population of between 47,000
and 50,000 people. Based on its size, assess the City of Harrisburg's debt
performance relative to that of comparably sized cities.
b. Later in the mayor's 2012 transmittal letter she indicates that the city is confident of
financial solvency and the city is working toward an economically bright future.
Based on the limited information you have been provided, discuss your assessment
of how financially solvent the city appears and its timeframe for achieving an
economically bright future.
10
14
Financial Trends. You are a new city council person for the City of Columbia, Missouri.
You are aware that several cities have been in the news recently because of the financial
crises they have faced. The governing bodies have been criticized for not being aware of
the negative signals and trends that obviously contributed to challenging financial
situations. Although you were assured at the first few council meetings that the city was
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overall in good financial shape, you want to be sure you “do your homework” and assess
the financial condition of the city for yourself.
You know that the City of Columbia prepares a Financial Trends report each year based
on the ICMA's Financial Trends Monitoring System and that it posts this on its Web site at
www.gocolumbiamo.com.
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Required
Page 431
a. Go to the city's Web site and view a copy of the Financial Trends
report. (Hint: Once at the Web site, click on City Government and you will find
financial reports.) The trend report can be accessed by clicking on Financial Reports.
Examine the trend information and make a list of any indicators that are negative.
b. Prepare a list of questions for the next city council meeting. Your questions should
help you focus on whether you and the other council members should be concerned
about any trends.
Exercises and Problems
10
15
Examine the CAFR. Utilizing the CAFR obtained for Exercise 116 and your answers to
the questions asked in Chapters 1 through 9, assess the economic condition of the
government. For purposes of this project, the term economic condition is as defined earlier
in this chapter. Examine the following issues and questions.
a. Analysis of revenues and revenue sources.
(1) How stable and flexible are the city's revenue sources in the event of adverse
economic conditions?
(2) Is the revenue base well diversified, or does the city rely heavily on one or two
major sources?
(3) Has the city been relying on intergovernmental revenues for an excessive
portion of its operating expenditures?
(4) What percentage of total expenses of governmental activities is covered by
program revenues? By general revenues?
(5) Do any extraordinary or special items reported in the statement of activities
deserve attention?
b. Analysis of reserves.
(1) Are the levels of financial reserves (i.e., spendable fund balances, contingency
funds, and unrestricted net position) adequate to meet unforeseen operational
requirements or catastrophic events?
(2) Do total governmental fund revenues exceed total governmental fund
expenditures? Do General Fund revenues exceed General Fund expenditures?
What has been the trend in the ratio of revenues to expenditures?
(3) Is an adequate amount of cash and securities on hand, or could the city borrow
quickly to cover shortterm obligations?
c. Analysis of expenditures and expenses.
(1) Do any components of expenditures and, at the governmentwide level,
expenses exhibit sharp growth?
(2) How flexible are expenditures? That is, are there large percentages of relatively
nondiscretionary expenditures, such as for interest and public safety?
(3) How does the growth pattern of operating expenditures and expenses over the
past 10 years compare with that of revenues?
d. Analysis of debt burden.
(1) What has been the 10year trend in general obligation longterm debt relative to
trends in population and revenue capacity?
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(2) Are significant debts of other governments (e.g., a school district, a county)
supported by the same taxable properties? What has been the trend for this
“overlapping” debt?
(3) Are there significant levels of shortterm operating debt? If so, has the amount
of this debt grown over time?
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(4) Are there any significant debts (e.g., lease obligations, unfunded
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pension liabilities, accrued employee benefits) or contingent
liabilities?
(5) Are any risky investments such as derivatives disclosed in the notes to the
financial statements?
e. Socioeconomic factors.
What have been the trends in demographic and economic indicators, such as real
estate values, building permits, retail sales, population, income per capita, percent of
population below the poverty level, average age, average educational level,
employment and unemployment, and business licenses? (Note: Many of these items
and other potentially useful information can be obtained from the Census Bureau's
Web site www.census.gov.)
f. Potential “red flags” or warning signs.
(1) Decline in revenues.
