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

2. 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”

3. 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

4. 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

5. 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