Financial Condition Assessment

1
Financial Condition Assessment

• Florida Government Finance Officers Association
• Altamonte Springs Hilton
• February 2009

2
What is financial condition and why worry about
it?
3
Financial Condition Assessment

• ICMA Sponsored White paper www.transformgov.org/Fi
  scalSection.aspx?id2158
• Fiscal health reflects the adaptation of a LGs
  revenues and expenditures to the resources and
  constraints provided by its environment
• Long-term adaptation tactics
• Avoid commitments to fixed expenses such as debt
  service
• Diversify revenue sources so theyre fairly
  stable
• Maintain adequate reserves to deal with abrupt
  shocks
• Short-term tactics
• Promptly rein in controllable expenses
• Adjust revenue mix and tax rates to extent
  permitted by law

4
Financial Condition Assessment

• What are effects of poor financial condition?
• Possible consequences of deteriorating financial
  condition
• Significant reduction of staff or services
• Postponement of capital projects
• Negative impact on bond or credit ratings (more
  costly and difficult to obtain financing)
• Negatively impact companies looking to relocate
• Political embarrassment
• Financial emergency (possible oversight board)

5
Financial Condition Assessment

• Who is responsible for monitoring financial
  condition?
• Local Government Auditor
• Apply financial condition assessment procedures
• Notify local governments of deteriorating
  financial conditions and make recommendations to
  address them (Section 218.39(5), FS)
• Local Government
• Responsible for self assessment to assist
  governing body to make decisions re providing
  services while being fiscally responsible

6
Financial Condition Assessment

• What financial condition assessment procedures
  should the LG or auditor use?
• Task force developed financial condition
  assessment procedures
• Available on the AG Web site
• Not mandatory, but strongly suggested

7
(No Transcript)
8
(No Transcript)
9
(No Transcript)
10
(No Transcript)
11
(No Transcript)
12
(No Transcript)
13
(No Transcript)
14
Guide for Analysis Follow Up of Financial
Indicators

• Financial Indicator 1
• Ratio/Trend Unreserved Fund Balance
  Unrestricted Net Assets (Constant )
• Applicable Funds All governmental funds except
  special revenue funds, proprietary funds
• Warning Trend Declining results may indicate
  that the entity could have difficulty maintaining
  a stable tax and revenue structure and/or
  adequate level of services (deficits may indicate
  a financial emergency)

15
Suggested Analysis - Fund Equity Properly
Classified?

• An entitys unreserved fund equity was overstated
  by 950,000 because restricted resources were not
  properly reported
• Unexpended loan proceeds, restricted for capital
  improvement purposes, were not reported as
  reserved fund balance
• Required water and sewer bond reserves were not
  reported as reserved net assets
• Result Misstatement of financial position and
  improper assessment of financial condition

16
Suggested Analysis Budget Properly Prepared?

• Types of budget preparation deficiencies noted
• Effect of beginning fund equities available from
  prior fiscal years not considered
• No support for budgeted beginning fund equities
• Some expenditures not budgeted for
• Improperly prepared budget diminishes ability to
  determine appropriate increases or decreases in
  revenues or expenditures that may be needed for
  the fiscal year for which budget is being adopted

17
Suggested Analysis Budget Overexpenditures?

• Law limits local government expenditures to
  budgeted appropriations however, law does not
  establish the level of detail at which budgeted
  appropriations are to be made
• One entity established legal level of budget
  control (i.e., the level at which changes to
  budget amounts require approval by the governing
  body) at department level for the General Fund
• Budget overexpenditures totaled 1,076,836 in
  various departments in the General Fund
• One did not establish legal level of budget
  control

18
Suggested Analysis Budget Comparisons?

• An entity failed to adhere to the amortization
  schedule for a 260,000 loan to finance the
  purchase of a fire truck
• Amortization schedule called for semi-annual P
  I payments of 13,000, but entity made
  semi-annual payments of 1,300
• Pre-audit procedures did not detect that payments
  were not in agreement with the amortization
  schedule
• Entity started paying correct amount, but by the
  end of the loan term the entity will have paid an
  additional 44,700 of interest