(2) Decline in property tax collection rate.
(a) Less than 92 percent of current levy collected?
(b) Property taxes more than 90 percent of the legal tax limit?
(c) Decreasing tax collections in two of the last three years?
(3) Expenditures increasing more rapidly than revenues.
(4) Declining balances of liquid resources and fund balances.
(a) General Fund spendable fund balance deficit in two or more of the last five
years?
(b) General Fund assigned and unassigned fund balance less than 5 percent of
General Fund revenues and other financial sources?
(5) Reliance on nonrecurring (i.e., special item) revenues to support currentperiod
operations.
(6) Growing debt burden.
(a) Shortterm debt more than 5 percent of operating revenues?
(b) Twoyear trend of increasing shortterm debt?
(c) Shortterm interest and currentyear debt service on general obligation debt
more than 20 percent of operating revenues?
(d) Debt per capita ratio 50 percent higher than four years ago?
(7) Growth of unfunded pension and other employeerelated benefits such as
compensated absences and postemployment health care benefits.
(8) Deferral of needed maintenance on capital plant.
(9) Decrease in the value of taxable properties, retail sales levels, or disposable
personal income.
(10) Decreasing revenue support from federal or state government.
(11) Increasing unemployment.
(12) Unusual climatic conditions or the occurrence of natural disasters.
(13) Ineffective management and/or dysfunctional political circumstances.
Required
a. Calculate, insofar as possible, the financial ratios in Illustrations 103 and 104 of
the text. Evaluate the ratios in terms of the red flags, information provided in
Illustration 103, benchmarks provided in Illustrations 105 and 106, and longterm
trend data for each ratio, if available. List any assumptions you made.
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Locate any additional data that you think may be useful in assessing
Page 433
the financial condition of this city; for example, see the U.S. Census
Bureau's Web site at www.census.gov and the Web sites of cities you
consider comparable in size or other attributes to this city.
c. Prepare a report on the results of your analysis. The report should have an appendix
providing a few graphs and/or tables to support your analysis. In particular, graphs
showing revenues, expenditures, and key debt ratios for the past 10 years and
selected demographic and socioeconomic trends are helpful. You may want to
include some of the ratios calculated in part b in an appendix. Be succinct and
include only data relevant to your analysis. Organize your report along the lines of
the ratios evaluated in part a.
10
16
Multiple Choice. Choose the best answer.
1. Evaluation of government financial performance is important for which of the
following reasons?
a. Credit analysts use it to determine whether bonds should be issued.
b. Investors use it to make decisions about bond investments.
c. Oversight bodies use it to develop new laws.
d. Managers use it to evaluate day to day operations.
2. Which of the following terms or concepts focuses primarily on a government's
ability to generate enough cash over a 30 or 60day period to pay its bills?
a. Interperiod equity.
b. Financial position.
c. Budgetary solvency.
d. Cash solvency.
3. Why does GASB prefer to use the term economic condition rather than financial
condition?
a. Economic condition considers the probability that the government will meet
both financial and service obligations currently and in the future but financial
condition does not.
b. Financial condition does not consider the ability to maintain service levels.
c. Economic condition focuses on both the ability and willingness to meet
financial and service obligations.
d. Financial condition focuses primarily on liquidity.
4. Factors that influence a government's financial condition include which of the
following?
a. Financial factors, such as governmental fund financial ratios.
b. Environmental factors, such as community needs and resources.
c. Organizational factors, such as management practices and legislative policies.
d. All of the above.
5. Which of the following environmental factors reveals the entity's underlying
philosophies regarding willingness to support higher taxes, issuances of longterm
debt, and increased social services?
a. Political culture.
b. Community needs and resources.
c. External economic conditions.
d. Management practices and legislative policies.
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Which of the following would be an effective means of
Page 434
benchmarking?
a. Comparing the city's key ratios to those of special purpose
governments in the area.
b. Comparing currentperiod ratios to published medians of the same ratios for
cities of similar size or in the same geographic region.
c. Comparing key ratios to published medians of the same ratios for larger cities
in other parts of the country.
d. Comparing currentperiod ratios to estimates for future periods.
