Government Financial Condition

1
Government Financial Condition
2
Overview

• What is financial condition?
• Why is it important?
• Why evaluate financial condition?
• What influences financial condition?
• Results of national survey
• Results of national study

3
Financial Position vs. Financial Condition vs.
Economic Condition

• Financial position focuses on
• Current financial resources
• Ability to pay obligations in the short-run
  (liquidity)
• Financial condition refers to
• Governments ability to provide services at
  desired levels both currently in the future
  (solvency)

4
Financial Position vs. Financial Condition vs.
Economic Condition

• Economic condition term used by GASB to capture a
  composite of the governments
• Financial health
• Its ability willingness to meet its
• Financial obligations
• Commitments to provide services

5
What is Financial Condition?

• Financial position
• A measure of financial performance
• Ability to provide services
• Concept Statement No. 1
• Short long term
• Time dimension
• Impact of economic environment
• Multi-constituency with interdependencies
• Obligations not reflected in cash flows or
  contracts

6
Why is Financial Condition Important?

• Florida Statutes the auditor
• Ultimate indicator of financial performance
• Bond rating agencies
• GASB

7
Why is Financial Condition Important?

• Necessary to continue providing services
• Continued use
• Deterioration of FC
• Deplete a citys cash reserves
• Reduce services
• Health, safety, and welfare

8
Why Evaluate Governmental Financial Condition?

• Early warning system can possibly prevent
  disruption in critical government services
• Taxpayers demand better performance from
  governmental officials credit analysts expect
  it
• Analytical tools have evolved to better track
  governmental financial performance

9
What Influences Financial Condition?

• Resources
• Financial
• Human
• Capital
• Allocation, distribution, management

10
What Influences Financial Condition?

• Environment
• Governance
• Philosophies
• Socio-economic

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What Influences Financial Condition?

• Environment
• Governance
• Years incorporated
• Form of government
• Type of elections
• Number of terms for elected officials
• Legal limitations

12
What Influences Financial Condition?

• Environment
• Philosophies elected officials staff
• Taxes vs. user fees
• IFTs
• Use of debt
• Budget balancing

13
What Influences Financial Condition?

• Environment
• Socio-economic
• Population MSA
• Education, employment, income
• Age

14
What Influences Financial Condition?

• Financial management capacity
• Links resources to financial performance
• Management necessary to provide adequate services
  with available resources
• Ensure sound FC without affecting services
• Implementation monitoring safeguards assets
• Improves FC

15
What Influences Financial Condition?

• Financial management capacity
• Government Performance Project
• Budget system
• Strategic system
• Fall back system
• Accounting reporting system
• Internal control system
• Leadership system

16
What Influences Financial Condition?

• Financial management capacity
• Consists of
• Policies
• Procedures
• Practices
• Strategies
• Financial leadership

17
What Influences Financial Condition?

• Designations of fund equity
• Rainy day fund
• Asset replacement
• Optional early retirement of debt
• Natural disasters
• Voluntary rate stabilization

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Financial Condition Monitoring Process

• Benchmarks
• Considerations
• Comparability of jurisdictions used
• Appropriateness of indicators used
• Effort involved to obtain benchmark info
• Timing of availability of benchmark info
• Interpretations of benchmark comparisons
• Internal vs. external
• Consistent use
• Positive negative trends

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Financial Condition Monitoring Process

• Ratios - useful analytical tools in examining
  relationships among elements of FS
• Data - normally readily obtainable from sections
  of CAFR other documents
• Both single year multiple-year trends are
  useful

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Financial Condition Monitoring Process

• Constant dollars
• Formal policy
• Delineates stress points
• Incorporates remedies
• Staff
• Elected officials

21
Financial Condition Monitoring Process

• Frequency
• Consistent
• Timing in FY
• Who to perform
• Internal
• External
• Reporting results
• To whom how
• Responding to evaluation

22
Financial Condition Monitoring Process

• Level of data
• Year end vs. interim
• Trends
• Revenue
• Expenditure/expense
• Operating position
• Debt
• Long term commitments

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Signs of Fiscal Distress

• Decline in revenues relative to expenditures
• Declining property values
• Declining economic activity
• Retail sales
• Tourist travelers

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Signs of Fiscal Distress

• Erosion of capital plant
• Deferred maintenance
• Increasing levels of unfunded obligations
• Pensions, OPEB
• Compensated absences
• Inadequate capital expenditures

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Common Financial Condition Indicators
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Revenue Trends

• Recurring General Fund revenues per capita
• Ad valorem taxes
• Restricted operating revenues to net operating
  revenues