19
Guide for Analysis Follow Up of Financial
Indicators

• Financial Indicator 2
• Ratio/Trend Unreserved Fund Balance/Total
  Expenditures
• Applicable Funds All governmental funds for
  total expenditures and all governmental funds
  except special revenue funds for unreserved fund
  balance
• Warning Trend Percentages decreasing over time
  may indicate unstructured budgets that could lead
  to future budgetary problems even if the current
  fund balance is positive

20
Suggested Analysis Expenditures
Proper/Reasonable?

• Governments are exempt from certain Federal,
  State, and local taxes on telephone services
• Internal Revenue Code Section 4253(i) - exemption
  to certain Federal taxes on telephone services
• Section 212.08(6), FS - exemption to State sales
  taxes on telephone bills
• Section 202.125(3), FS exemption to gross
  receipts tax on communication services
• AGO 87-29 governments exempt from E911 fees
• One entity we audited was billed for and paid
  approximately 4,000 for such taxes on cell phone
  billings during a fiscal year

21
Suggested Analysis Expenditures
Proper/Reasonable?

• Of one entitys 77 telephone lines, 47 were not
  being utilized
• 20 were not even functional
• 27 were functional but never used
• Result During the audit period, the entity paid
  about 22,000 for 47 telephone lines for which it
  received no benefit

22
Suggested Analysis Expenditures
Proper/Reasonable?

• An entity did not timely notify employee
  insurance providers about employee terminations
• The providers kept billing the entity for
  premiums on employees that no longer worked for
  the entity
• Entity did not reconcile the billings to lists of
  active employees
• Result Entity overpaid 164,000 of premiums for
  health, dental, vision, and life insurance during
  the audit period

23
Suggested Analysis Expenditures
Proper/Reasonable?

• Audit tests disclosed that an entity had
  expenditures totaling 9,600 that primarily
  benefited private individuals rather than serve a
  public purpose
• 3,600 for Thanksgiving turkey giveaways
• 800 for flowers for employees and others
• 900 for certain individuals to attend theme
  parks
• Entity ended up in a state of financial emergency
  because it had insufficient cash to pay required
  employee pension plan contributions

24
Guide for Analysis Follow Up of Financial
Indicators

• Financial Indicator 3
• Ratio/Trend Cash Investments/Current
  Liabilities
• Applicable Funds Governmental and proprietary
  funds separately
• Warning Trend Percentages decreasing over time
  may indicate that local government has
  overextended itself in the long run or may be
  having difficulty raising the cash needed to meet
  its current needs

25
Suggested Analysis Collection Process Adequate?

• One citys A/R subsidiary records for water
  sewer billings didnt identify how long bills
  were past due
• Couldnt determine collectability of amounts owed
• Couldnt assess late fees because couldnt tell
  whether a late fee was due
• Another city did not timely send utility bills to
  customers
• Up to two months after billing period
• No procedures to compel payment of delinquent
  accounts (cut-off, collection agency, etc.)

26
Guide for Analysis Follow Up of Financial
Indicators

• Financial Indicator 5
• Ratio/Trend Current Liabilities/Total revenues
  (governmental funds) or total operating revenues
  (proprietary funds)
• Applicable Funds Governmental and proprietary
  funds separately
• Warning Trend Increasing results may indicate
  liquidity problems, deficit spending, or both

27
Suggested Analysis Cash Flow Techniques
Adequate?

• Types of bank reconciliation problems noted
• Untimely or not done at all
• Unexplained or unsupported reconciling items
• Unreconciled differences
• Cash balance per accounting records listed on
  face of bank reconciliation did not agree to
  amount per trial balance (there was a 3.4
  million difference for one bank account)

28
Guide for Analysis Follow Up of Financial
Indicators

• Financial Indicator 7
• Ratio/Trend Excess of revenues over (under)
  expenditures/Total revenues
• Applicable Funds Governmental Funds
• Warning Trend Decreasing surpluses and/or
  increasing deficits may indicate that current
  revenues are not supporting current expenditures

