Financial Aspects of Economic Condition

1
Financial Aspects of Economic Condition

• Common-size ratios
• Financial position
• Liquidity Solvency
• Fiscal capacity
• Risk exposure
• Other

2
Liquidity

• Does the government have the means available to
  cover its existing obligations in the short run?

3
Liquidity

• Current ratio
• Current assets current liabilities
• Quick ratio
• (cash current investments) current liabilities

4
Liquidity Current ratio
Current assets current liabilities

3.01
5
Remember not only to remove deferred revenues
from the denominator, but also the corresponding
assets in the numerator.
3.15
6
In other words

• The governments current resources were equal to
  more than three times the debts that would come
  due during the next year.

7
Words of wisdom regarding financial position
liquidity ratios

• Making comparisons depends a lot on the timing of
  cash flows. For instance
• Government A receives its major state grant
  payments in the last month of the fiscal year.
  Its financial position and liquidity ratios may
  look much better than those of
• Government B, which collects most of its property
  taxes in the first month of the year.

8
Solvency

• Does the government have the means available to
  cover its existing obligations in the long run?

9
Solvency Leverage

• Debt-to-assets ratio
• Total liabilities total assets
• Debt-to-net-assets ratio
• Total liabilities net assets

10
Leverage Debt-to-net-assets
Total liabilities net assets
0.863

11
In other words

• More than 86 percent of the governments net
  assets would have to be liquidated to satisfy its
  liabilities immediately.

12
Is that realistic?

• Almost 85 percent of its net assets are invested
  in capital assets.
• However, 95 percent of its liabilities are
  long-term debts.

13
Solvency Coverage

• Times-interest-earned
• (cash flow from operations interest expense)
  interest expense
• Debt service coverage
• (cash flow from operations debt service) debt
  service

14
Problem with Coverage Ratios

• There is still no cash flow statement for the
  government as a whole only for the proprietary
  funds.
• Consequently, an elegantly simple ratio like
  this
• (cash flow from operations interest expense)
  interest expense
• becomes this

15

• (general fund revenues special revenue fund
  revenues general fund current expenditures
  special revenue fund current expenditures
  enterprise funds cash flows from operations
  total interest on long-term debt for governmental
  and business-type activities) (total interest
  on long-term debt for governmental and
  business-type activities)

16
Solvency Alternative Ratios

• Liabilities total revenues
• Liabilities personal income
• Liabilities property value
• Liabilities population
• Debt service total expenditures
• Debt service own-source revenues

17
Financial Aspects of Economic Condition

• Common-size ratios
• Financial position
• Liquidity Solvency
• Fiscal capacity
• Risk exposure
• Other

18
Fiscal Capacity

• Does the government have the financial ability to
  finance needed services going forward?

19
Fiscal Capacity

• Debt per 100 of assessed property value
• (total liabilities x 100) total assessed
  property value
• Debt per capita
• Total liabilities population
• Property tax revenues per 100 of assessed value
• (property tax revenues x 100) total assessed
  property value

20
Fiscal capacity property tax revenues per 100
of assessed value
(property tax revenues x 100) total assessed
property value
(51,693,573 4,726,244) x 100) 3,923,863,884
1.44
21
Fiscal Capacity Caution!

• Be clear about definition of denominator,
  especially when it comes to property values!!
• Valuation systems differ from government to
  government, as does the assessment ratiothe
  percentage of assessed value to market value
• Makes comparisons difficult

22
Fiscal CapacityAdditional Ratios

• Debt per 1,000 of personal income
• Sales tax revenues total retail sales
• Income tax revenues total personal income
• Expenses revenues per capitaboth total and for
  specific client bases
• spending per pupil
• state education aid per pupil
• taxes per capita

23
Financial Aspects of Economic Condition

• Common-size ratios
• Financial position
• Liquidity Solvency
• Fiscal capacity
• Risk exposure
• Other

24
Risk and Exposure

• Can the government withstand unforeseen financial
  difficulties?

25
Risk and Exposure

• Revenue dispersion (percentage distribution)
• Risk exposure ratio
• (investment revenue intergovernmental aid)
  property tax revenues
• Tax leverage ratio
• operating expenses property tax revenues

26
Risk exposure ratio
(investment revenue intergovernmental aid)
property tax revenue
27
Risk exposure ratio
(2,559,493 5,176,310 4,894,915 1,475,820)
56,419,817 0.25
28
In other words

• For every one percent decline in revenues beyond
  the governments control, property taxes would
  have to be raised one-quarter of one percent.

29
Tax leverage ratio
Operating expenses property tax revenue
117,111,882 56,419,817 2.075
30
In other words

• For every one percent increase in operating
  spending, the government would have to increase
  property taxes almost 2.1 percent.

31
Risk and ExposureAdditional Ratios

• Property tax receivables current assets
• Property tax receivables property tax levy
• Uncollectable property taxes property tax levy