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J:\MyFiles\OTHERJOB\LOCALG~1\Lo J:\MyFiles\OTHERJOB\LOCALG~1\Lo Document Transcript

  • Local Government Management Guide Financial Condition Analysis Alan G. Hevesi COMPTROLLER State of New York Office of the State Comptroller Division of Local Government Services & Economic Development April 2003
  • STATE OF NEW YORK OFFICE OF THE STATE COMPTROLLER As a local official, you need the tools to do your job. The Office of the State Comptroller also recognizes that you need to be kept up-to-date on financial practices and developments. We have developed a new publication entitled the Local Government Management Guide, which replaces the Financial Management Guide for Local Governments. Sections of the new publication will be released periodically. The new guide includes technical information as well as suggested practices for local government operations. Financial Condition Analysis, the first section of this new guide, is now available. We believe that you will find this release and subsequent sections an easy-to-use tool and resource. The Local Government Management Guide is available in electronic format, including CD, so that it can be easily updated. The publication is also available on our web site, www.osc.state.ny.us.
  • Table of Contents Introduction...............................................................................................................1 Overview....................................................................................................................1 Part I - Defining Financial Condition........................................................................1 Part II - Using Analytical Tools to Evaluate Financial Condition............................2 Indicators and Ratios.....................................................................................3 Trend Analysis...............................................................................................3 Peer Comparisons..........................................................................................4 Judgment and Reasoning...............................................................................4 Resources......................................................................................................4 Part III - Identifying Causes of Fiscal Stress............................................................5 Cash Solvency.................................................................................................5 Budgetary Solvency.........................................................................................6 Long Run Solvency..........................................................................................7 Service Level Solvency....................................................................................7 Part IV - Improving Financial Condition Through Corrective Action.....................8 Stronger Cash..................................................................................................8 Better Budgeting..............................................................................................9 Continued Health.............................................................................................9 Quality Service...............................................................................................10 Final Thoughts............................................................................................11 Part V - Appendices.................................................................................................12 Appendix A - Glossary of Terms.................................................................13 Appendix B - OSC Financial Indicators.......................................................17 Appendix C - Data Request Form...............................................................51 Appendix D - Financial Indicator Codes......................................................52 OSC Contacts
  • Financial Condition Analysis Introduction Sound fiscal health is imperative to the effective operation of municipalities in New York State. For this reason, local managers should periodically assess the financial condition of their local government. Timely financial condition analysis can provide managers with valuable information on the past, present and future state of their municipality’s finances. This information can highlight current or potential fiscal problems and provide the impetus for timely corrective action. By taking action to address weaknesses and strengthen fiscal health, local managers can better ensure that resources are available to fund the level and quality of services expected by local citizens. Overview The following sections are designed to help local managers analyze the financial condition of their local government: • Defining Financial Condition • Using Analytical Tools to Evaluate Financial Condition • Identifying Causes of Fiscal Stress • Improving Financial Condition Through Corrective Action For additional assistance, the following appendices are also provided: Appendix A - Glossary of Terms used in this chapter Appendix B - Office of the State Comptroller (OSC) Financial Indicators 1 through 14 Appendix C - OSC Data Request Form for Indicators, Peer Comparisons and Financial Data Appendix D - Financial Indicator Codes I. Defining Financial Condition Financial condition may be defined as a local government’s ability to finance services on a continuing basis. This ability involves maintaining adequate service levels while surviving economic disruptions, being able to identify and adjust to long-term changes and anticipating future problems. Financial Condition Analysis 1
  • Put another way, financial condition refers to a local government’s ability to: • generate enough cash to pay its bills over a 30 to 60 day period (cash solvency), • generate sufficient revenues throughout its fiscal year to meet expenditures and not incur a deficit (budgetary solvency), • pay all the costs of doing business in the long run (long run solvency) and • provide needed and desired services at the level and quality needed for the health, safety and welfare of the community (service level solvency).1 It is important to note that these solvency areas are interrelated and that local government services may be at risk if a municipality is unable to maintain solvency in one or more of the defined areas. The efficiency of government operations can be affected when any of these solvency areas becomes an issue. Costs may rise or revenues may decline because of solvency problems. For example, a local government that is experiencing cash solvency problems may have to borrow to pay vendors and employees. The interest paid on the borrowed money becomes an additional cost for the municipality. In a snowball effect, as operations become less efficient (in this example, more costly), the municipality’s fiscal health is further compromised. This weakened financial condition can cause the effectiveness of municipal operations to be seriously undermined. With fewer financial resources to fund them, the quality and extent of essential services may be diminished (service level solvency). Because these solvency areas are interrelated, periodic financial condition analysis should address each area. (Such analysis of a local government’s solvency areas can help identify the early signs of downward fiscal trends that threaten the delivery of municipal services. The early identification of negative trends, and their causes, can allow for corrective action by management before the situation worsens.) II. Using Analytical Tools to Evaluate Financial Condition Analyzing the financial condition of a municipality can provide valuable information about its past, current and future fiscal health. Reviewing the information contained in prior and current year financial statements allows for the assessment of a local government’s fiscal strengths, weaknesses and tendencies. Managers can use this information to develop appropriate financial plans that will help ensure the continued delivery of quality municipal services. 1 Groves, S. M. and M. G. Valente. Evaluating Financial Condition: A Handbook for Local Government. ICMA, 1994 2 Chapter 11 - Local Government Management Guide
  • Indicators and Ratios An analysis of current year information using various ratios (indicators) can provide an up-to-date picture of a municipality’s financial position and results of operations. These indicators can provide managers with information on current financial activities so that solvency issues can be identified and investigated. They can provide a basis for trend analysis and intergovernmental comparisons. Financial indicators can provide snapshots of per capita ratios, revenue collection efforts, expenditure levels and compositions, results of operations, fund balances, cash levels and other key areas. These indicators can be used to analyze the activity of each major operating fund or to analyze government-wide issues, such as debt or cash balances. Once the ratios are obtained, they can be compared to internal or external benchmarks. Internal benchmarks for a local government may be set by policy. For example, management may set an internal threshold for taxes receivable as a certain percentage of real property tax revenues. (If the percentage is exceeded, then management would be notified). External benchmarks are standards set by convention or practice. “Industry” norms for cash as a percentage of current liabilities or for debt per capita are examples of external benchmarks. Such benchmarks may be found in management textbooks, rating agency guidelines or government organization literature. (The State Comptroller’s Office has suggested benchmarks for some of the financial indicators discussed in Appendix B). Any indicators that vary significantly from established benchmarks should be investigated. Positive variances may indicate an improved practice that can be used to improve other areas of operation. A negative variance may indicate an area for further analysis and eventual corrective action. Trend Analysis A trend analysis of several years of data is an equally important analytical tool for identifying underlying causes of fiscal problems (or successes) and for predicting future financial outcomes. A review of an indicator over a period of years can help put the current year’s activity into context. The review can indicate whether the most recent year is the continuation of an upward trend, a downward trend or something in between. A multi-year analysis can quickly identify those years that were unusual or outside the trend, pinpointing those areas that require further investigation. More importantly, a trend analysis can help identify a negative financial trend. (Examples of negative trends are included with the guidance for each indicator in Appendix B). The identification of negative trends provides two benefits to municipal managers. First, if warranted, corrective action can be taken to address the underlying causes of the problem before it worsens. Second, budget estimates (current and future) can be modified to better reflect existing conditions. If corrective action is possible and it is implemented soon enough, the budget can be adjusted to reflect the improved projections. If corrective action is not possible or immediate, projections can be downgraded to prevent significant fiscal problems from occurring later on. Financial Condition Analysis 3
