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Chapter FifteenLecture Notes

Financial Condition Analysis

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Financial Condition Analysis

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.

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Financial Condition Analysis - the Comprehensive Annual Financial Report (CAFR)

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.

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Central Issues inFinancial 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.

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Financial Condition Analysis Relies on Comparisons

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.

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Government Solvency Ratios

Total Long-Term DebtDebt Burden = ----------------------------------

Population

Total Debt ServiceDebt Service Burden = -----------------------------

Total Revenues

Rule of Thumb: NoneTrend should be: DOWNRatio should be: BELOW MEDIAN

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Government Efficiency Ratio

Current Year Property Taxes CollectedTax Collection ratio = ------------------------------------------------------

Current Year Property Tax Levy

What portion of the taxes billed in a given year are collected?

Rule of Thumb: NoneTrend should be: UPRatio should be: ABOVE MEDIAN

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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 inthe event of a shortfall (tax leverage factor);

the relative level of services provided by a government to its constituents.

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Risk and Capacity Ratios

Investment Revenue + Intergovernmental

Revenue + Transfers In Risk Exposure Factor = --------------------------------------------------------

Own Tax Revenues

How does external revenue relate to own taxes?

Rule of Thumb: NoneTrend should be: DOWNRatio should be: BELOW MEDIAN

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Total Operating ExpendituresTax Leverage Factor = ----------------------------------------

Own Tax Revenues

How much of our expenditures do we pay for ourselves?

Rule of Thumb: NoneTrend should be: DOWNRatio should be: BELOW THE MEDIAN

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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