Chapter Fifteen
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Chapter Fifteen Lecture Notes. Financial Condition Analysis. 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;

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Chapter Fifteen Lecture Notes

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Chapter fifteen lecture notes

Chapter Fifteen

Lecture Notes

Financial Condition Analysis


Chapter fifteen lecture notes

  • 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.

Financial Condition Analysis


Chapter fifteen lecture notes

  • 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.

Financial Condition Analysis - the Comprehensive Annual

Financial Report (CAFR)


Chapter fifteen lecture notes

Central Issues in

Financial Condition Analysis

  • 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

  • The amount of discretionary funding available after debt service, committed programs, and entitlements.


Chapter fifteen lecture notes

  • Financial Condition Analysis is based on comparisons:

    -time series analysis,

    -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 extremely difficult to obtain.

Financial Condition Analysis

Relies on Comparisons


Government solvency ratios

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


Chapter fifteen lecture notes

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

Government Efficiency Ratio


Chapter fifteen lecture notes

Risk in Financial

Condition Analysis

  • 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.


Chapter fifteen lecture notes

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

Risk and Capacity Ratios


Chapter fifteen lecture notes

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


Other government ratios

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


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