  • Peer Comparisons Another analytical tool that can provide important information to fiscal managers and others is a peer comparison. (While any financial ratio could be used for peer comparisons, per capita ratios are particularly useful for this type of analysis.) Comparing the financial numbers of a base municipality to those of other similar governments allows differences to be identified and analyzed. Developing peer group averages or ranges can further increase the value of these comparisons. The base municipality can then determine where it stands in relation to the group norm. Peer comparisons can highlight operational areas where the base municipality’s numbers look better than the peer group’s averages. This may indicate that the municipality is doing something well. A peer group comparison may also show that the municipality’s numbers are below average. This might suggest areas for further investigation and possible improvement. Contacting one of the peer municipalities that have “better” numbers may yield some ideas for improving current practices. Judgment and Reasoning An important point to keep in mind when performing any analytical procedure is that financial ratios/indicators are only as good as the data from which they are derived. Any unusual results (red flags) should be traced to the supporting data for validation before proceeding to more complex and time consuming operational explanations. Ideally, the supporting financial data should be reviewed for consistency and reasonableness before it is used for analytical purposes. This initial review should answer several questions. Do the numbers make sense? Are they realistic? Are they reliable, current and complete? Having good numbers up front will make all other analytical techniques that much more effective. Also, reviewing the quality of the supporting data may help identify reporting deficiencies or other information concerns that require attention. Resources There are a number of resources available to help with the analysis of financial condition for local governments. Software programs can be purchased or developed to produce the exact financial ratios that are needed for particular analytical objectives. Local colleges or high schools may be able to provide assistance. Other local governments may already be using their own spreadsheets or databases and may be willing to share their technology/expertise. Government organizations may also be able to help. The New York State Comptroller’s Office can help. Financial condition indicators, peer comparisons, and balance sheet/operating statement details are available upon request from the State Comptroller’s Office. Up to six years of financial data is available. See Appendix C for an order form to request any of this financial information. A guide describing the OSC financial indicators is included in Appendix B. 4 Chapter 11 - Local Government Management Guide
  • III. Identifying Causes of Fiscal Stress Fiscal stress comes in various forms and levels. As discussed in the opening section, a municipality can experience solvency problems in one or more of four financial areas. Cash solvency, budgetary solvency, long run solvency and service level solvency are all areas where a local government may be struggling. Each solvency area has unique contributing factors that can cause fiscal stress to occur. For example, certain actions or inactions may directly contribute to a municipality not having sufficient cash to pay its bills on time (cash solvency). There are also factors that can contribute to fiscal problems in many or all of these solvency areas. Severe budgetary problems may cause cash flow problems as well as long run and service level concerns. The degree of fiscal stress will also vary from situation to situation. Cash flow problems may be no more than a temporary annoyance. However, chronic cash problems may result in significant additional costs both from increased vendor prices and increased debt. Similarly, fund deficits may represent a one-time shortfall or years of operating losses. The causes of fiscal stress are many and varied. Often more than one factor can be identified. There may be primary and secondary factors. It is important to thoroughly investigate each instance of fiscal stress so that most of the underlying causes are identified and addressed. Each situation will have its own unique aspects. The clearer the understanding of the causes, the better the chance for effective corrections. It is not possible to list and discuss all the contributing factors of fiscal stress in local governments, but to help start the identification process, here’s a general discussion of areas to consider. (Possible corrective actions will be addressed in the next section of this chapter). Cash Solvency Cash flow problems are generally the result of one or more of these conditions: • Billings are not frequent enough or occur at the wrong time of the year in relation to expenditure demands. • Cash collections are not occurring fast enough. • Unpaid (receivable) amounts are increasing. Financial Condition Analysis 5
  • Budgetary Solvency Budgetary problems can have a number of underlying causes: • There may be problems with budget estimates. • Conditions may change during the year affecting actual revenue or expenditure levels. • Controls over revenues, expenditures and/or information systems may be weak or missing. • Expenditures may be increasing at a faster rate than revenues. • Non-recurring revenues may be used to finance recurring expenditures. • Significant decisions may be made that are not cost-effective. • External factors such as state and federal mandates, severe weather, declining population or industry, or a weakening economy may have a negative impact on municipal finances. (For external factors, it is important to note that the real issue is how these factors affect a local government’s revenues and expenditures). The following scenario illustrates some possible causes: A review of financial indicators (see Appendix B) may disclose that a municipality is experiencing a downward trend in its general fund operations. This trend may be reflected in an analysis of results of operations (OSC Indicator 4) that shows operating deficits for the last 5 years. The trend may also be seen in a review of fund balance (OSC Indicator 5) that shows fund balance declining steadily over the same period. Although the fund balance for the last completed fiscal year is still positive, it is obvious that if the trend continues, the general fund will experience a fund deficit by the end of the next year. This is a fiscal “red flag.” Something needs to be done (sooner rather than later) to avoid fiscal problems down the road. Identifying the causes of this negative trend will involve further analysis and investigation. A good approach is to start with the general and work to the specific. Rarely is this a linear process (but it should be logical). There are often many side paths to be taken and investigated. Here is one possibility to illustrate this point: A review of revenue and expenditure detail records (budget vs. actual) shows that there have been significant unfavorable budget variances for several line items in each of the last 5 years. Two revenue items have been consistently overestimated and one expenditure area has been repeatedly underestimated (or so it appears). Assuming the numbers are correct (your first investigation), logic would indicate that there is a problem with either the estimates, the actual results or both. 6 Chapter 11 - Local Government Management Guide
  • This is where further investigation is needed. Questions should be asked to determine which of these factors is contributing to the fiscal problems. The answers to those questions will dictate the next set of questions and/or possible corrective actions. For example, it may turn out that revenue estimates were based on certain assumptions that have not come to pass for the last 5 years. (Time to revisit these assumptions for the next budget.) It may be that the estimates are supportable but that revenue collections have been down for some to-be-determined reason(s). Perhaps unpaid receivables have grown over the last 5 years. (Time to find out why and take corrective action.) On the expenditure side of the problem, it may be that costs have risen dramatically, demand for services has increased over time or adequate cost controls are not in place. It may be all of these reasons. It may be something else. Each answer will generate another question until the fundamental causes are identified. Long Run Solvency Long run solvency problems have many of the same contributing factors as budgetary (short-term) solvency. In many ways, ongoing budgetary solvency issues can lead to long run solvency problems. Conditions keep getting worse. (This is another good reason for timely corrective action when budget problems first surface.) Some other causes that should be considered for this solvency area are: • Deteriorating infrastructure and/or fixed assets • Inadequate funding provisions for long-term liabilities • Failure to properly account for long-term liabilities • Lack of planning/budgeting for multi-year obligations such as employee contracts, new services, and long-term service contracts Service Level Solvency Service level solvency issues can often represent the last stage of fiscal decline. Chronic budgetary problems can result in cuts to essential quality of life services. So again, uncorrected budgetary solvency problems can have severe financial consequences down the road. Other factors contributing to service level decline include: • A stagnant or shrinking tax base • A lack of revenue growth • Deteriorating infrastructure • Budget inflexibility • An inadequate (cost) accounting system Financial Condition Analysis 7
