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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

Financial Condition Analysis

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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

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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)

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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.
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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

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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

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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.
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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

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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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