Lesson 8: Financial Statement Analysis for Governments Justin Marlowe PBAF 522 – Public Financial Management and Budgeting Autumn 2015

Key Takeaways Liquidity and cash management are significant challenges for many state and local governments Solvency means many different things in government: Near-term solvency vs. long-term solvency vs. service-level solvency Unlike non-profits, most governments have long-term debt; how a government manages its debt, and whether it has an appropriate amount of debt (also known as “debt affordability”) is the main concern behind a government's solvency We typically think of government financial health in terms of the “Ten Point Test”

What’s Different About Governmental Accounting? Dual emphasis on near-term and long-term Near-term = fiscal year, financial resources focus; budget control and accountability Long-term = full accrual, economic resources focus; “service level solvency” Near-term emphasis “Modified Accrual” accounting Emphasis on funds and fund financial statements Funds are “self-balancing,” stand-alone divisions of the government’s finances Governmental funds = general, special revenue, and capital projects funds Business-type activities = by definition, are “self-balancing” (i.e. break-even); includes utilities, enterprise funds Component units = stand-alone entities whose finances are inextricably linked from the general government

What’s Different About Governmental Accounting? Long-Term Emphasis Traditional, full accrual accounting Focus of Statement of Net Position and Statement of Activities Emphasis on debt and debt affordability, unfunded pension liabilities, unfunded OPEB liabilities Some challenges: What about services that don’t pay for themselves? What about depreciation of capital assets? Who cares? First incorporated into government GAAP with GASB Statement 34

Modified Accrual Accounting Expense/expenditure recognition basically the same Key differences are with revenue recognition We recognize revenues when they’re: Measurable – can be estimated Available – available for spending within 60 days Recognition rules vary by revenue source – IT DEPENDS! Property Taxes: recognized when property tax bills are sent out Parking Tickets: recognized when the ticket is written Sales Taxes: recognized when the government can derive an estimate of future sales tax collections