  • All of these conditions can have a significant impact on a municipality’s ability to provide key services to its constituents. IV. Improving Financial Condition Through Corrective Action Generally, the less advanced the fiscal stress, the easier the fix. That’s why early detection and correction are so important. Periodic financial condition analysis can be an effective tool for early detection of negative fiscal trends. Once the causes of these negative trends have been sufficiently isolated, corrective action becomes the next step. Again, there are many possibilities for addressing the underlying reasons for any fiscal problems encountered. Each factor should be addressed. Additional information is available on a number of these actions in other chapters of the Local Government Management Guide. Finally, the costs and benefits of each option should be weighed as part of the decision process. Stronger Cash Possible actions to remedy cash flow problems include increasing tax or user charge rates, changing billing cycles (timing and/or frequency), improving collection efforts, shifting payment schedules, improving interest earnings and borrowing cash. Some of these options are self-explanatory: • Collection efforts can be improved through stricter enforcement and increased penalties, within legal parameters. • Payment schedules can be shifted a number of ways depending on the type of expenditures being made. In certain circumstances, contractual schedules (debt and vendor) may be re-negotiated. It may be possible, subject to collective bargaining agreements, to make payrolls bi-weekly, semi-monthly or monthly. • Interest earnings could be increased by shopping for higher rates and by investing the maximum amount possible of idle cash. • Borrowing cash is another option for improving cash flow. When considering this option, keep in mind that advancing monies to one fund from another may result in lower borrowing costs than issuing short-term notes. (General Municipal Law § 9-a addresses the issue of such interfund advances). 8 Chapter 11 - Local Government Management Guide
  • Better Budgeting Improving budgetary solvency can involve even more options. Most of these options will fall into one of the following general categories: improving budget accuracy, improving structural balance, monitoring results throughout the year, controlling costs, improving internal controls and using cost-benefit analysis: • Beginning the fiscal year with sound, conservative estimates of revenues, available fund balance and expenditures can prevent serious deficit-causing problems. • A structurally balanced budget limits the use of one-shot, non-recurring revenues except to fund non-recurring or capital expenditures. • Timely identification of significant revenue or expenditure fluctuations will allow fiscal managers to modify the adopted spending plan and avoid problems. Periodic status reports should be used to closely monitor budget activity so that corrective action can be taken sooner rather than later. • Costs can be controlled through a variety of measures intended to achieve the best price for goods and services, improve the efficiency of processes or share costs with other municipalities. • Internal controls can be strengthened through improved record keeping and accountability. For example, expenditures may be controlled through a purchase order and encumbrance system that assures that approved funds are available prior to purchase. • Each significant decision should include cost-benefit analysis. The budget impact (current year and beyond) of a particular option should be identified prior to implementation. Continued Health Ensuring long run solvency requires foresight. Multi-year financial plans and long-term capital plans are essential for long-term fiscal health. By planning for service and capital needs beyond the current year, managers can better anticipate and prepare for the necessary funding. Such planning reduces the likelihood of severe service cuts or costly “emergency” expenditures. Two important pieces of long-term planning are accurately identifying future financial obligations and providing for sufficient funding to liquidate those obligations when they become due: • Funding may be provided through a variety of methods, including yearly budgetary appropriations, available fund balance, legal reserve monies and/or debt proceeds. Financial Condition Analysis 9
  • • Key to ensuring that sufficient funds are available when needed is accurate accounting for these long-term obligations. Getting reliable numbers on the books gives financial planners a clear target to shoot for. Again, a good multi-year plan can help prevent unpleasant fiscal surprises down the road. Quality Service Service level solvency problems are usually the result of prolonged fiscal stress. Because the problems are so severe at this point, lasting solutions can require significant actions by local managers. These corrective actions can often take years to fully implement. At this level of fiscal stress there are no quick and easy solutions. Turning off streetlights, closing firehouses, laying-off workers and similar cost-cutting measures are not solutions to, but symptoms of, service level problems. All of these drastic measures reduce the quality of life in affected municipalities. Needed and desired services are no longer being provided (see solvency definition on page 2). Long-term strategies needed to help restore service quality include expanding the tax base, developing new revenue sources, investing in infrastructure, improving budget flexibility, planning strategically and accounting for service costs: • The tax base can be expanded through various economic development initiatives that encourage development and business. • Sharing the provision of municipal services with other governments in effect transfers a portion of the cost of those services to other tax bases. Similarly, charging other governments for services provided to them can be a way to develop new revenue sources. • Other, non-local revenues should also be sought. Increases to tax rates and user fees should be avoided or pursued as a last resort. Such increases may have a negative impact on the tax base as businesses and citizens move to less expensive areas. Work with other governments to obtain additional state aid, federal aid and sales tax monies. Consider requesting that the county take over the enforcement of delinquent taxes, if appropriate. Look for ways to increase the number of customers using fee-generating services such as recreation, water, sewer, refuse, parking, etc. (Contact our office for assistance. We can perform a $MART review to help you develop non-tax revenues.) • As a long-term strategy, investment in infrastructure can help resolve many financial woes. Most importantly, for service level solvency problems, sound infrastructure can be a key element for attracting new business to a municipality. It also allows the municipality to provide a higher quality of service to its taxpayers. To help finance such projects consider partnering with other local governments, seeking additional state and federal funding, and/or seeking other authorized financing arrangements. 10 Chapter 11 - Local Government Management Guide
  • • As another long-term solution, improving budget flexibility can help municipalities deal with an array of fiscal problems. Once finances have stabilized, begin adopting budgets that generate additional funding sources such as reserves, contingency appropriations and fund balances. This strategy will allow local managers to more easily adjust to financial changes without resorting to drastic service cuts. On the expenditure side of the budget, by making decisions that limit the extent of fixed, long-term financial commitments (for such things as debt redemption and personal service contracts), managers can open their budgets to more cost-cutting options should the need arise. • Planning strategically by developing a clear municipal vision and setting long-term goals can help local officials with key financial decisions. Decisions can be made in the context of a strategic plan. Difficult funding and service level choices can be made with the long-term goals in sight. Performance measures can also be established and tracked to help improve the efficiency and effectiveness of municipal operations. • Another necessary tool for improved service level solvency is a cost accounting system. For service level solvency problems, controlling costs is often a necessary remedy. An accounting system that tracks service costs will help managers control those costs and also provide them with the information needed to make effective decisions. For instance, such a system would allow managers to analyze the actual cost of services and determine if related revenues were sufficient to cover both fixed and variable costs. (A survey of surrounding municipalities would determine if fees could be raised to comparable levels). Final Thoughts While all of the above strategies are presented as corrective actions for various solvency problems, the best strategy is to implement these measures before they become necessary. These recommendations can be viewed as sound business practices and should be used to prevent fiscal problems from occurring or worsening. Timely financial condition analysis will let you know if your preventive measures are working. The routine analysis of financial condition should be analogous to visiting your doctor. It should be done at least annually. Prevention is the best medicine, but early detection and treatment are also key components of good (fiscal) health. Financial condition analysis can produce the same result for a local government. This analysis goes beyond a periodic review of budget status reports and annual reports. It provides a bigger, long-term picture of a local government’s financial position. Choose those indicators that have the most meaning to your government’s operations. Indicators should provide managers with valuable information regarding the past, present and future of their municipality. Remember, early detection is the key. Financial Condition Analysis 11
  • Financial Condition Analysis - Appendices Appendix A - Glossary of Terms 13 Appendix B - OSC Financial Indicators 17 Appendix C - Data Request Form 51 Appendix D - Financial Indicator Codes 52 12 Chapter 11 - Local Government Management Guide
