Local Government Financial Condition Analysis

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Local Government Financial Condition Analysis

• FGFOA Career Development Seminar
• The ABCs of Government Finance
• February 23, 2007

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Overview

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

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What is Financial Condition?

• Financial position
• 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

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Why is Financial Condition Important?

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

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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

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What Influences Financial Condition?

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

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What Influences Financial Condition?

• Environment
• Governance
• 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

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What Influences Financial Condition?

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

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What Influences Financial Condition?

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

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What Influences Financial Condition?

• Management capacity theory
• Government Performance Project
• 1997
• States, counties, cities
• Management systems
• Financial
• Human resources
• Information technology
• Capital
• Vertical horizontal integration
• Leadership
• Managing for results

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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

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What Influences Financial Condition?

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

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The ABCs of Financial Condition Analysis

• Assessment
• Buy-in
• Commitment
• Development
• Evaluation
• Fine tune

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Assessment

• What are you doing?
• What are others doing?
• What will work for you?
• What will you measure monitor?
• Implement monitor

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AssessmentWhat are We Doing?

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

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AssessmentWhat are We Doing?

• Policies
• Purpose
• Performance evaluation
• Periodic review

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AssessmentWhat are We Doing?

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

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AssessmentWhat is Every One Else Doing?

• Auditors
• Contemporaries
• Florida Auditor General
• ICMA
• GASB
• GFOA
• NLOC
• Other governments

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Buy-In

• Governing body
• Turnover
• Expertise
• Willingness to support
• Staff
• Finance
• Others
• External auditor

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Commitment

• Initial on-going
• Staff
• Expertise
• Availability
• Compilation of data
• Timeliness

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Commitment

• 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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Development

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

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Development

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

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Evaluation

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

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Fine Tune

• Response to evaluation
• Time frames
• Response
• Development
• Implementation
• Re-evaluation
• Response to
• Economy
• Political shifts
• Staff changes
• Projection of budgetary impacts

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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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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

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Service Level Solvency

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

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National Survey Results

• Conducted Summer 2004

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Research Questions

• Do specific financial management techniques
  influence the financial condition of cities
  differently?
• If specific financial management techniques
  influence financial condition, how do these
  techniques influence the financial condition of
  cities?

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Research Methodology

• Y - Financial management capacity
• Survey of CFOs (n487) - nominal
• Demographic data from 2000 U.S. Census - ratio
• X - Financial condition
• Quantitative analysis (n1,609/1,575) - ratio
• C - Environmental factors
• Governance structure CFO survey - nominal
• Demographics 2000 U.S. Census - ratio

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Variable Dimensions - X

• Financial management capacity
• Budgeting system
• Strategic planning system
• Fall back system
• Accounting reporting system
• Internal control system
• Financial leadership

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Variable Dimensions - Y

• Financial condition
• Cash solvency
• Budgetary solvency
• Long-run solvency
• Service level solvency

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Variable Dimensions - C

• Environmental factors
• Governance
• Form, years incorporated, number voting members
• Form of elections terms
• Statutory limits
• Ad valorem tax rate
• Changes in taxable property values
• Legal debt limit
• Demographics
• MSA, population
• Population
• Income, education, age
• Employment rate

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Data Collection

• GFOA, fiscal 2001 (n1,609, 1,575)
• Response rate 46.41 (n226, 217)
• Two mailings
• Index creation - interval
• 5 (strong) 1 (weak) A - F
• FCratio/dimension/index
• FMCresponse/indicator/dimension/index

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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

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National Survey Results

• Respondents FMC scores
• All scored 3
• Mostly 3 for
• Budget
• 1 1
• 11 4
• Contingency planning
• 1 1
• Accounting reporting
• Internal control
• 1 4
• Leadership
• 1 4
• Mostly 2 for
• Strategic management
• 15 1

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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

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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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Research Results

• Mean FC 3.052 (n1,575) 3.032 (n217)
• Range 1.9 4.2 2.0 3.8
• Cash solvency 3.000 2.993
• Long run solvency 3.116 budget solvency 3.054
• Mean FMC 3.010 (n217)
• Range 1-5
• Fall back system 2.160
• Budgeting system 3.030

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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 Survey Results

• Correlations among dimensions
• Strategic management
• Accounting reporting (r .308, p lt .01)
• Internal control (r .338, p lt .01)
• Budget system (r .179, p lt .01)
• Accounting reporting
• Internal control (r .258, p lt .01)

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Major Limitations

• Data source
• Stratification comparison
• Concepts, dimensions, indicators
• Independent review
• Pilot survey
• Statistics Pearsons, Coefficient Alpha
• Survey
• Not vetted review, pilot, Coefficient Alpha
• Self reported - univariate analysis for
  exogeneity
• Study period vs. collection period
• Survey construction

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National Study Results

• Fiscal Year 2003

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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

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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

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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)
• Economic momentum index 2003 (r .377)
• Economic momentum rank change 2000-2003 (r .330)