7. Which of the following conditions could signal decreasing fiscal stress?
a. Increasing unemployment.
b. Decreasing property values.
c. Increasing revenues relative to expenditures.
d. Increasing levels of unfunded pension obligations and other postemployment
retirement benefits.
8. Rating agencies, such as FitchRatings, Moody's Investor Service and Standard &
Poor's, produce bond ratings that
a. Are created using the exact same measures and weights.
b. Allow users to know how much better one issuing entity's financial condition
is than another's.
c. Focus both on quantitative and qualitative factors using proprietary models.
d. Are intended to be precise indicators of the government's longterm financial
condition.
9. Which of the following suggests a government that is relying primarily on revenues
it directly controls?
a. Property taxes, 20%; charges for services, 70%; grants and contributions, 5%;
investment income, 5%.
b. Property taxes, 20%; charges for services, 60%; grants and contributions,
10%; investment income, 10%.
c. Property taxes, 40%; charges for services, 40%; grants and contributions,
10%; investment income, 10%.
d. Property taxes, 60%; charges for services, 5%; grants and contributions, 30%;
investment income, 5%.
10. What is Electronic Municipal Market Access, or EMMA?
a. A librarybased service that provides information about state and local
governments that have issued debt.
b. A feebased service that provides information to investors and credit analysts
about government bond issues.
c. An online service that allows users to learn more about the municipal
securities market.
d. A source of municipal finance information developed by the Securities and
Exchange Commission.
10
17
Financial Condition. Write the letters a through o on a sheet of paper. Beside each letter,
put a plus (+) if a high or increasing value of the item is generally associated with stronger
financial condition, a minus (−) if a high or increasing value of the item is generally
associated with a weaker financial condition, and NE if the item generally has no effect on
the financial condition or the direction of the effect cannot be predicted.
a. Unfunded pension liability.
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b. Operating deficit.
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Revenues over expenditures.
d. Intergovernmental revenues.
e. Level of business activity.
f. Education level of citizens.
g. Unemployment rate.
h. Restrictions on revenues.
i. Personal income per capita.
j. Debt service.
k. Percentage of households below the poverty level.
l. Shortterm borrowing.
m. Property values.
n. Population growth.
o. Political party of the mayor.
10
18
Page 435
Benchmarks. Examine the following tables from the Financial Trend Monitoring Report
for the Town of Oakdale that reports on fiscal year 2017. The performance indicators
selected are total revenue and revenue per capita. The town provides three reference
groups with which to compare Oakdale: Aaarated municipalities, comparison
municipalities, and the state median. Since local government budgeting in this state is
driven by the property tax levy cap, this is a key variable in comparing municipalities.
Required
a. Prepare a histogram or bar graph that shows Oakdale in relation to the three
reference groups, Aaarated median, comparison reference group, and state median
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for FY 2017 total revenue and a separate graph for FY 2017 revenue per capita.
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Evaluate the financial performance of Oakdale for FY 2017. Use
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information from the tables and the graph you prepared for Part a to
support your analysis.
c. What other performance measures would you like to see before you conclude the
town is in good or bad shape for the fiscal year shown?
10
19
Financial Trend Monitoring System. The City of St. Cloud, Minnesota, annually
prepares a trend report using the ICMA's Financial Trend Monitoring System. The table
presented here captures trend information provided by St. Cloud in its 2013 Annual
Financial Trend Report. For a description of the indicators included, see Illustration 103 in
this chapter.
Required
a. Based on the trend, which indicators indicate improving financial performance?
b. Based on the trend, which indicators indicate declining financial performance?
Using Illustration 103, discuss what the decline indicates.
c. Discuss your overall assessment of St. Cloud's financial performance.
d. What additional information would be helpful in assessing St. Cloud's financial
performance?
10
20
Comparative Ratios. The governmentwide financial statements for the City of Arborland
for a threeyear period are presented on the following pages.
Additional information follows:
Population: Year 2017: 30,420, Year 2016: 28,291, Year 2015: 26,374.