  • APPENDIX A GLOSSARY OF TERMS This glossary is intended for use with this chapter, primarily OSC Financial Indicators 1 through 14 (see Appendix B). The definitions included here provide further explanation of the materials contained in Appendix B. They should be used in that context only. Budgetary Solvency - A local government’s ability to generate sufficient recurring revenues during the fiscal year to meet recurring expenditures without incurring a fund deficit. Capital Outlay - Expenditures to either construct or extend the life of infrastructure, buildings, machinery or equipment having a large initial cost and a useful life of more than one year. Minor equipment purchases are also included in this category. Cash and Investments - All cash and investments accounts that have not been legally reserved and are available to pay current liabilities as they become due. Cash Solvency - A local government’s ability to generate enough cash to pay bills over a 30 or 60-day period. Current Liabilities - Obligations that will be liquidated with expendable available financial resources. Examples include short-term debt issues, accounts payable, accrued liabilities, due to other governments, etc. Debt Limit - The maximum amount of indebtedness that may be contracted by a local government under law. Debt Service Expenditure - The amount that a local government must pay each year for principal and interest on debt. Expenditures are made from the major governmental operating funds and the debt service fund. Enterprise Fund - A fund established where the intent of the governing body is that the costs of providing goods or services to the general public on a continuing basis are financed or recovered primarily through user charges (i.e., water, sewer, electric utility, airport, hospital, etc.). Expenditures - For purposes of financial condition analysis, any use of funds to provide services or support those services. Financial Condition - A local government’s ability to finance expected services on a continuing basis. This means maintaining adequate service levels while surviving economic disruptions, having the ability to identify and adjust to long-term changes and anticipating future problems. Financial Condition Analysis 13
  • Fiscal Stress - The inability of a local government to maintain solvency in any one or more of the following areas: cash solvency, budgetary solvency, long-term solvency or service level solvency. (The State Comptroller’s Office has developed indicators to measure trends in a government’s operations that may provide warnings when a local government is experiencing difficulty in any of these solvency areas). Full Value Assessment - Assessed value divided by the equalization rate. Fund Balance - For purposes of financial condition analysis, the total accumulation of all operating surpluses and deficits since the beginning of a local government’s existence. Assets-Liabilities = Fund Balance. Fund Balance Appropriated - The part of the unreserved fund balance that has been appropriated for use in the next fiscal year’s budget. Fund Balance Reserved - The part of fund balance that is not available for discretionary appropriation due to accounting treatment or the creation of legally authorized reserves. Fund Balance Unreserved - The total fund balance at the end of the fiscal year less any reservations of fund balance. Gross Expenditures - The total of all expenditures for a specific fund for the year. Gross Revenues - The total of all revenues for a specific fund for the year. Intergovernmental Revenues - Those revenues received from New York State and/or the federal government. Long-Term Debt - Debt with a maturity date more than one year after the date of issuance. Long-Run Solvency - A local government’s ability to pay all the costs of doing business in the long run. (This includes maintaining the infrastructure, meeting employee benefit obligations, paying debt as it comes due, etc.). Major Governmental Operating Fund - Any fund with total expenditures greater than 10% of the aggregate expenditures for all governmental operating funds. One-Time Revenues - Revenues that are not derived from a government’s normal operating cycle and, therefore, may not be available from year to year. Also known as “one-shot” revenues. As used in the OSC Financial Indicators, one-time revenues include such items as proceeds from the sale of real or personal property, special non-recurring grants and proceeds from the issuance of long-term obligations. 14 Chapter 11 - Local Government Management Guide
  • Operating Deficit - Total expenditures for the year exceed total revenues for an operating fund. Operating Surplus - Total revenues for the year exceed total expenditures for an operating fund. Per-Capita Debt - The amount of a government’s debt divided by its population. Per capita debt is used to indicate the government’s debt position by showing the proportionate debt borne per resident. Real Property Tax Receivables - Real property taxes that remain unpaid (at year-end). Real Property Tax Revenues - Real property taxes levied for the budget of the current year. Recurring Expenditures - Expenditures made through the normal year-to-year operations of a local government. Recurring Revenues - Revenues derived through the normal year-to-year operations of a local government. These do not include one-time revenues. Revenues - For purposes of financial condition analysis, any funding source generated through operations to finance local government services. Service Level Solvency - A local government’s ability to provide needed and desired services at the level and quality required for the basic health, safety and welfare of the community. Structurally Balanced Budget - A budget that is structured to finance recurring expenditures with recurring revenues. Tax Limit - The maximum amount that may be raised by real property tax in any fiscal year under law. Total Fixed Costs - As used in the OSC Financial Indicators, salaries and fringe benefits plus debt service. Financial Condition Analysis 15
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  • APPENDIX B OSC FINANCIAL INDICATORS The State Comptroller’s Office has developed a number of fiscal indicators that can be used to gauge the financial condition of local governments. These indicators are expressed as ratios to facilitate comparisons with other similar local governments and to give a picture of what has been occurring in a particular municipality over a period of 5 to 6 years. Graphs are included to help illustrate local government financial trends. A sample of each indicator is also provided. These indicators can be obtained for a municipality upon request. A data request form is available (Appendix C) or call the State Comptroller’s Office at (518) 473-5065 to order selected indicators and other financial data. It is important to analyze the numbers that make up the indicators to obtain a better understanding of what is actually occurring and whether there is a need for concern. (To assist with this analysis, a list of indicator components is provided in Appendix D detailing the account codes used for each formula). No one indicator alone should be accepted as an indication of a positive or negative trend. Although the indicators are not weighted, there are some indicators that tend to provide a stronger measure of fiscal condition than other indicators. Indicators 4, 5 and 6b are considered key indicators for financial condition analysis. The following indicators are explained in this section: Indicator 1: Revenues and Expenditures Per Capita, Recurring Revenues Per Capita Indicator 2: Real Property Taxes Receivable Indicator 3: Fixed Costs - Personal Services and Debt Service Indicator 4: Operating Surplus/Deficit Indicator 5: Unreserved Fund Balance and Appropriated Fund Balance Indicator 6a: Liquidity - Cash and Investments as a Percentage of Current Liabilities Indicator 6b: Liquidity - Cash and Investments as a Percentage of Gross Monthly Expenditures Indicator 7: Long-Term Debt Per Capita Indicator 8: Capital Outlay Indicator 9: Current Liabilities Indicator 10: Intergovernmental Revenues Indicator 11: Economic Assistance Costs Indicator 12: Public Safety Costs Indicator 13: Tax Limit Exhausted Indicator 14: Debt Limit Exhausted A detailed explanation of each indicator includes: • Purpose • Measurement • Formula • Negative Trends • Recommended Funds to Review • Analysis • Possible Practices Financial Condition Analysis 17
  • Indicator 1: Revenues and Expenditures Per Capita Recurring Revenues Per Capita Purpose: To identify trends in a local government’s revenues and expenditures relative to the population of the local government. Measurement: Gross and recurring revenues generated per person and the expenditure burden per person within a municipality. Formula: a. Gross Revenues Population b. Gross Expenditures Population c. Recurring Revenues (Gross Revenues - One-Time Revenues) Population Negative Trend: Indicator 1b increasing faster than indicator 1a or 1c. Recommended Funds to Review: All major governmental operating and enterprise funds, combined as necessary. Analysis: Examining per capita revenues and expenditures shows changes in revenues and expenditures relative to changes in population size. As population increases, the need for services is likely to increase. The cost of those services and the revenues needed to finance them would also likely increase. If the trend in revenues per capita is downward (less revenue per capita) coupled with a trend in expenditures that is upward (more expenditures per capita), it may indicate that the local government is unable to maintain services at current levels. The local government would then have to determine if it is able to develop new revenue sources and/or find ways to reduce expenditures. Formula 1c (recurring revenues per capita) provides a more conservative view of revenue levels by subtracting out revenues that may not be available year-to- year. Significant decreases in this ratio (without corresponding decreases in 1a) could indicate over-reliance on sporadic revenues. In evaluating the trends of this indicator, it is important to consider that the population figures used to calculate the ratios are only updated every ten years, with the federal census. Furthermore, apparent increases in revenues or expenditures per capita may be the result of increases in the cost of living and may not reflect actual increases in per capita revenues or expenditures in real dollar terms. Possible Practices: Local governments should meet recurring expenditures with recurring revenues to ensure structurally balanced budgets. Reliance on non-recurring revenues or appropriations of fund balance could result in budgetary gaps that have to be corrected in future-year budgets. 18 Chapter 11 - Local Government Management Guide
  • Fund Aggregated: A Indicator 1 - Revenues, Expenditures and Recurring Revenues - Per Capita Formula: Gross Revenues 1500 Population 84 7 7 55 55 57 Gross Expenditures 7 7 09 11 10 11 11 11 115 1 09 04 1 11 Population 9 10 9 03 1 9 10 98 2 2 97 7 97 10 1000 92 907 92 94 Recurring Revenues Population Per Capita Gross Revenues Per Capita Gross Expenditures Percentage 500 0 1996 1997 1998 1999 2000 2001 Year Fiscal Year: 1996 1997 1998 1999 2000 2001 Gross Revenues $270,036,404 $286,543,141 $295,627,130 $321,049,552 $340,313,186 $340,788,806 Population 292,793 292,793 292,793 292,793 294,565 294,565 Per Capita Gross Revenues $922 $979 $1,010 $1,097 $1,155 $1,157 Gross Expenditures $265,495,407 $277,391,957 $289,703,390 $306,571,011 $327,000,234 $348,811,058 Population 292,793 292,793 292,793 292,793 294,565 294,565 Per Capita Gross Expenditures $907 $947 $989 $1,047 $1,110 $1,184 One Time Operating Revenues $0 $0 $1,900,113 $0 $0 $0 Gross Revenues – One Time Oper. Rev. $270,036,404 $286,543,141 $293,727,017 $321,049,552 $340,313,186 $340,788,806 Population 292,793 292,793 292,793 292,793 294,565 294,565 Per Capita Recurring Revenues $922 $979 $1,003 $1,097 $1,155 $1,157 Financial Condition Analysis 19