29
Suggested Analysis Accurate Budget Estimates?

• An entity obtained financing for a capital
  improvements project
• The original estimated project costs were
  subsequently determined to be overstated by 1.45
  million
• Incurred unnecessary financing costs
• About 3 million of loan proceeds not used for
  nearly 3 years
• Investment earnings on unused proceeds were not
  sufficient to cover the related financing costs

30
Suggested Analysis Effective Expenditure
Controls?

• For several cities, we noted inadequate controls
  over purchases. Problems noted included
• Purchase orders and requisitions generally were
  not used, or not used in several instances
  disclosed by our tests
• Purchase orders dated after invoice date
  (prepared after the fact)
• Pre-approved POs/requisitions provide a basis for
  controlling the use of appropriated resources

31
Guide for Analysis Follow Up of Financial
Indicators

• Financial Indicator 9
• Ratio/Trend Intergovernmental revenues/Total
  revenues (governmental funds) or total operating
  revenues (proprietary funds)
• Applicable Funds Governmental and proprietary
  funds separately
• Warning Trend Percentages increasing over time
  indicate a greater risk assumed by the local
  government due to increased dependence on outside
  revenues

32
Suggested Analysis Grants Received?

• One entity was awarded a 200,000 grant for a
  construction project, incurred 20,800 in design
  work, but lost out on the grant because it
• Did not complete the project timely
• Submitted extension request too late
• Did not comply with reporting requirements
• Another entity lost 2 grants totaling 122,000
  because
• Did not complete project timely due to inadequate
  planning and use of bond proceeds on other
  unauthorized projects

33
Guide for Analysis Follow Up of Financial
Indicators

• Financial Indicator 11
• Ratio/Trend Total Revenues (Constant )/
  Population
• Applicable Funds Governmental funds
• Warning Trend Decreasing results indicate that
  the local government may be unable to maintain
  existing service levels with current revenue
  sources

34
Suggested Analysis Ways to Increase Revenues?

• Entity failed to properly assess a monthly
  surcharge to users of its sewer system outside of
  the entitys limits
• Council had enacted an ordinance to eliminate a
  surcharge on water, but did not extend to sewer
  surcharges
• Entity incorrectly applied water surcharge
  ordinance to sewer surcharge
• Result Entity lost out on about 63,000 of
  revenues for the fiscal year audited

35
Suggested Analysis Ways to Increase Revenues?

• Entity provided water service to residents, but
  did not reconcile gallons of water produced to
  gallons of water billed
• Our analysis disclosed large discrepancies
  between gallons produced and billed for several
  months (e.g., 4.2 million gallons for one month)
• May be due to excessive water loss requiring
  enhancements to water system or failure to
  properly bill customers
• Subsequently determined that meter was not
  accurately metering water production

36
Suggested Analysis Ways to Increase Revenues?

• Several other instances of unassessed revenues
• Did not fully assess occupational license fees
• Did not fully assess fire inspection fees
• Did not assess late utility payment fees
• Revenues from fruit sales from citrus grove (used
  in connection with disposal of wastewater
  affluent) decreased 80 from prior FY
• Inadequate controls to ensure entity received
  payment for fruit removed from grove
• Fruit company was delinquent on payment, entity
  wasnt aware of this, received 16,000 because of
  our inquiry

37
Suggested Analysis Ways to Increase Revenues?

• Several entities did not optimize their return on
  idle cash. For example
• One entity maintained large amounts of cash (from
  950,000 to 1.8 million) in non-interest bearing
  checking accounts for long periods of time.
  Could have earned additional 30,000 of interest
  for FY if invested in its MM account.
• Another entity routinely kept large amounts of
  cash (average daily balances of 12 to 16
  million) in low interest checking accounts.
  Could have earned additional 280,000 of interest.

38
Florida Auditor General

• Contact Information
• Kathryn Brewer
• 850-487-9308
• kathrynbrewer_at_aud.state.fl.us