Debt limit remained at $20,000,000 for each of the three years. Net cash from
operations is generally 80 percent of total revenues each year.
Required
a. Which of the financial performance measures in Illustration 104 can be calculated
for the City of Arborland based on the information that is provided?
b. Calculate those ratios identified in part a for FY 2017. Show your computations.
c. Provide an overall assessment of the City of Arborland's financial condition using all
the information provided, both financial and nonfinancial. Use information from the
prior years to form your assessment.
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Page 437
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Page 440
*This case represents an update to the Detroit case that can be found in the 16th edition of the textbook.
1 http://www.detroitmi.gov/DepartmentsandAgencies/Finance/PerformanceIndicators.aspx
2 Comprehensive Annual
Financial Report, Independent Auditors Report, Detroit, Michigan, 2012, p 2.
*This case represents an update to the Harrisburg case presented in the 16th edition of the textbook.
3 Michael
Corkery and Matthew Dolan, “Detroit Bankruptcy Likely to Spark a Pension Brawl; Filing Will be a Test
Case of How Far a City Can Go in Shedding Retiree Costs,” The Wall Street Journal (online), July 20, 2013.
1 We define financial
transparency as all relevant financial information that is fully and freely available to users.
2 Dean
M. Mead, What You Should Know about Your Local Government's Finances: A Guide to Financial Statements (Norwalk,
CT: GASB, 2011). A related guide, also by Dean M. Mead, is What You Should Know about Your School District's Finances: A
Guide to Financial Statements (2012).
3 Dean
M. Mead, An Analyst's Guide to Government Financial Statements (Norwalk, CT: GASB, 2012), p. 277.
4 Robert
Berne, Research Report, “The Relationship between Financial Reporting and the Measurement of Financial Condition”
(Norwalk, CT: GASB, 1992).
5 Ibid., pp. 16–17.
6 Ibid.
7 Karl
Nollenberger, Evaluating Financial Condition: A Handbook for Local Government, 4th ed. (Washington, DC: International
City/County Management Association, 2003); a revision of the original 1980 text by Sanford M. Groves and Maureen G. Valente.
8 Governmental
Accounting Standards Board, Concepts Statement No. 1, “Objectives of Financial Reporting” (Norwalk, CT:
GASB, 1987), par. 61.
9 GASB Statement
No. 44, “Economic Condition Reporting: The Statistical Section” (Norwalk, CT: GASB, 2004), par.49.
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10 Lisa Parker, Dean
Mead, Dan Brown, and Jay Fountain memo to Economic Condition Reporting: Fiscal Sustainability Task
Force Members. Definitions of “Economic Condition and Its Components, Including Fiscal Sustainability,” GASB, May 17, 2010.
11 Governmental
Accounting Standards Board. See Project Pages: Economic Condition Reporting: Financial Projections at
www.gasb.org.
12 Ibid.
13 Nollenberger, Evaluating
14 Crawford
Financial Condition, pp. 147–52.
& Associates, P.C., The Performeter® (Oklahoma City, OK, 2008). See its Web site at crawfordcpas.com.
15 Barbara A. Chaney, Dean
M. Mead, and Kenneth R. Schermann, “The New Governmental Financial Reporting Model,” Journal
of Government Financial Management, Spring 2002, pp. 2731. In this article, the authors calculate and compare these ratios for
two cities with similar population size.
16 Government
Finance Officers’ Association, Recommended Practice: The Use of Trend Data and Comparative Data for
Financial Analysis (2003). Available at www.gfoa.org.
17 Christopher
18 Richard
O'Leary, “Rating Agencies to Reevaluate Ratings Criteria,” Investment Dealer's Digest, August 23, 1999, pp. 7–9.
J. Raphael, FitchRatings Presentation at the GFOA Conference: Rating Methodology, May 19, 2014.
19 Moody's Investor
20 Standard
Service, Rating Methodology: US Local General Obligation Debt, January 15, 2014.
& Poor's Ratings Services, https://www.spratings.com/uslocalgovernmentscenariobuilder, accessed May 27, 2014.
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