  • Indicator 2: Real Property Taxes Receivable Purpose: To identify trends in a local government’s collection of real property tax revenues. (For most towns and certain villages whose real property taxes are guaranteed by counties, this indicator would not be applicable). Measurement: The relationship of real property taxes receivable to total real property tax revenue. Formula: Real Property Taxes Receivable Real Property Tax Revenues Negative Trend: The percentage increasing over time. Recommended Funds to Review: All funds with general property taxes. Analysis: Real property taxes receivable as a percentage of real property tax revenue provides a measure of a municipality’s collection efforts/success. Since municipalities frequently guarantee tax levies of other local governments, there is no fixed benchmark that can be cited for this indicator. What needs to be observed is the movement of the indicator over time. Receivables increasing at a greater rate than revenues (percentage is increasing over time) would have a negative impact on the financial condition of the local government and could indicate that a greater number of taxpayers are either unwilling or unable to pay taxes at current rates. This could indicate an inability to generate the revenues needed to finance current service levels. Possible Practices: Vigorous enforcement of tax delinquencies helps keep the receivable account from increasing too rapidly. When levying taxes, an adequate amount for taxes deemed to be uncollectible and for tax revenues deemed unavailable (deferred tax revenues) should be included to ensure that sufficient real property tax revenues are generated. 20 Chapter 11 - Local Government Management Guide
  • Indicator 2 - Real Property Tax Receivables 20 0. 15 160 Funds Aggregated: 4 02 85 .3 A 140 4 5. 4. 19 .9 02 1 09 11 8. 11 1 10 Formula 120 100 Real Property Tax Receivables Real Property Tax Revenues 80 60 Percentage 40 20 0 1996 1997 1998 1999 2000 2001 Year Real Property Tax Receivables as % of Real Property Tax Revenues Fiscal Year: 1996 1997 1998 1999 2000 2001 Real Property Tax Receivables $40,398,834 $42,743,025 $40,706,930 $41,465,084 $42,281,215 $50,333,824 Real Property Tax Revenues $36,746,331 $37,160,259 $37,684,702 $36,103,687 $35,427,886 $33,510,559 Real Property Tax Receivables as % of Real Property Tax Revenues $109.94% 115.02% 108.02% 114.85% 119.34% 150.20% Financial Condition Analysis 21
  • Indicator 3: Fixed Costs - Personal Services and Debt Service Purpose: To identify how much of a local government’s total costs are fixed by personal service and debt obligations. Measurement: The relationship of costs for salaries, fringe benefits and debt service to total operating expenditures. Formula: a. Salaries and Fringe Benefits Gross Expenditures b. Debt Service Expenditures Gross Expenditures c. Salaries and Fringe Benefits + Debt Service Gross Expenditures Negative Trend: Percentages increasing over time. Recommended Funds to Review: All major governmental operating and enterprise funds, combined as necessary. Analysis: The higher the relative level of personal services and debt service expenditures, the less flexibility local officials have to respond to economic changes. The generally fixed nature of these expenditures makes it more difficult to adjust service levels if resources decline. The services that the local government offers impact on the level of personal service expenditures. For example, a town that provides police protection will have a higher percentage of personal services costs to total expenditures than a similar town that does not. Therefore, the best test for reasonableness here is to compare the local government with other similar governments that provide the same level of services. Since there is no established benchmark for this indicator, the user should review the trend in this indicator over time. If the ratio is increasing, it indicates that the local government is losing its ability to adapt to changing circumstances. Possible Practices: To better manage fixed costs, local officials should keep salary rates and fringe benefits consistent with similar local governments in the region. In addition, overtime should be kept at a minimum. In order to limit debt service costs, local officials should ensure that proper equipment maintenance programs are developed and followed in order to extend the useful life and trade-in value of equipment. 22 Chapter 11 - Local Government Management Guide
  • Funds Aggregated: A, V Indicator 3 - Fixed Costs as % of Gross Expenditures Formula: 40% . 29 Salaries and Fringe Benefits 36 0 Gross Expenditures 4 .4 .0 34 33 . 99 31 . 90 30 02 . Debt Service 29 30% 8 5 Gross Expenditures .3 . 32 .2 . 09 . 35 25 25 . 68 25 25 24 25 Total Fixed Costs Salaries and Fringe Benefits as % of Gross Expenditures Gross Expenditures 20% Debt Service as % of Gross Percentage Expenditures 10% Total Fixed Costs as % of Gross Expenditures 7 .9 90 15 22 10 34 6. 9. 6. 67 5. 3. 0% 5.34 1996 1997 1998 1999 2000 2001 Year Fiscal Year: 1996 1997 1998 1999 2000 2001 Salaries and Fringe Benefits $75,796,038 $79,218,857 $80,873,636 $82,954,427 $86,470,182 $0 Debt Service $38,563,209 $34,325,393 $29,317,096 $22,818,549 $21,798,421 $13,364,363 Total Fixed Costs $75,796,038 $79,218,857 $80,873,636 $82,954,427 $86,470,182 $0 Gross Expenditures $265,495,407 $277,391,957 $289,703,390 $306,571,011 $327,000,234 $0 Salaries and Fringe Benefits as % of Gross Expenditures 25.38% 25.32% 25.25% 25.09% 24.68% 25.35% Debt Service as % of Gross Expenditures 5.34% 10.97% 9.15% 6.90% 6.22% 3.67% Total Fixed Costs as % of Gross Expenditures 33.04% 36.29% 34.40% 31.99% 30.90% 29.02% Financial Condition Analysis 23
  • Indicator 4: Operating Surplus/Deficit Purpose: To identify trends in revenues, recurring revenues, expenditures and the resulting surpluses or deficits. Measurement: The relationship of operating results (gross revenues less gross expenditures) to total operations (gross expenditures). Formula: a. Gross Revenues - Gross Expenditures Gross Expenditures b. Gross Revenues - Gross Expenditures - One-Time Revenues Gross Expenditures Negative Trend: Percentages decreasing over time. Recommended Funds to Review: This indicator is displayed individually for each major governmental operating fund. Analysis: The annual operating surplus or operating deficit is the difference between a government’s revenues and expenditures for a fiscal year. If expenditures exceed revenues, the government has an operating deficit. If revenues exceed expenditures, the government has an operating surplus. Over time, operating deficits of one year may offset operating surpluses of another year. Several successive years of operating deficits could cause financial hardship for a local government. Each year’s operating surplus or deficit is added to or subtracted from a local government’s fund balance. A government’s fund balance is the total accumulation of all operating surpluses and deficits since the beginning of that local government’s existence. Therefore, Indicator 4 is related to Indicator 5 (Unreserved Fund Balance and Appropriated Fund Balance). Indicator 4a is expressed as a percentage of the local government’s expenditures. This depicts how large or small the surplus or deficit is in relation to each fund’s operations for the year. A local government may experience an operating deficit when using fund balance to finance current operations. Continued use of fund balance for this purpose could create fiscal problems. Reviewers should consider the results of several years of operation, not just the most recent year, and also review fund balance (Indicator 5) in analyzing Indicator 4. 24 Chapter 11 - Local Government Management Guide
  • Indicator 4b addresses one-time non-recurring revenues. (One-time revenue is a term used to describe revenue that is not derived from a government’s normal operating cycle and, therefore, cannot be relied upon from year to year). These revenues are subtracted from the fund surplus or deficit to present a more conservative picture of the results of operations. This indicator measures only those recurring, more reliable revenues as they compare to expenditures. The difference is then expressed as a percentage of gross (total) expenditures. Using one-time revenues to finance recurring expenditures could create fiscal problems, because future budgets have to provide for new revenues to compensate for past one-time revenues. However, the appearance of one-time revenues in this indicator is not necessarily an indication that such revenues were used to finance recurring expenditures. The one-time revenue may have been used to finance one-time expenditures, such as using the proceeds from the sale of real property to purchase a piece of equipment. Further analysis to determine the use of one-time revenues is necessary. Possible Practices: Local governments should try to avoid large fluctuations in operations. One-shot revenues (including available fund balance) should not be relied upon to balance annual budgets. Their use should be limited to the financing of non-recurring expenditures. Financial Condition Analysis 25
  • Fund: A Indicator 4 - Operating Surplus/Deficit Formula: 10% Gross Revenues - Gross Expenditures Gross Expenditures 8% Gross Revenues - Gross Expenditures - OneTime Revenues 6% 72 72 Gross Expenditures 4. 4. 07 07 4. 4. 3 3 4% 3. 3. 71 04 71 1. 2. 1. 39 1. 2% .3 .3 Percentage -2 -2 0% -2% Surplus/Def as % of Expenditures Surplus/Def-One Time Rev as % of Expenditures 26 Chapter 11 - Local Government Management Guide -4% 1996 1997 1998 1999 2000 2001 Year Fiscal Year: 1996 1997 1998 1999 2000 2001 Gross Revenues $270,036,404 $286,453,141 $295,627,130 $321,049,552 $340,313,186 $340,788,806 Gross Expenditures $265,495,407 $277,391,957 $289,703,390 $306,571,011 $327,000,234 $348,811,058 Surplus/Deficit $4,540,997 $9,151,184 $5,923,740 $14,478,541 $13,312,952 ($8,022,252) Surplus/Deficit as % of Gross Expenditures 1.71% 3.30% 2.04% 4.72% 4.07% -2.30% One Time Revenues $0 $0 $1,900,113 $0 $0 $0 Surplus/Def-One Time Rev as % of Gross Expenditures 1.71% 3.30% 1.39% 4.72% 4.07% -2.30%
  • ****Indicators continue on the following page**** Financial Condition Analysis 27
