This final section of the chapter walks through the process of utilizing the 10-point test on an illustrative municipal government, the City of Port Hayley. The relevant financial statements and note disclosures are presented in Table 15.A1–15.A8. The information that is needed to calculate the 10 ratios is identified in Table 15.4 and is shaded in Table 15.A1–15.A8.
The discussion that follows addresses each of the 10 ratios, what they mean, and how they compare with a peer comparison group of similar cities in the same state. Before proceeding, however, a few words on building peer comparison groups are necessary.
Table 15.4 Location of Information Needed to Calculate Ratios
Ratio Sources
Short-run financial position: Unreserved general fund balance 4 general fund revenues
Governmental funds balance sheet;
governmental funds statement of revenues, expenditures, and changes in fund balances
Liquidity: General fund cash and investments4(general fund liabilities general fund deferred revenues)
Governmental funds balance sheet
Financial performance: Change in governmental activities net assets 4 total governmental activities net assets
Government-wide statement of activities
Solvency: (Primary government liabilitiesdeferred revenues)4 primary government revenues
Government-wide statement of net assets and statement of activities Revenues (A): (Primary government
operating grants and contributions þ unrestricted aid)4total primary government revenues
Government-wide statement of activities
Revenues (B): (Net (expense) revenue for governmental activities4total governmental activities expenses) 1
Government-wide statement of activities
Debt burden: Total outstanding debt for the primary government4 population
Long-term liabilities note disclosure and statistical section
Coverage (A): Debt service 4 noncapital governmental funds expenditures
Governmental funds balance sheet or statistical section
Coverage (B): (Enterprise funds
operating revenue þinterest expense) 4interest expense
Proprietary funds statement of revenues, expenses, and changes in fund net assets
Capital assets: (Ending net value of primary government capital assets beginning net value) 4 beginning net value
Capital assets note disclosure
A Manageable System of Economic Condition Analysis for Governments g 397
15.5.1 Peer Comparison Groups
The purpose of building a comparison group is to provide some context for understanding the ratios of the government you are interested in. Judgments about whether a ratio is ‘‘good’’ or ‘‘bad’’ or somewhere in between are made easier by comparing a government’s results to those of other governments. In a comparative perspective, good becomes ‘‘better than other governments’’ and bad becomes ‘‘worse than other governments.’’
Equally as important, you replace the static judgment of good versus bad with a dynamic scale that allows judgments about the degree to which a government is better or worse than other governments.
The identification of the peer governments to include depends on several characteristics. First, the group should include the same types of governmental entities; in other words, a general purpose local government should be compared with other general purpose local governments, a school district should be compared with other school districts, and so on.
Second, it is preferable to include peer governments from the same geo- graphic region. This can be as small as a county or as large as a state. The benefit to staying local is that the governments are governed by the same regulations, face the same general economic conditions, and are likely to provide similar services. Third, the peer governments should be roughly the same size, in terms of either annual financial activity (revenues or expenses/
expenditures) or population or both.
There are a variety of ways to assemble the information necessary to develop a comparison group. Obtaining the relevant information from the financial statements of the peer governments may be the most time consuming approach, but it offers the benefit of being able to see the information first-hand and identify any anomalous circumstances that might adversely affect the comparability of the peers. Alternatively, one may utilize available databases of government financial information. Every state collects financial information from school districts and many states collect financial information from localities as well. The Government Finance Officers Asso- ciation’s (GFOA) financial indicators database includes information drawn from the comprehensive annual financial statements submitted to its certi- ficate of achievement for excellence in financial reporting program. The information can easily be sorted by government size. In fact, Brown’s 10-point test draws its comparison groups from GFOA’s database.
There are at least two negative factors, however, that weigh against the ease of using such databases. First, they are not timely, taking at least a year, and often several, to be assembled and published. Second, the GFOA database may be skewed toward governments that have better financial management practices and that therefore may perform better financially than the norm for all governments.
15.5.2 Short-run Financial Position
The City of Port Hayley’s ratio of short-run financial position is 0.37 (see Table 15.5 for the calculations of Port Hayley’s ratios and how they compare with the peer group of cities.) This means that its generally available current financial resources (unreserved general fund balance) are equal to 37 percent of its annual governmental fund revenues. In other words, Port Hayley’s unreserved fund balance would be sufficient to keep the city’s basic functions running for about 135 days (37 percent times 365 days).
When compared with a peer comparison group of similar cities in the same state, Port Hayley’s short-run financial position ratio ranks in the top quartile. Under the 10-point test system, Port Hayley is awarded two points for placing in the top quartile.
15.5.3 Liquidity
Port Hayley’s liquidity ratio is 8.9, which means that its resources that are most readily converted to cash amount to nearly nine times more than the obligations that it has to pay off in the next year. This ratio also compares favorably with the peer governments, landing in the second quartile. The city receives one point.
