15.4 A More Comprehensive 10-Point Test
15.4.1 Financial Position, Financial Performance, Liquidity,
Financial position, roughly defined as a government’s financial standing at a given point in time, may be the most frequently mentioned factor in economic condition analysis. Brown’s 10-point test included three measures intended to address what he termed ‘‘operating position.’’ Two of Table 15.2 Revisions to the 10-Point Test
Ratios from Brown’s 10-Point Test Revisions (1) Operating position:
Unreserved general fund balance4total general fund revenues
(1) Retain as is
(2) Operating position: Total general fund cash and investments4general fund liabilities
(2) Retain as is, but remove deferred revenues from liabilities
(3) Operating position: Total revenues4total
expenditures
Replace with (3) change in governmental activities net assets4total governmental activities net assets
(4) Revenues: Total revenues 4population
Replace with (4) (primary government operating grants and contributionsþ unrestricted aid)4total primary government revenues, and (5) (Net (expense) revenue for governmental activities4 total governmental activities expenses) 1
(5) Revenues: Total general fund revenues from own sources4total general fund sources
(6) Revenues: General fund sources from other funds4 total general fund sources (7) Debt structure: Direct long-
term debt 4population
Replace with (6) total outstanding debt for the primary government4population (8) Debt structure: Debt
service4total revenues
Retain, but revise as (7) debt service4 noncapital governmental funds expenditures;
add (8) (Enterprise funds operating revenueþ interest expense)4interest expense
(9) Debt structure: Total general fund liabilities4 total general fund revenues
Retain, but revise as (9) (primary government liabilitiesdeferred revenues)4primary government revenues
(10) Expenditures:
Operating expenditures4 total expenditures
Replace with (10) (Ending net value of primary government capital assets beginning net value)4beginning net value
A Manageable System of Economic Condition Analysis for Governments g 391
those measures — unreserved general fund balance divided by total general fund revenuesand general fund cash and investments divided by general fund liabilities — are retained as indicators of short-run financial position and liquidity, respectively. However, the latter ratio is adjusted to remove deferred revenues from the liabilities. Rather than obligations that are awaiting liquidation, deferred revenues are resources that do not yet qualify to be considered revenues, such as taxes receivable that are not expected to be collected within the period of availability to finance current expenditures.
In general, when these ratios are relatively higher, it suggests a better capacity to handle unforeseen resource needs and a greater ability to meet short-term obligations, respectively (see Table 15.3 for a complete list of the ratios in the updated 10-point test and their suggested interpretations).
The third measure Brown employed — total revenues divided by total expenditures — is replaced withtotal governmental activities change in net assets divided by total governmental activities net assetsas an indicator of financial performance. Generally, a comparatively high ratio suggests a government is doing a better job of making ends meet each year, though a very high ratio could suggest that a government is raising too much revenue or underspending on needed services.
This change is recommended for several reasons. First, the accrual information for governmental activities eliminates the commingling of capital projects spending in the governmental funds statements. It also avoids concerns about variations among governments regarding other financing sources and uses. Second, using change in net assets, instead of total revenues and expenses, offers a dynamic, rather than static, measure that nonetheless still addresses the same factors, such as whether a government is living within its means. Dividing by net assets puts the measure in a common metric that can be compared across governments, regardless of their size, similar to percentage change and percentage distribution. Finally, the replacement measure also resembles a return-on- net-assets ratio, thereby providing an additional indicator of financial health not previously available in the 10-point test.
A fourth measure adds a long-run dimension: primary government liabilities (less deferred revenue) divided by total revenues.This solvency ratio is an indicator of a government’s overall capacity for repaying or otherwise satisfying all of its outstanding obligations. A low ratio, other factors being equal, suggests that annual revenues are relatively more sufficient for satisfying the liabilities.
Table 15.3 Suggested Interpretations of the Updated 10-Point Test Ratios
Ratios of the Updated 10-Point Test Suggested Interpretation Short-run financial position: Unreserved
general fund balance4general fund revenues
A high ratio suggests larger reserves for dealing with unexpected resource needs in the near term.
Liquidity: General fund cash and investments4(general fund liabilities general fund deferred revenues)
A high ratio suggests a greater capacity for paying off short-run obligations.
Financial performance: Change in governmental activities net assets 4 total governmental activities net assets
A high ratio suggests that annual costs are being adequately financed and financial position is improving.
Solvency: (Primary government liabilitiesdeferred revenues)4 primary government revenues
A low ratio suggests that outstanding obligations can more easily be met with annual revenues.
Revenues (A): (Primary government operating grants and contributions þ unrestricted aid)4total primary government revenues
A low ratio suggests a government is not heavily reliant on intergovernmental aid.
Revenues (B): (Net (expense) revenue for governmental activities4total governmental activities expenses) 1
A low ratio suggests basic government services are more self-sufficient through charges, fees, and categorical grants, and less reliant on general tax support.
Debt Burden: Total outstanding debt for the primary government4population
A low ratio suggests less burden on taxpayers and greater capacity for additional borrowing.
Coverage (A): Debt service 4 noncapital governmental funds expenditures
A low ratio suggests general
governmental long-term debt can be more easily repaid when it comes due.
Coverage (B): (Enterprise funds
operating revenue þinterest expense) 4interest expense
A high ratio suggests greater resource availability for repaying the debts of enterprise activities as they come due.
Capital Assets: (Ending net value of primary government capital assets beginning net value)4beginning net value
A high ratio suggests a government is keeping pace, on average, with the aging of its capital assets and replenishing them.
A Manageable System of Economic Condition Analysis for Governments g 393