  • Indicator 5: Unreserved Fund Balance and Appropriated Fund Balance Purpose: To identify trends in a local government’s fund balance. Measurement: The relationship of unreserved fund balance and of appropriated fund balance to total operations (gross expenditures). Formula: a. Unreserved Fund Balance Gross Expenditures b. Appropriated Fund Balance Gross Expenditures Negative Trend: Percentages decreasing over time. Recommended Funds to Review: This indicator is displayed individually for each fund a government maintains, except enterprise funds. Analysis: A positive fund balance provides local officials with options to help deal with revenue shortfalls or expenditure overruns. Reviewers of this information should also pay attention to this indicator over time. Continuous reductions in fund balance could indicate unstructured budgets that could lead to future budgetary problems for the local government even if the current fund balance is positive. Even more significant is a fund balance that is negative, or what is known as a deficit fund balance. Generally, the larger any deficit as a percentage of expenditures, the more difficult it will be for the government to eliminate the deficit. This situation could have serious implications for the government’s ability to provide services at current levels. Deficits in major funds in excess of 1.5% of fund expenditures or $50,000 (whichever is greater) are generally causes for concern. Appropriated fund balance information can provide another explanation for any declining fund balances. Annual appropriations of available fund balance would normally reduce unreserved fund balance each year. However, favorable budget variances (revenue and/or expenditure) could offset some, or all, of this otherwise negative trend. Possible Practices: Careful budgeting, long-term planning, proper use of reserves and capital asset maintenance help governments insulate themselves from unexpected major costs and thereby keep expenditures within revenue limits and stabilize fund balances. Such practices will also allow local managers to maintain a reasonable level of fund balance, providing yet another insulating benefit. 28 Chapter 11 - Local Government Management Guide
  • Indicator 5 - Unreserved Fund Balance and Appropriated Fund Balance Fund: A Formula: 20% Unreserved Fund Balance 61 . 16 Gross Expenditures 15 . 14 Appropriate Fund Balance Gross Expenditures 48 . 69 10 9. 65 10% 8. 10 Percentage 6. 15 5. 3 4. Unreserved FB as a % of Gross Expenditures Appropriated FB as a % of Gross Expenditures 35 9 1. .3 .2 0 0% 1996 1997 1998 1999 2000 2001 Year Unreserved and Appropriated Fund Balance as % of Gross Expenditures Fiscal Year: 1996 1997 1998 1999 2000 2001 Unreserved Fund Balance $15,953,681 $23,753,289 $28,842,359 $43,380,330 $54,328,627 $36,569,746 Appropriated Fund Balance $774,865 $0 $3,900,000 $907,792 $16,830,000 $15,000,000 Gross Expenditures $265,495,407 $277,391,957 $289,703,390 $306,571,011 $327,000,234 $348,311,058 Unreserved Fund Balance as % of Gross Expenditures 6.01% 8.56% 9.96% 14.15% 16.61% 10.48% Appropriated Fund Balance as % of Gross Expenditures 0.29% 0.00% 1.35% 0.30% 5.15% 4.30% Financial Condition Analysis 29
  • Indicator 6: Liquidity Cash and Investment as a Percentage of Current Liabilities Cash and Investments as a Percentage of Gross Monthly Expenditures Purpose: To identify trends in a local government’s year-end cash balances. Measurement: The ability to liquidate current liabilities or to fund ensuing operations from available cash: 6a. Measures the amount of cash on hand at the end of the year in relation to the amount of current liabilities. 6b. Measures the amount of cash on hand at the end of the year in relation to gross monthly expenditures. Formula: a. Cash and Investments Current Liabilities b. Cash and Investments Gross Expenditures/12 Negative Trend: Percentages decreasing over time. Recommended Funds to Review: This indicator is an aggregate of all the funds included in the analysis. Individual funds and other combinations can also be generated as needed/requested. Analysis: These indicators measure the availability of cash in relation to current liabilities at the end of the year and to average monthly expenditures for the year. A downward trend in these indicators (percentages are decreasing) indicates that the government may be having difficulty raising the cash needed to meet its current expenditure needs. Real property taxes, a significant revenue source in most local governments, are generally collected at the beginning of the fiscal year and spent down as the year progresses. The above indicators are generated using the year-end figures, at which time cash balances are usually at their lowest, thus creating a conservative indicator. However, a government should generally have year-end cash equal to about 50% of current liabilities and 75% of average monthly expenditures. Possible Practices: Cash flow analysis helps identify moneys available for investment in longer-term instruments (as authorized by law), thereby maximizing investment yields. Vigorous collection of receivables helps speed up the receipt of cash, making it available for investment sooner. Cash collections may be enhanced through timely filing of claims, improved billing cycles and stricter enforcement efforts. Extending or delaying cash disbursements can also have a positive effect on cash flow. 30 Chapter 11 - Local Government Management Guide
  • Indicator 6a - Liquidity Funds Aggregated: A 42 57 4. 4. 12 12 130% Formula: 2 5 .1 .7 99 99 Cash and Investment 104% Current Liabilities 2 .7 78% 66 8 .3 51 52% Percentage 26% 0% 1996 1997 1998 1999 2000 2001 Year Cash & Investments as % Current Liabilities Fiscal Year: 1996 1997 1998 1999 2000 2001 Cash and Investments $25,030,571 $37,953.539 $49,010,377 $53,188,348 $64,778,334 $66,634,200 Current Liabilities $48,714,716 $56,888,758 $49,446,874 $42,750,088 $52,003,522 $66,798,352 Cash and Investments as a % of Current Liabilities 51.38% 66.72% 99.12% 124.42% 124.57% 99.75% Financial Condition Analysis 31
  • Funds Aggregated: Indicator 6b - Liquidity A 2 4 .7 .2 2 37 29 9 2 1 .1 Formula: 240% .0 08 2 03 2 Cash and Investment 9 Gross Expenditures/12 .1 1 64 160% 13 3. 11 Percentage 80% 32 Chapter 11 - Local Government Management Guide 0% 1996 1997 1998 1999 2000 2001 Year Cash & Investments as % of Gross Monthly Expenditures Fiscal Year: 1996 1997 1998 1999 2000 2001 Cash and Investments $25,030,571 $37,953,539 $49,010,377 $53,188,348 $64,778,334 $66,634,200 Gross Expenditures $265,495,407 $277,391,957 $289,703,390 $306,571,011 $327,000,234 $348,811,058 Gross Expenditures/12 $22,124,617 $23,115,996 $24,141,949 $25,547,584 $27,250,020 $29,067,588 Cash Investments as a % of Gross Monthly Expenditures 113.13% 164.19% 203.01% 208.19% 237.72% 229.24%
  • ****Indicators continue on the following page**** Financial Condition Analysis 33
  • Indicator 7: Long-Term Debt Purpose: To identify trends in a local government’s use of debt as a financing source in relation to the population of the local government. Measurement: The amount of year-end outstanding long-term debt per capita. This measures the debt principal burden that must be borne by each individual in the local government. Formula: Long Term Debt Population Negative Trend: Percentage increasing over time. Recommended Funds to Review: General long-term debt group of accounts (and all major governmental operating funds plus enterprise funds, combined as necessary). Analysis: Increased levels of debt can mean that local officials have a decreasing level of flexibility in how they allocate resources, which could lead to difficulty in maintaining the current level of services. This indicator is related to Indicator 3 (Debt Service/ Expenditures). An increase in Indicator 7 would most likely trigger a subsequent increase in Indicator 3. If long-term debt per capita is increasing, it is important to identify the expenditures being financed by the new debt. When a government uses debt to finance expenditures that previously had been financed with recurring revenues, it could be a sign that the government is having difficulty raising the revenues needed to finance current operations. A related indicator in this case is Indicator 8 (Capital Outlay). As increased debt replaces current funds to finance capital expenditures, Indicator 8 will decrease. Possible Practices: Local managers should review the existence and condition of municipal capital assets and plan for proper maintenance and replacement. The planned replacement of costly capital assets may reduce the need for, or level of, debt to be issued. Similarly, proper maintenance may extend the useful life of these expensive assets or it may result in a higher trade-in value when a replacement is needed. In general, local government managers should limit the issuance of debt to the purchase of larger (more expensive) capital assets. 34 Chapter 11 - Local Government Management Guide
  • Funds: A, W Indicator 7 - Long Term Debt Formula: 640 6 Long Term Debt 55 Population 560 480 5 39 3 35 400 7 30 1 28 320 1 Dollar 20 240 160 80 0 1996 1997 1998 1999 2000 2001 Year Fiscal Year: 1996 1997 1998 1999 2000 2001 Long Term Debt $162,788,895 $115,692,101 $103,213,792 $89,903,047 $59,351,563 $82,762,391 Population 292,793 292,793 292,793 292,793 294,565 294,565 Long Term Debt Per Capita $556 $395 $353 $307 $201 $281 Financial Condition Analysis 35
  • Indicator 8: Capital Outlay Purpose: To identify trends in a local government’s use of operating funds to finance capital expenditures. Measurement: The relationship of capital outlay (expenditures for equipment and transfers to the capital projects fund) to gross operating expenditures. Formula: Capital Outlay Gross Expenditures Negative Trend: Percentage decreasing over time. Recommended Funds to Review: All major governmental operating and enterprise funds, combined as necessary. Analysis: Capital outlay consists of expenditures to maintain or improve a local government’s infrastructure or to acquire fixed assets. This indicator measures the extent to which a local government uses current operating funds to finance capital outlay needs. A decrease in this indicator coupled with an increase in Indicator 7 could indicate that the local government is increasing its reliance on debt to finance capital expenditures. This could indicate a difficulty in raising revenues needed for current operations. A decrease in this indicator without a corresponding increase in Indicator 7 could indicate that capital maintenance expenditures are being reduced. This could have long-term implications if deteriorating infrastructure leads to higher future capital maintenance spending. This indicator can provide a very early warning of fiscal stress. Since neglecting capital expenditures does not have an immediate impact on services, governments experiencing financial difficulties may see these expenditures as a convenient place to cut the budget. Possible Practices: Local officials should review the existence and condition of capital assets and plan for routine maintenance and replacement. In general, fiscal managers should limit the use of debt to larger (more expensive) capital improvements and equipment purchases. 36 Chapter 11 - Local Government Management Guide
