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Financial Condition Reporting AASHTO Audit Conference, July 2015 Oregon Secretary of State Audits Division Gary Blackmer Audits Director
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Overview Why assess financial condition? What does a report look like? –For Oregon –For its counties
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Why assess financial condition? Identify emerging problems Communicate complex ideas in a clear, concise way Extend the financial timeline beyond a year or biennium Recommend strategies to improve financial condition
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Recognize improvements resulting from actions and decisions Identify potential audit areas Show your audit agency’s commitment to on-going monitoring, to assure the public Get greater value out of the CAFRs
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Introduction to the 2011 report by Secretary of State Kate Brown… “It is my hope that the analysis provided by the Audits Division will give Oregonians and public officials the tools they need to understand the unfavorable trends the state experienced and identify potential solutions to forge a better future for our state and for our people.”
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The most favorable trends are: –Oregon’s unemployment fund helped cover the needs of many Oregonians during this deep recession, unlike many other states that are borrowing from the federal government to support the unemployed; –Payments to state PERS retirees appear to be leveling out in recent years; and –Oregon continues to see a declining rate of violent property crimes.
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Unfortunately, less favorable trends are prevalent in this report: –Basic conditions for Oregonians have worsened with increased unemployment, increasing poverty rates, and greater dependence on Medicaid and other public assistance; –K-12 education costs have grown substantially in the past 9 years; –Oregon’s Rainy Day Fund, created 3 years ago, has already been reduced by two-thirds; and –Oregon has doubled its long-term debt over the last 9 years, limiting its future options.
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big problems can creep up on you big problems take time to solve setting goals and policies can prevent, lessen problems
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What does a report look like? Revenues Expenditures Long-Term Debt Fiscal Health Demographics Operational indicators are an additional report… Or some variation on these sections…
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Approach Apply the skills and insights of our financial auditors to the task International City and County Managers Association published “Evaluating Financial Condition” in 1985 in response to the municipal bankruptcies in the 1980s. 36 indicators, which is more than necessary - GASB has more recent guidance Instead, identify 10-20 key indicators and put the extra effort into deeper analyses of any emerging trends.
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Regular reporting State financial condition reports –2011, 2013, 2015 County financial condition reports –2012, 2014
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Total Revenues Revenues determine the capacity of a government to provide services to citizens and are affected by economic and policy changes. Total revenues have increased 26% over the last ten years. In fiscal year 2014, tax revenues and federal revenues increased while charges for services decreased resulting in an overall increase in total state revenues of $1.4 billion from the prior year. The state benefited from federal funding under the American Recovery and Reinvestment Act (ARRA). However, ARRA provided only temporary funding increases, and the majority of those funds were spent in fiscal years 2010 and 2011. In 2014 declines in federal revenues included approximately $327 million in Unemployment Compensation and $73 million to Economic Development. Why this indicator is important What’s behind the trend Simple, consistent graphic
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What’s behind the numbers? Federal Revenues by Program Area The state received about $9.9 billion in federal assistance in FY14, an increase of $950 million from the previous year. Traditionally, the largest federal revenue source is for Medicaid in the human services program area, for which Oregon receives between $2.0 and $4.8 billion annually. Other large human services programs include Supplemental Nutrition Assistance Program (formerly known as food stamps) and Temporary Assistance to Needy Families.
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Total Expenditures by program General Fund Expenditures by program
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Long-term perspective on financial issues
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Patterns emerge
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Oregon’s Counties We had concerns about the finances of our partners After our state assessment, we began looking at counties Timber payments changed the game –How many counties, how much? –What actions have other states taken with financially- troubled municipalities
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Adapting to the loss of federal funds “Although Federal officials had repeatedly warned that the program would end…many municipal officials expected that the program would be reduced. ‘It's forcing a whole rethinking of municipal finances. Many municipalities are stuck. They have no choice but to cut back.’” New York Times, January 31, 1987
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Challenges How to conduct high-level financial reviews of local governments? –No agreement on the right indicators –No agreement on standards of financial condition –Without consistent accounting
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10 indicators Self-Support Timber Payment Dependence Debt Burden Liquidity Fund Balance Retirement Benefit Obligation Public Safety Personal Income Population Trends Unemployment
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Employed+Seeking employment Total Population over 16
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Identifying counties to watch On the weak end of the range for several indicators Extra weighting for dependence on federal funds Columbia Coos Curry Douglas Jackson Josephine Lane Linn Polk
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Douglas County Overview County response Indicators – 10 year trends
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Douglas overview Approximately 50% of Douglas County’s 5,071 square miles is public land, with forest products and agriculture being key to its economy. The selected financial management indicators show that the county has sound debt management practices and one of the largest fund balances among counties. The indicators also show that Douglas County has strong liquidity and has experienced steady population growth over the past several decades. The county levies the fourth lowest property tax rate in Oregon, which limits its ability to generate local revenues. It is the most dependent among counties on federal timber payments, has high unemployment, and a high pension obligation per capita.
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County Response Douglas County has responded to the loss of a safety net by reducing budgets, service levels and personnel services until a permanent revenue solution is found. The County continues to budget the use of reserves at levels that are not sustainable. Based on current spending patterns, in approximately two years, the County’s General Fund will need to reduce service levels and expenditures to balance the budget with current revenues. Minimum reserve levels needed for operating cash requirements will be reached near that time.
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Local revenue per capita adjusted for inflation
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Fund balance adjusted for inflation
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Strategies of other states Monitoring –State offices review financial statements –Some track indicators Proactive –Engage, advise, assist troubled municipalities Intervention –Prevent, react to financial crises –Highly controversial
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Portland
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Metro
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Multnomah County
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Why auditors? Management may resist this transparency Auditors have the credibility Good insights into finances, operations Organizations never sustain these efforts
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Questions? www.sos.state.or.us/audits gary.blackmer@state.or.us
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