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Revenue Trends

• Intergovernmental operating revenues to gross
  operating revenues
• Enterprise user charges to service costs
• Operating revenues per customer

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Expenditure/Expense Trends

• Governmental expenditures per capita
• Enterprise fund expenses per customer
• Personnel costs per employee

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Operating Position Trends

• General Fund operating deficits to net operating
  revenues
• Unreserved fund balances to net operating revenues

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Operating Position Trends

• Cash and short-term investments to current
  liabilities
• Enterprise fund profits or losses in constant
  dollars

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Debt Trends

• Ratio of outstanding general obligation debt to
  assessed valuation
• Ratio of outstanding self-supporting debt to
  related pledged revenue source(s)

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Other Trends

• Funded pension/OPEB liability (AAL) ratio
• Ratio of accumulated days unused compensable
  employee leave to number of eligible employees

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Financial Condition Indicators

• ICMA GASB Style

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Financial Condition Solvency

• Cash solvency
• Ability to generate enough cash to pay bills
  (30-60 days)
• Budgetary solvency
• Ability to generate enough revenue over a normal
  budgetary period to meet expenditures
• Long-run solvency
• Ability to pay all costs of doing business in
  long-run
• Service-level solvency
• Ability to provide services at level quality
  required desired by community

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Cash Solvency

• Cash ratio
• Quick ratio
• Current ratio

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Budget Solvency

• Operating ratio
• Surplus/deficit per capita

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Long-run Solvency

• Net asset ratio
• Long-term liability ratio
• Long-term liabilities per capita

38
Service Level Solvency

• Taxes per capita
• Revenues per capita
• Expenses per capita

39
National Survey Results

• Conducted Summer 2004
• Dennis

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National Survey Results

• Respondents demographics
• 77 CFO/DOF
• 43 South
• 71 manager/council
• 66 term length 3-4 years
• 56 voting members 6-10
• 48 10,000-49,999 population
• 56 median age 26-35
• 66 over 16 employed
• 84 high school education

41
National Survey Results

• Budget system
• 47 line item
• 46 program/performance
• 82 excess revenues to equity
• Multiyear
• 14 operating gt 3 years
• 31 capital gt 5 years

42
National Survey Results

• Strategic management
• 78 CM policy
• 27 with PMs
• 32 formally mandated
• 94 IM policy
• 66 with PMs
• 70 formally mandated
• 74 DM policy
• 51 with PMs
• 31 formally mandated
• 56 strategic plan
• 76 use for operating budget
• 60 capital budget
• 75 CIP
• 13 formally mandated

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National Survey Results

• Correlations with FMC index
• All significant (p lt .01)
• Strategic management (r .65)
• Accounting reporting (r .63)
• Internal control (r .572)
• Contingency planning (r .48)
• Leadership (r .31)
• Control variables
• Term length (-.202, p lt .01)
• Limit on LTD (-.146, p lt .05)
• Household income (-.150, p lt .05)
• employed (.202, p lt .01)

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National Study Results

• Fiscal Year 2003
• Wang, Dennis, Tu

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Research Purpose

• Develop financial condition index
• Initial continued evaluation of financial
  condition
• Useful for
• Managers
• Rating agencies
• Business community
• Citizens
• Elected officials
• Appropriateness of government-wide data for
  analysis of financial condition

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Research Methodology

• Government-wide data (PG only)
• Statement of Net Assets, Statement of Activities
• 50 states
• New Mexico excluded no data
• Alaska excluded - outlier
• 2003
• Second year of GASB No. 34
• NY first year

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Research Methodology

• ICMA solvency framework of financial condition
• Cash
• Budget
• Long-run
• Service level
• Comparison of financial condition index to
• Socioeconomic variables
• Changing socioeconomic conditions

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ICMA Framework of Financial Condition

• Cash solvency
• Cash, quick, current ratios
• Budget solvency
• Operating ratio
• Surplus/deficit per capita

49
ICMA Framework of Financial Condition

• Long-run solvency
• Net asset ratio
• Long-term liability ratio
• Long-term liabilities per capita
• Service level solvency
• Taxes, revenues expenses per capita

50
National Study Results

• Correlations
• All significant (p lt .01)
• Budget solvency cash solvency (r .397)
• Budget solvency long-run solvency (r .490)
• Long-run solvency cash solvency (r .384)
• Financial Condition - all significant (p lt .10)
• Population financial condition (r -.295)
• Personal income per capita (r -.259)
• change in employment 1998-2003 (r .254)