  • Funds Aggregated A Indicator 8 - Capital Outlay as % of Gross Expenditures Formula: 73 7 0. 0 .6 64 Capital Outlay 0.70 0. Gross Expenditures 0.60 50 49 0. 0. 0.50 38 0. 0.40 0.30 Percentage 0.20 0.10 0.00 1996 1997 1998 1999 2000 2001 Year Fiscal Year: 1996 1997 1998 1999 2000 2001 Capital Outlay $1,018,948 $1,763,175 $1410,962 $2,039,144 $1,640,002 $2,539,783 Gross Expenditures $265,495,407 $277,391,957 $289,703,390 $306,571,011 $327,000,234 $343,811,058 Capital Outlay as a % of Gross Expenditures 0.38% 0.64% 0.49% 0.67% 0.50% 0.73% Financial Condition Analysis 37
  • Indicator 9: Current Liabilities Purpose: To identify trends in outstanding short-term debt and payables. Measurement: The relationship of current liabilities to gross operating revenues. If this percentage increases over time, it signals potential liquidity problems. Formula: Current Liabilities Gross Revenues Negative Trend: Percentage increasing over time. Recommended Funds to Review: All major governmental operating and enterprise funds, combined as necessary. Analysis: This indicator compares the amount of a local government’s liabilities with its ability to pay off those liabilities based on future revenues. An increase in this indicator could point to a reduced ability to pay bills in a timely fashion. An increasing trend, coupled with a decrease in Indicator 6a (Cash and Investments as a Percentage of Current Liabilities), could indicate cash-flow problems for a local government. In analyzing this indicator, it is important to identify which liabilities have been increasing (since the indicator combines a number of balance sheet accounts). Possible Practices: Reducing the collection cycles for receivables (the time it takes to convert receivables into cash) could improve cash flow and provide monies to reduce outstanding liabilities. See also Possible Practices included with Indicator 6. Tighter controls over spending may also be needed to improve this indicator. 38 Chapter 11 - Local Government Management Guide
  • Notes: Funds Aggregated: Indicator 9 - Current Liabilities A 85 0 4 1 9. .6 Formula: .0 19 18 20% 3 .7 Current Liabilities 16 8 .2 Gross Revenues 15 2 .3 16% 13 12% 8% Percentage 4% 0% 1996 1997 1998 1999 2000 2001 Year Fiscal Year: 1996 1997 1998 1999 2000 2001 Current Liabilities $48,714,716 $56,888,758 $49,446,874 $42,750,088 $52,003,522 $66,798,352 Gross Revenues $270,036,404 $286,543,141 $295,627,130 $321,049,552 $340,313,186 $340,788,806 Current Liabilities as a % of Gross Revenues 18.04% 19.85% 16.73% 13.32% 15.28% 19.60% Financial Condition Analysis 39
  • Indicator 10: Intergovernmental Revenues Purpose: To identify trends in state and federal revenues as financing sources for a local government. Measurement: The relationship of intergovernmental revenues to gross revenues. Formula: Intergovernmental Revenues Gross Revenues Negative Trend: Percentage increasing over time. Recommended Funds to Review: All major governmental operating and enterprise funds, combined as necessary. Analysis: This indicator measures the extent to which a local government’s operations are supported by intergovernmental revenues from state and federal sources. It compares state and federal revenues to total fund revenues. There are budgetary risks associated with revenues received from other governments. Because a local government does not directly control many of these revenues, there is greater risk that the revenues may not be available to fund operations. This is particularly true of intergovernmental revenues such as grants or entitlements that require no action by the local government. Changes in state or federal policy or solvency could have a significant impact on local government revenue streams. (There is somewhat less risk associated with state and federal revenues that are dependent on local action. These revenues often represent expenditure reimbursements or matching funds.) In general, the higher the percentage of operations funded by intergovernmental revenues, the greater the revenue risk that a local government bears. Possible Practices: A local government may reduce the risks associated with intergovernmental revenues through sound budgeting practices. Developing local sources of revenue will lessen the relative effect of any reductions in state and federal revenues. Further, restricting the use of such revenues to finance either non-recurring or capital expenditures can mitigate the adverse impact of subsequent revenue cuts on the day-to-day operations of the local government. This practice would help ensure that expected services are maintained despite any interruptions in the intergovernmental revenue stream. 40 Chapter 11 - Local Government Management Guide
  • Funds Aggregated: A Indicator 10 - Intergovernmental Revenues Formula: 3 1 6 5 Intergovernmental Revenues 3 1 .6 .2 .2 .9 .6 .2 Gross Revenues 40% 34 34 34 34 34 35 30% 20% Percentage 10% 0% 1996 1997 1998 1999 2000 2001 Year Fiscal Year: 1996 1997 1998 1999 2000 2001 Intergovernmental Revenues $94,331,377 $99,185,968 $101,200,550 $111,109,321 $116,597,270 $120,140,070 Gross Revenues $270,036,404 $286,543,141 $295,627,130 $321,049,552 $340,313,186 $340,788,806 Intergovernmental Revenues as a % of Gross Revenues 34.93% 34.61% 34.23% 34.61% 34.26% 35.25% Financial Condition Analysis 41
  • Indicator 11: Economic Assistance Costs Purpose: To identify trends in economic assistance costs (for counties only). Measurement: The relationship of economic assistance costs to gross expenditures. Formula: Economic Assistance Costs Gross Expenditures Negative Trend: Percentage increasing over time. Recommended Funds to Review: This indicator applies to financial data reported in the county general fund. Analysis: This indicator measures the extent to which economic assistance expenditures impact a county’s general fund operations. Total expenditures for the local share of state and federal social service programs are compared to total general fund expenditures. Economic assistance costs represent the county’s share of state and federally mandated social programs. As such, other governments largely control the level of these costs. These expenditures as a percentage of the county’s general fund budget represent that portion of operations where local governments have limited budgetary discretion. Any budget modifications necessitated by fiscal problems must be made to other (non-mandated) services. Since state and federal funds are provided for these services, this factor should be analyzed in conjunction with Indicator 10. Possible Practices: Because of the relative magnitude of economic assistance costs, from a fiscal health standpoint it is important that the programs be run efficiently at the local level. In addition to implementing cost-effective procedures, local financial managers should ensure that accounting systems accurately capture all eligible program costs and that claims for related state and federal aid are submitted promptly. Such practices will help maximize cash flow in this area of operations. 42 Chapter 11 - Local Government Management Guide
  • Funds Aggregated: Indicator 11 - Economic Assistance Costs A 7 Formula: .1 78 54% 8 53 2. .6 5 Economic Assistance Costs 01 52 5 2. Gross Expenditures 53% 6 .2 51 52% 51% 9 .3 49 50% Percentage 49% 48% 47% 1996 1997 1998 1999 2000 2001 Year Economic Assistance as % of Gross Operating Expenditures Fiscal Year: 1996 1997 1998 1999 2000 2001 Economic Assistance Costs $131,120,719 $144,266,918 $152,619,011 $163,010,064 $172,579,799 $178,801,876 Gross Expenditures $265,495,407 $277,391,957 $289,703,390 $306,571,011 $327,000,234 $348,811,058 Economic Assistance Costs as a % of Gross Expenditures 49.39% 52.01% 52.68% 53.17% 52.78% 51.26% Financial Condition Analysis 43
  • Indicator 12: Public Safety Purpose: To identify trends in public safety costs (This indicator is currently available for cities and villages only). Measurement: The relationship of public safety costs to gross operating expenditures. Formula: Public Safety Cost Gross Expenditures Negative Trend: Percentage increasing over time. Recommended Funds to Review: This indicator applies to financial data reported in the city and village general funds. Analysis: This indicator measures the extent to which police, fire and other public safety expenditures impact a city or village general fund operations. Public safety expenditures are often one of the most costly service areas in a city or village general fund. Further, many of the costs associated with these highly visible programs are linked to long-term contractual agreements. These conditions can combine to create a significant budgeting challenge. Substantial general fund resources are required to fund highly visible and demanded public safety programs over a number of years. This reduces the budget flexibility that local governments need to react to downward trends in fiscal health. Possible Practices: Utilizing short-term employment contracts and exploring cooperative arrangements with other municipalities are tools that public managers could use to increase budget flexibility in the public safety service area. Short-term contracts with payment provisions linked to prevailing inflation rates would provide financial managers with two benefits. Generally, inflation would raise certain general fund revenues at the same rate as the contracted expenditures with no net budgetary increase. Subject to collective bargaining agreements, short-term contracts would also give managers more flexibility to adjust costs sooner in response to changes in financial conditions and/or the demand for public safety services. Partnering with other governments could help to spread the cost of certain services to more than one government. Authorized cooperative arrangements could also help each government obtain needed services that may have been unaffordable in the past. 44 Chapter 11 - Local Government Management Guide
  • Funds Aggregated: Indicator 12 - Public Safety A 1 Formula: .3 51 9 .1 51% 51 8 Public Safety Expenditures .9 2 Gross Expenditures 51% 50 .9 50 51% 3 .6 51% 50 51% 4 .3 50 50% Percentage 50% 50% 50% 1996 1997 1998 1999 2000 2001 Year Public Safety as % of Gross Expenditures Fiscal Year: 1996 1997 1998 1999 2000 2001 Public Safety Expenditures $45,905,981 $47,699,044 $48,811,926 $51,281,025 $52,861,539 $56,755,636 Gross Expenditures $91,184,474 $94,219,881 $95,133,030 $100,580,666 $103,267,009 $111,467,286 Public Safety Expenditures as a % of Gross Expenditures 50.34% 50.63% 51,31% 50.98% 51.19% 50.92% Financial Condition Analysis 45
