Auditor General Update FGFOA Webinar May 16, 2013
TOPICS FOR DISCUSSION • Financial Condition Assessment Procedures • Repeat Findings • Audit Report Review Reminders • Auditor General Local Government Audits
ENHANCING THE EXAMPLE FINANCIAL CONDITION ASSESSMENT PROCEDURES LOCATED ON THE AUDITOR GENERAL’S WEB SITE
OVERVIEW • Background • History • GASB 34 • Economic Condition • What is it? • Aspects of economic condition • Research • Purpose • Academic and Inquiries • What are other states doing? • Recommendation • New Indicators • Implementation
BACKGROUND • History • Created in 1999 • 14 Indicators recommended by Task Force • Calculated based on financial and non-financial data (population, millage rates, and taxable property values) • Trend analysis (5 year) • Benchmark comparisons • Auditors may incorporate into their assessment of financial condition pursuant to Section 218.39(5), F.S. • 90 local governmental entities were reported as experiencing deteriorating financial conditions for the 2010-11 fiscal year
BACKGROUND • GASB statement No. 34 • Issued June 1999 • Effective date • In three phases based on a governments total annual revenues, with periods beginning after June 15, 2001 and continuing through periods beginning after June 15, 2003 • Main Features: • Management’s discussion and analysis (new) • Government-wide financial statements (new) • Fund statements (improved) • Budgetary comparison (improved) • Note disclosure (new and improved) • Almost 10 years since effective implementation
Defining financial condition - ICMA • A government’s ability to generate enough cash over thirty to sixty days to pay its bills • A government’s ability to generate enough revenues over its normal budgetary period to meet its expenditures and not incur deficits • A government's ability in the long run to pay all the costs of doing business • A government’s ability to provide services at the level and quality that are required for the health, safety, and welfare of the community and that its citizens desire
What is economic condition? • Considerable variation in definitions • Confusion regarding terminology – financial position versus financial condition versus financial health, and so on… • GASB developed a comprehensive concept of government financial health called economic condition
What is GASB’s definition of economic condition? Economic conditionis a composite of a government’s financial health and its ability and willingness to meet its financial obligations and commitments to provide services. Economic condition includes three components: • Financial position • Fiscal capacity • Service capacity
Components of economic condition • Financial position is the status of a government’s assets, liabilities, and net asset accounts displayed in its basic financial statements • Fiscal capacity is a government’s ongoing ability and willingness to raise revenues, incur debt, and meet its financial obligations as they come due • Service capacity is a government’s ongoing physical ability and willingness to supply the capital and human resources needed to meet its commitments and provide services
Aspects of Economic Condition: Conceptual View Indicators View • Fund Balance/Net Assets • Surplus and deficits • Revenues and revenue base • Expenses/Expenditures and spending pressures • Debt/Liabilities and debt service • Pension and OPEB • Liquidity • Common-size ratios • Financial position • Liquidity/Solvency • Fiscal Capacity • Risk and exposure • Other (includes pension and OPEB)
Financial Condition Current AG indicators address most of the aspects of economic condition; however, for purposes of the local government financial condition assessment procedures located on our website, the term financial condition is defined as: “A local governmental entity’s ability to meet its financial obligations and provide services that are required for the health, safety, and welfare of the community, and that its citizens desire.”
Research • Purpose • To determine how and if the existing example indicators used in the financial condition assessment procedures system located on the Auditor General’s Web site should be revised, removed, or updated • In doing so, we explored: • Assessment procedures implemented/recommended by others (other states, GASB, ICMA, and academia) • Government-wide financial statements and note disclosures • General fund specific • Pension and OPEB • Collection of data easy and consistent
Research • Academic and inquires • Subsequent to issuance of GASB Statement No. 34 there has been little academic research using government-wide financial statements information. • Credit analysts tend to focus on specific areas of interest they are evaluating and not the entire government. For example, someone at Moody’s looking at sewer bond issues doesn’t really focus on, nor make decisions based on, the government-wide data.
Research • Academic and inquires (cont.) • Dean Mead (GASB, An Analyst’s Guide to Government Financial Statements, 2nd edition) • Suggestions for economic condition analysis • Applicable ratios relating to financial position, fiscal capacity, and service capacity • Pension and OPEB information
Research • What are other states doing? • Fund financial statement data is commonly used for indicators, with only a few states incorporating government-wide financial indicators • Financial indicators that relate specifically to the general fund are widely used • Most states collect data similar to the AFR process used by the FDFS • Data is usually on a detailed code level than would be presented on the financial statements and is usually unaudited, but reviewed.
Research Based on the research, the example indicators located on our website, which can be used to make preliminary financial condition assessments, are still commonly used in ICMA, GASB, and other state models.
Recommendation New Indicators • Government-wide • Change in Net Assets (Net Position) • Capital Asset Condition • General Fund • Fund balance as a % of expenditures • Quick ratio • Pension and OPEB • Funded Ratio
Change in Net Assets (Net Position) • Change in Net Assets / Beginning Net Assets • Government-wide statement of activities (governmental activities) • The percent change in net assets indicates how the government's position changed during the year (positive or negative) as a result of resource flow • This ratio includes the affects of changes in long-term assets and liabilities, capital outlay and other financing sources and uses
Capital Asset Condition • Accumulated Depreciation/Depreciable Capital Assets • Notes to the financial statements • Governmental type activities and proprietary type activities separately • Indicates the percentage of assets depreciated. • Trend analysis and benchmark comparisons can indicate whether or not an entity is systematically investing in capital assets.
Fund Balance as a % of Expenditures • Unassigned and Assigned Fund Balance/Total Expenditures • General fund on the fund financial statements • Creates a common-size ratio out of financial position • Could indicate a government’s ability to handle general fund emergencies and unanticipated needs • Current AG indicator is combined for all funds except for special revenue funds
Quick Ratio • Cash and Investments/Current Liabilities – Deferred Revenues • General fund on the fund financial statements • Liquidity ratio • Indicator of a government’s ability to meet current obligations • Current indicator is for all governmental and proprietary funds separately • Deferred revenues are generally in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period
Funded Ratio • Funded Ratios for Pension and OPEB Plans • Pension Plans – defined-benefit plans • Pension Plans – separate indicators for general employee (includes FRS), police, fire, and combined plans • Increasing concern for pension and OPEB plans • The schedule of funding progress expresses the actuarial value of pension plan resources as a percentage of the actuarial accrued liability • Pension Plans – Update indicator in the future for GASB Statement No. 68
Implementation • Available for 2013 FYE audits • Website Updates • Example Financial Condition Assessment Procedures • Assessment Tools (e.g. spreadsheets, graphs, appendixes) • Data Collection • 2009 – 2012
Data Elements • Reorganized to match flow of data in audit reports
Data Elements • Reorganized to match flow of data in audit reports (cont.)
Indicators • Reorganized - logical order
Indicators • Reorganized - logical order (cont.)
Local Government Accountability • Requires AG to notify Legislative Auditing Committee (LAC) of any audit report that indicates an entity has failed to take full corrective action in response to a recommendation that was included in the two preceding audit reports. • LAC may direct the governing body to provide a written statement explaining why full corrective action has not been taken or describing the corrective action to be taken and when it will occur. • If LAC determines that written statement is not sufficient, it may require the governing body’s chair or designee to appear before it. • If LAC determines that the entity failed to take action for which there is no justifiable reason for not taking action, or failed to comply with LAC requests, it may act pursuant to Section 11.40(2), FS. Section 218.39(8), Florida Statutes