15.5.4 Financial Performance
Port Hayley’s financial performance ratio is 0.07. The city’s increase in net assets was equal to 7 percent of its total net assets, a result that does not compare well with the peer group. Port Hayley’s ratio is in the bottom quartile of the comparison group, and therefore the city loses one point.
15.5.5 Solvency
In order to calculate the solvency ratio, four numbers in the government- wide statement of activities (see Table 15.A2) must be summed — charges for services, operating grants and contributions, capital grants and con- tributions, and total general revenues. The solvency ratio of 1.14 for Port Hayley means that its liabilities are 14 percent greater than the sum of these annual revenues. In other words, to repay all of its liabilities would take a full year’s revenues plus 14 percent of the next year’s revenues. This ratio ranks in the third quartile, and no points are awarded.
15.5.6 Revenues
The first revenue ratio requires the addition of operating grants and contri- butions (which are found in the program revenue section of the statement
A Manageable System of Economic Condition Analysis for Governments g 399
Table 15.5 Calculation of Ratios and Assignment of Scores
Ratio Calculation Result Quartile Score
Short-run financial position
3,903,429410,466,389 0.37 1st 2
Liquidity 4,377,3684(796,058306,473) 8.94 2nd 1
Financial performance 3,779,620451,504,550 0.07 4th –1
Solvency (43,441,261179,857)4(15,877,339þ1,425,380þ 627,815þ19,928,578)
1.14 3rd 0
Revenues (A) (1,425,380þ2,666,347)4(15,877,339þ1,425,380þ 627,815þ19,928,578)
0.09 2nd 1
Revenues (B) (–15,921,202422,228,063)–1 0.72 3rd 0
Debt Burden (22,981,400þ11,603,300)424,907 1,389 2nd 1
Coverage (A) 3,500,8234(26,518,698 – 4,601,515) 0.16 4th –1
Coverage (B) (11,257,893þ232,908)4232,908 49.34 1st 2
Capital Assets [(56,286,652þ46,993,402) – (54,282,487þ43,959,679)]
4(54,282,487þ43,959,679)
0.05 3rd 0
Total 5
gDebt,WorkingBalances,andFinancialConditionAnalysis
of activities) and unrestricted intergovernmental aid (located with the general revenues). The ratio of that sum to total revenues is 0.09 for Port Hayley. Port Hayley receives 9 percent of its total revenue in the form of intergovernmental operating support, a comparatively low number that places it in the second quartile of the comparison group. One point is awarded.
The second revenue ratio, which assesses the degree to which general governmental activities are supported by taxes and other general reven- ues (as opposed to revenues raised by the activities themselves), is 0.72.
That means 72 percent of the expenses of Port Hayley’s governmental activities was financed with taxes and other general revenues; conversely, 28 percent was self-funded through charges for services, grants, and contributions. This is fairly close to the typical ratio for the peer govern- ments; Port Hayley is in the third quartile, so no points are awarded.
15.5.7 Debt Burden
The calculation of debt burden should include all outstanding debt instruments — not just general obligation debt, but also other types of bonds and notes, loans, capital leases, and so on. The items from the long-term liabilities note disclosure (see Table 15.A8) that should not be included, however, are claims and judgments, compensated absences, postclosure landfill costs, and so on.
Port Hayley’s total outstanding debt amounts to $1,389 per resident. This ratio is in the second quartile of the comparison group, garnering one point.
15.5.8 Coverage
The first coverage ratio — comparing debt service to noncapital expen- ditures — amounts to 0.16 for Port Hayley. That is, general governmental debt service consumes 16 percent of its operating expenditures, a relatively high amount. Consequently, Port Hayley is in the bottom quartile and loses one point.
The coverage ratio for the enterprise funds is a robust 49.34, which means that operating revenues of the business-type activities are more than 49 times their annual interest costs. Port Hayley places in the top quartile with this ratio and receives two points.
15.5.9 Capital Assets
Port Hayley’s ratio of 0.05 means that the net value of the capital assets increased 5 percent of the year. In other words, new investment is more than
A Manageable System of Economic Condition Analysis for Governments g 401
keeping pace with depreciation and the disposal or sale of capital assets.
The ratio ranks in the third quartile, for which no points are awarded.
15.5.10 Total Score
The City of Port Hayley’s total score of 5 is obtained by summing the points awarded for each of the ratios (refer to Table 15.4). According to Brown’s interpretation of the scores (refer to Table 15.1), Port Hayley is just inside the group of governments that are ‘‘better than most.’’ Additional meaning can be added to this score by tracking it over time. A score of 5 may be more impressive if Port Hayley had been steadily rising from a score of 2 or 3 several years ago. By contrast, being better than most governments may be less impressive if Port Hayley’s score was higher in recent years, say a 7 or 8. In this way, an analyst discovers not only the comparative standing of the government’s economic condition, but also whether its economic condition is improving or deteriorating relative to other governments.