  • Indicator 13: Tax Limit Exhausted Purpose: To identify tax limit trends used for counties, cities and villages. Measurement: The relationship of the tax levy to the tax limit. Formula: Tax Levy Tax Limit Negative Trend: Percentage increasing over time. Recommended Funds to Review: Not applicable. Analysis: This indicator measures the extent to which a county, city or village has exhausted its tax limit. The tax limit is the maximum amount of taxes that can be levied based on the state constitution and other applicable statutory authority. These laws limit taxes by imposing mandated ceilings linked to a five-year average of taxable full valuation of property. (Towns do not have such a limit.) The tax limit may apply to taxes raised for specific or general purposes. Certain debt service and capital expenditure appropriations may be added to the tax limit to increase the total taxing power. Percentages increasing over time could be an indication that spending is growing faster than the real property tax base. Such trends could be the result of increased spending, the loss of other revenues, or a declining tax base. A county, city or village that is at, or near, its tax limit has fewer financing options. This lack of options is particularly critical because most local governments rely on real property taxes as a major source of financing for operations. Possible Practices: There are a number of actions that local governments can take that will result in a greater tax margin, which means more taxing power available and more options. Assuming a constant or increasing full valuation of taxable real property, any action that reduces the tax levy will result in a greater tax margin. Decreasing spending and/or increasing other revenues could reduce the tax levy. Also, using the proceeds of debt not subject to statutory limits as a financing source will have a positive long-term effect on the tax margin. Actions that increase the average full valuation of taxable real property of the tax base, without an increase in the tax levy, will also serve to improve the tax margin. (Some counties may increase their tax limit through board action, County Law Section §233.) 46 Chapter 11 - Local Government Management Guide
  • Formula: Indicator 13 - Tax Limit Exhausted Percentage of Tax Levy Exhausted 20% 0 .3 8 4 15 .5 .4 6 14 14 .6 9 1 13 .5 .5 12 12 10% Percentage 0% 1996 1997 1998 1999 2000 2001 Year Fiscal Year: 1996 1997 1998 1999 2000 2001 Percentage of Tax Limit Exhausted 15.30% 13.66% 14.58% 14.44% 12.59% 12.51% Financial Condition Analysis 47
  • Indicator 14: Debt Limit Exhausted Purpose: To identify debt limit trends. Measurement: The relationship of outstanding non-exempt debt to the debt limit. Formula: Total Debt Subject to Limit Debt Limit Negative Trend: Percentage increasing over time. Recommended Funds to Review: Not Applicable. Analysis: This indicator measures the extent to which a local government has exhausted its debt limit. With certain exceptions, outstanding debt (long-term and short-term) is subject to the debt limit. The debt limit is the maximum amount of debt that can be issued based on the state constitution and other applicable statutory authority. These laws limit the issuance of debt by imposing ceilings linked to a five-year average of taxable full valuation of property. Certain debt, such as debt issued for water supply and distribution, is exempt from the debt limit. There are numerous other exclusions. An increasing percentage indicates an increased reliance on non-exempt debt. Such a trend is not necessarily a problem until the debt limit poses restrictions on prospective debt issues. This factor should be analyzed with Indicator 3, which shows debt service costs as a percentage of gross expenditures, and Indicator 7, which shows debt per capita figures. Possible Practices: A greater debt margin means more available borrowing power and more options. Debt strategies should be part of a local government’s long-term capital plan. Debt levels should be managed so that additional debt can be issued as needed to finance planned capital projects. Local governments can take a number of actions to increase their debt margin, such as redeeming existing debt and financing new capital projects through non-debt sources. Also, any actions that increase the full value assessment of the tax base will expand the debt margin. 48 Chapter 11 - Local Government Management Guide
  • Formula: Indicator 14 - Debt Limit Exhausted Total Debt Subject to Limit Debt Limit 20% 1 .2 0 14 .1 4 13 .5 12 8 .6 5 11 .7 10 10% Percentage 0% 1996 1997 1998 1999 2000 Year Fiscal Year: 1996 1997 1998 1999 2000 Percentage of Debt Limit Exhausted 14.21% 13.10% 12.54% 11.68% 10.75% Financial Condition Analysis 49
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  • APPENDIX C DATA REQUEST FORM OFFICE OF THE STATE COMPTROLLER Division of Municipal Affairs 110 State St. - 12th floor Albany, New York 12236 Telephone: (518) 473-5065 Fax: (518) 486-3146 Type of Local Government (please circle one): County City Town Village Name of Local Government: _______________________ County located in: _____________________ Please check or complete the following information you would like to receive: I. INDIVIDUAL LOCAL GOVERNMENT ANALYSIS ! Indicator 1 (Gross Revenues/Expenditures per Capita) ! Indicator 2 (Real Property Tax Receivables as a percentage of Real Property Tax Revenues) ! Indicator 3 (Personnel and Debt Service Costs as a percentage of Gross Expenditures) ! Indicator 4 (Operating Surplus/Deficit as a percentage of Gross Expenditures) ! Indicator 5 (Unreserved and Appropriated Fund Balance as a percentage of Gross Expenditures) ! Indicator 6 (Cash and Investments as a percentage of Current Liabilities and Monthly Expenditures) ! Indicator 7 (Long-Term Debt per Capita) ! Indicator 8 (Capital Outlay as a percentage of Gross Expenditures) ! Indicator 9 (Current Liabilities as a percentage of Gross Revenues) ! Indicator 10 (Intergovernmental Revenues as a percentage of Gross Revenues) ! Indicator 11 (Economic Assistance Costs as a percentage of Gross Expenditures Available for counties only. ! Indicator 12 (Public Safety Costs as a percentage of Gross Expenditures) Available for cities and villages only. ! Indicator 13 (Tax Limit Exhausted) Available for counties, cities and villages only. ! Indicator 14 (Debt Limit Exhausted) II. PEER GROUP COMPARISON - Compares a local government with up to six other local governments of the same type. Circle the requested indicators listed below and identify up to six other local governments of the same type for comparison. Indicator(s): 1 2 3 6 7 8 9 10 11 12 13 14 all INDICATE UP TO SIX OTHER LOCAL GOVERNMENTS OF THE SAME TYPE FOR COMPARISON. THIS SECTION MUST BE COMPLETED: 1. ____________________ 2. ____________________ 3. ____________________ 4. ____________________ 5. ____________________ 6. ____________________ III. FULL DETAIL ANNUAL REPORT ! Detailed balance sheet, operating statement and budgetary account code information from the Annual Financial Reports filed by a local government for the past six years. Name (please print): ______________________________________________________ Title: ___________________________________________________________________ Organization: ____________________________________________________________ Address: ________________________________________________________________ Telephone Number: (________)___________________ Date of Request: ___________________ Financial Condition Analysis 51
  • APPENDIX D Financial Indicator Codes This appendix is intended for use with the OSC Financial Indicators 1 through 14 (see Appendix B). The account codes included here are described in detail in the OSC Accounting and Reporting Manual. Indicator 1: Revenues and Expenditures Per Capita and Recurring Revenues Per Capita Gross Revenues – This figure is the total from the Annual Financial Report to OSC Gross Expenditures – This figure is the total from the Annual Financial Report to OSC One Time Revenues – Account codes 2655, 2660, 5700 – 5791 Recurring Revenues – Gross Revenues minus One-Time Revenues Population – 2000 Census (Account code 9ZPOP) Indicator 2: Real Property Tax Receivable Real Property Tax Receivables – Account codes 250 – 330 Real Property Tax Revenues – Account codes 1001, 1002, 1019 Indicator 3: Fixed Costs Salaries and Fringe Benefits – All account codes ending in .1, .8 and 9000 – 9189 Debt Service – Account codes 9700 – 9799 Total Fixed Costs – Salaries and Fringe Benefits plus Debt Service Gross Expenditures – This figure is the total from the Annual Financial Report to OSC Indicator 4: Operating Surplus/Deficit Gross Revenues – This figure is the total from the Annual Financial Report to OSC Gross Expenditures – This figure is the total from the Annual Financial Report to OSC One Time Revenues – Account codes 2655, 2660, 5700 – 5791 Indicator 5: Unreserved Fund Balance and Appropriated Fund Balance Unreserved Fund Balance – Account codes 910, 911 Appropriated Fund Balance – Account code 910 52 Chapter 11 - Local Government Management Guide
  • Indicator 6: Liquidity Cash and Investments – Account codes 200 – 223, 450 – 451 Current Liabilities – Account codes 600 – 626, 630 – 668 Gross Expenditures – This figure is the total from the Annual Financial Report to OSC Indicator 7: Long Term Debt Long Term Debt – Account codes W623, W626, W627, W628, W685, W689 All operating and E funds 623, 626, 627, 628, 685, 689 Population – 2000 Census (Account code 9ZPOP) Indicator 8: Capital Outlay Capital Outlay – All account codes ending in .2 plus 9950.9 Gross Expenditures – This figure is the total from the Annual Financial Report to OSC Indicator 9: Current Liabilities Current Liabilities – Account codes 600 – 626, 630 – 668 Gross Revenues – This figure is the total from the Annual Financial Report to OSC Indicator 10: Intergovernmental Revenues Intergovernmental Revenues – Account codes 3001 – 3004, 3006 – 4997 Gross Revenues – This figure is the total from the Annual Financial Report to OSC Indicator 11: Economic Assistance (Counties only) Economic Assistance Costs – Account codes 6000 – 6199 Gross Expenditures – This figure is the total from the Annual Financial Report to OSC Indicator 12: Public Safety Public Safety Costs – Account codes 3000 – 3999, 9015.8 Gross Expenditures – This figure is the total from the Annual Financial Report to OSC Indicator 13: Tax Limit Exhausted – Percent of limit exhausted Indicator 14: Debt Limit Exhausted – Percent of limit exhausted Financial Condition Analysis 53