Chapter 11 Issues of Reporting, Disclosure, & Analysis

Reporting Entity A reporting entity consists of:  A primary government and  Component units

Reporting Entity (Cont’d)  A primary government is:  A state government,  General purpose local government (e.g., a city, town, village, township, borough, county, etc.), or a  Special purpose government that has a separately elected governing body, is legally separate, and is fiscally independent of other state or local governments

 Local Governments are ALWAYS subunits of the states in which they are located and are subject to state control.  To qualify as a primary government, one must have a separate elected governing body, separate from other primary governments and must be fiscally independent.  Fiscal Independence = determine budget, tax, issue bonds Reporting Entity

 A component unit is a legally separate government for which the elected officials of the primary government are financially accountable or an organization whose exclusion would cause statements to be misleading.  To be a component:  The primary government is able to impose its will upon the component (Board member, budgets, decision overrules)  Component is able to impose burden on the primary government (obligation of debt) Reporting Entity

 Reporting can be in either of two ways: 1. Discrete presentation – reporting one or more units in a single column, apart from the date of the primary government  This is default method 2. Blending – Combining the unit’s transactions and balances as if they were part of the primary government  Appropriate when relationship is so close that they are substantially one organization  Can have the same board members  Provide services only to the primary government Reporting of Components

 Account for special revenue funds as if they were the governments special revenue funds, and debt service funds as if they were the governments debt service fund  HOWEVER – THIS IS ONLY ONE GENERAL FUND  This the general fund of the blended component should be treated as a special revenue fund. Blending

 Joint Ventures  Contractual agreement whereby 2 or more participants agree to carry out a common activity  Dallas/Ft. Worth building a shared airport  Related Organizations  Primary govt appoints a voting majority of its governing board, but account impose its will upon the organization  Example – NY Transit authority Other Types of Units

 Governments are required to incorporate statistical data and information that supplements the basic financial statements:  Budget to Actual  Infrastructure Condition  Pension Actuarial Valuations  Financial Trends – over time  Revenue Capacity – ability to generate more  Debt Capacity – current burden  Demographics and Economics – socioeconomic environment Required Supplementary Information (RSI)

 An “early warning” system of impending financial difficulty can serve to prevent disruption in critical government services  Examples of well-publicized financial crises: New York City, Orange County California, Miami, Washington D.C.  Taxpayers now, more than ever, demand better performance from governmental officials  Technological developments now make it easier to track governmental financial performance Q: Why Evaluate Governmental Financial Condition?

 Government managers  Bond investors  Creditors  Legislators and oversight bodies  Citizens Q: What do they need to know?  Whether the government will be able to continue providing the desired level of services in the future  Whether future debt service payments may be threatened Q: Who Needs to Know About Governmental Financial Condition?

 Financial position focuses on current financial resources and ability to pay obligations in the short-run (i.e., liquidity)  Financial condition refers to the ability of the government to provide services at the desired level indefinitely into the future (i.e., solvency); closely related to interperiod equity—the extent to which revenues are adequate to cover the cost of services, both short-term and long-term  Economic condition is the GASB’s term that captures a composite of the government’s financial health and its ability and willingness to meet its financial obligations and its commitments to provide services. Financial Position vs. Financial Condition vs. Economic Condition

 Financial trend monitoring system identifies three broad groups of factors  Environmental  Organizational  Financial  Organizational factors shape or influence how environmental factors affect financial factors Q: What Factors Affect Financial Condition?

These “causative” factors affect financial condition:  Community needs and resources (income, wealth, poverty, employment, etc.)  External economic conditions (regional and national)  Intergovernmental constraints (grants, mandates, etc.)  Natural disasters (e,g., weather, earthquakes, floods, and fire)  Political culture (attitudes, party dominance, etc.) Environmental Factors

 These factors shape or influence how environment factors affect the outcome of the financial factors  Most important are management practices and legislative policies, i.e.,  Willingness and ability to make tough and prudent fiscal decisions can prevent a fiscal crisis from occurring, even in the face of adverse environmental conditions. Organizational Factors

Financial factors are the result of other factors—not the cause of other factors and include:  Revenues (sources of resources)  Expenditures (uses of resources)  Operating position (operating results and fund balances)  Debt structure (short and long-term debt burden)  Unfunded liabilities (pensions and post-employment benefits)  Condition of the plan (including deferred maintenance) Financial Factors

 Examine multiple-year trends in financial factors as well as those for one year or a single point in time  Financial, environmental, and organizational factors need to be examined together  There is no generally accepted method of evaluation; experts do not agree on how much weight should be placed on the various factors.  Evaluation is as much subjective as objective. Financial Analysis

Data for Financial Analysis Data for calculating ratios may come from:  government-wide statements  fund financial statements  notes to the financial statements  introductory section of the CAFR, including the MD&A  statistical sections of the CAFR  other publicly available sources

 Analysis can be based on trends over time (e.g., 5 or 10 year trends) within a government  Ratios can be benchmarked against average data for other similar governments  Comparisons are more valid the closer the benchmark data are to the government being evaluated, e.g., using benchmark averages for cities of comparable size located in the same geographic region or state are preferable to using data for the entire country Benchmarking

 Few national data sets are available for comparison of state and local governments  Benchmarking can compare a government’s ratios to averages or medians provided by bond market services, e.g.,  Moody’s Investors Service  Standard & Poor’s  Fitch Investor’s Service Benchmarking, cont’d.

 Interpretation of trend or benchmark comparisons involves a great deal of professional judgment.  Usually a pattern of above or below average financial condition emerges.  Comparison to “red flag” levels is also useful. Interpretation of Financial Analysis Data

Interpretation of financial analysis is difficult, but these are recognizable signs of fiscal distress:  Decline in revenues relative to expenditures  Declining property values  Declining economic activity  (e.g., retail sales)  Erosion of capital plant  increasing levels of unfunded obligations  Inadequate capital expenditures Signs of Fiscal Distress

Ratios for Government-wide Statements 1.Total net assets (governmental activities and business-type activities) at the end of the year – total net assets at the beginning of the year. 2. Total revenues/total expenses 3. Unrestricted net assets/total revenues 4. Each revenue source/total revenues 5. Business-type activity revenue/business-type activity expenses 6. Accumulated depreciation/total depreciable capital assets

Ratios for Government-wide Statements (Cont’d) 7. Bonded debt/population (Debt limit – outstanding debt)/debt limit Property taxes/population 8. Interest and principal on long-term debt/total operating expenses 9. Total debt/total assets 10. Net cash generated to pay debt service/interest and principal on long-term debt 11. Current assets/current liabilities

Ratios for Governmental Funds Revenue measures: 1.Total revenues/population 2.Own source revenue/total revenues Expenditure measures: 3.Total expenditures/population 4.Operating expenditures/total expenditures Operating position liquidity measures: 5.Total revenues/total expenditures 6.Unreserved fund balances/operating revenues 7.Cash + short-term investments/current liabilities 8.Current liabilities/operating revenues

Ratios for Governmental Funds (Cont’d) Debt structure measures: 9.Net tax-supported long-term debt/net assessed valuation 10.Net tax-supported long-term debt/population 11.Debt service/operating revenues Unfunded liabilities: 12.Unfunded pension liability/net assessed valuation 13.Pension plan assets/benefits paid