Chapter Fifteen Lecture Notes

1. Chapter Fifteen Lecture Notes Financial Condition Analysis

2. Financial Condition Analysis builds from Financial Statement Analysis but goes further: - it looks at whether a government will be able to meet both its financial obligations and its constituent service obligations; - it includes a broader array of political and economic considerations than financial analysis; - it is complicated by the use of modified accrual and fund accounting; - the financial condition of each fund may be analyzed separately, but adjustments must be made for interfund activities. Financial Condition Analysis

3. The CAFR contains the financial statements of the government but often provides supplemental information: • the Management Discussion and Analysis contains a wide • variety of information useful for assessment of financial condition; • the Statistical Section gives economic and demographic trends as well as trends in revenues, expenditures, and debt; • the Financial Statements provide information on particular aspects of government operations. Financial Condition Analysis - the Comprehensive Annual Financial Report (CAFR)

4. Central Issues in Financial Condition Analysis • The economy (both locally and nationally) and demographics. • The potential revenue base. • Actual revenues and the public's willingness to pay more. • The proportion of own source and intergovernmental revenues. • Demand for public services • The amount of discretionary funding available after debt service, committed programs, and entitlements.

5. Financial Condition Analysis is based on comparisons: - time series analysis, - comparisons with other jurisdictions. • Comparisons among governments are difficult! - focus comparisons on both the specific and the aggregate revenue and expenditures, - make sure that the comparison governments are comparable, - factor differences in demographics and local economic conditions into your analysis, - data may be extremely difficult to obtain. Financial Condition Analysis Relies on Comparisons

6. Government Solvency Ratios Total Long-Term Debt Debt Burden = ---------------------------------- Population Total Debt Service Debt Service Burden = ----------------------------- Total Revenues Rule of Thumb: None Trend should be: DOWN Ratio should be: BELOW MEDIAN

7. Current Year Property Taxes Collected Tax Collection ratio = ------------------------------------------------------ Current Year Property Tax Levy What portion of the taxes billed in a given year are collected? Rule of Thumb: None Trend should be: UP Ratio should be: ABOVE MEDIAN Government Efficiency Ratio

8. Risk in Financial Condition Analysis • Risk analysis in Financial Condition Analysis involves looking at: • the reliability of individual revenue sources (the risk exposure factor); • the ability of the government to increase resources in the event of a shortfall (tax leverage factor); • the relative level of services provided by a government to its constituents.

9. Investment Revenue + Intergovernmental Revenue + Transfers In  Risk Exposure Factor = -------------------------------------------------------- Own Tax Revenues How does external revenue relate to own taxes? Rule of Thumb: None Trend should be: DOWN Ratio should be: BELOW MEDIAN Risk and Capacity Ratios

10. Total Operating Expenditures Tax Leverage Factor = ---------------------------------------- Own Tax Revenues  How much of our expenditures do we pay for ourselves? Rule of Thumb: None Trend should be: DOWN Ratio should be: BELOW THE MEDIAN

11. Other Government Ratios • Total Revenues/Population • Total Expenditures/Population • Operating Expenditures/Total Expenditures • Total Revenues/Total Expenditures • Current Liabilities/Operating Revenues • Unfunded Pension Liabilities/Net Assessed Property Value