1. 1 Chapter Fifteen Lecture Notes Financial Condition Analysis

2. 2 n 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.

3. 3 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.

4. 4 Central Issues in Financial Condition Analysis n The economy (both locally and nationally) and demographics. n The potential revenue base. n Actual revenues and the public's willingness to pay more. n The proportion of own source and intergovernmental revenues. n Demand for public services n The amount of discretionary funding available after debt service, committed programs, and entitlements.

5. 5 Financial Condition Analysis Relies on Comparisons n Financial Condition Analysis is based on comparisons: -time series analysis, -comparisons with other jurisdictions. n 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.

6. 6 Government Solvency Ratios Total Long-Term Debt Debt Burden = ---------------------------------- Population Total Debt Service Debt Service Burden = ----------------------------- Total Revenues Rule of Thumb:None Trend should be:DOWN Ratio should be: BELOW MEDIAN

7. 7 Government Efficiency Ratio Current Year Property Taxes Collected Tax Collection ratio = ---------------- -------------------------------------- Current Year Property Tax Levy What portion of the taxes billed in a given year are collected? Rule of Thumb:None Trend should be:UP Ratio should be: ABOVE MEDIAN

8. 8 Risk in Financial Condition Analysis n Risk analysis in Financial Condition Analysis involves looking at: n the reliability of individual revenue sources (the risk exposure factor); n the ability of the government to increase resources in the event of a shortfall (tax leverage factor); n the relative level of services provided by a government to its constituents.

9. 9 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: None Trend should be: DOWN Ratio should be: BELOW MEDIAN

10. 10 Total Operating Expenditures Tax Leverage Factor = ---------------------------------------- Own Tax Revenues  How much of our expenditures do we pay for ourselves? Rule of Thumb: None Trend should be: DOWN Ratio should be: BELOW THE MEDIAN

11. 11 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