Assessing Financial Conditions

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Module 9 - Assessing Financial Conditions

[SLIDE 2]

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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[SLIDE 3]

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.

[SLIDE 4]

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 and the amount of discretionary funding available after debt service, committed programs, and entitlements

[SLIDE 5]

Financial Condition Analysis is based on comparisons:

-time series analysis, and

-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 difficult to obtain.

[SLIDE 6]

Liquidity Ratios are used; fund accounting adds complications.

Solvency ratios—not typically used for funds that use modified accrual. Applicable to accrual-based government-wide statements.  Ratios that relate debt capacity to the taxable base (such as per capita debt) or ratios of debt service to receipts and disbursements are widely used. Solvency ratios also can address a government’s employee benefits (pension plans and retiree health care).

Efficiency Ratios can be used by governments especially in the enterprise funds but care must be used in the governmental funds.                                                                                                                                                                                                             

Common Size Ratios are helpful for comparison with other governments.

The ratios that look at solvency with respect to the taxable base relate debt to the asset base (both real, financial and human) that are the ultimate source of repayment.

They also allow for comparisons across jurisdictions.

However, with real estate taxes, it is important to equalize these ratios for differences in assessed valuation between governments.

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[SLIDE 7]

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

[SLIDE 8]

                                    Actuarial Value of Assets

Funded Ratio =   --------------------------------------

                                    Actuarial Accrued Liability

Rule of Thumb:         80% Funded or Higher

Trend should be:      UP

Ratio should be:        ABOVE MEDIAN

[SLIDE 9]

Net Assets Held for Pensions

Benefits Coverage = ------------------------------------------------

                                                Total Benefits and Refunds

                                             Investment Income

Investment Earning = ----------------------------------------------

to Benefits                    Total Benefits and Refunds

Rule of Thumb:         None

Trend should be:      UP

Ratio should be:        ABOVE MEDIAN

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[SLIDE 10]

                                                 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

[SLIDE 11]

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 in the event of a shortfall (tax leverage factor);

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

Risk exposure looks at the relative dependence of the government on a single source of revenue as a prevent of total and whether it has been stable over time.

Tax leverage factor looks at how heavily a single economic resource in the tax base and the total of all elements of the tax base have been taxed. Lower comparable rates suggest higher capacity for tax increases.

Service ratios measure how much of a specific service is being delivered to the constituency on a per capita basis. Low comparable numbers may mean that there is pent up demand for services that is not being met by the government.

Example: low per capita expenditures on police or fire services combined with high per capita crime rates or incidents of property loss to fire.

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[SLIDE 12]

Investment Revenue + Intergovernmental Revenue                               

Transfers in

Risk Exposure Factor =  --------------------------------------------------------

                                                  Property Tax Revenue

            How does external revenue relate to real estate taxes?

            Rule of Thumb:         None

            Trend should be:      DOWN

            Ratio should be:        BELOW MEDIAN

[SLIDE 13]

Total Operating Expenditures

Tax Leverage Factor   =       ----------------------------------------

                                                            Property Tax Revenue                                 

How much of our expenditures do we pay for ourselves?

Rule of Thumb:         None

Trend should be:      DOWN

Ratio should be:        BELOW THE MEDIAN

[SLIDE 14]

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

[SLIDE 15]

• Economy and Demographics
• Revenue Base
• Revenues
• Current and Capital Expenditures
• Debt
• Pension and Other Post-Employment Benefits
• Internal Resources

[SLIDE 16]

Factors Affecting Interest Rates

General Economic Conditions

Duration

Financial Condition of Borrower

[SLIDE 17]

AAA, Aaa

AA

A

BBB

BB

B

Municipal ratings recalibrated beginning in 2010 for more direct comparisons to private sector.

[SLIDE 18]

Moody’s Investors’ Services

Standard & Poor’s

Fitch Ratings

[SLIDE 19]

MBIA

AMBAC

FGIC (Financial Guaranty Insurance Corporation)

FSA (Financial Security Assurance)

[SLIDE 20]

Only Assured (FSA) remains as significant bond insurer.

Market has declined significantly because no AAA rated insurers remain.

[SLIDE 21]

Module 10: March 16 - 22

Topics: Financial Accounting & Reporting

FM Text – Chapter(s) 11