1 / 142

EVALUATING FINANCIAL PERFORMANCE

EVALUATING FINANCIAL PERFORMANCE. Objective : To enable participants to evaluate and report on financial performance for governmental entities. 1. ANALYZING GOVERNMENT FINANCIAL PERFORMANCE. Why do we care? Governments can become bankrupt.

amora
Télécharger la présentation

EVALUATING FINANCIAL PERFORMANCE

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. EVALUATING FINANCIAL PERFORMANCE Objective: To enable participants to evaluate and report on financial performance for governmental entities 1 APIPA 2009

  2. ANALYZING GOVERNMENT FINANCIAL PERFORMANCE • Why do we care? • Governments can become bankrupt. • An increasing number of governments are in fiscal crisis. • Governments provide essential services to its citizens and need to be fiscally sound 2 APIPA 2009

  3. 1/27/09 San Francisco faces budget crisis 3/09 San Francisco unemployment at 9% 5/15/09 Newsom to layoff 1,000 city employees SAN FRANCISCO, CALIFORNIA 3 APIPA 2009

  4. 5/1/09 Adams releases basic services budget (cuts of $9 mm) 5/21/09 Superintendent proposes further Portland Public School cuts PORTLAND, OREGON 4 APIPA 2009

  5. 1/14/09 On top of school closures, layoffs proposed ($25 mm budget gap) 4/17/09 Midyear budget adjustment SEATTLE, WASHINGTON 5 APIPA 2009

  6. WHO CARES? • GASB Study in 1985 • Three primary users of government financial reports • Citizen groups • Legislative and oversight officials • Investors and creditors 6 APIPA 2009

  7. CITIZEN GROUPS • Use financial reports to • Evaluate efficiency and effectiveness • Compare results of the current year with previous years • Assess financial operations and financial condition • Determine compliance with budget • Advocate certain programs or actions 7 APIPA 2009

  8. INVESTORS AND CREDITORS • Use financial reports to • Ascertain ability of government to repay its debt 8 APIPA 2009

  9. LEGISLATIVE AND OVERSIGHT OFFICIALS • Use financial reports to • Evaluate executive branch funding and spending proposals • Determine compliance with the budget and other finance-related requirements • Monitor fund activity and financial position and analyze fund balances 9 APIPA 2009

  10. COMPREHENSIVE ANALYSIS • STEP ONE: Consider the environment in which the government operates • STEP TWO: Identify and consider key factors that affect the environment • STEP THREE: Assess the government’s current status • STEP FOUR: Forecast the future (next five years) 10 APIPA 2009

  11. STEP ONE: OPERATING ENVIRONMENT • Consider the current state of and trends in economic, political, and social environments 11 APIPA 2009

  12. ECONOMIC ENVIRONMENT • Population • Age of population • Wealth and income distribution • Educational and skill level • Other relevant demographic factors • Immigration • Density 12 APIPA 2009

  13. ECONOMIC ENVIRONMENT • Major industries (and stability) • Unemployment rates • Value of property per capita • Sales tax base • Elasticity of revenues 13 APIPA 2009

  14. POLITICAL ENVIRONMENT • Formal structure of government • Degree of political competition • Competence and integrity of government officials • Overall citizen satisfaction with and expectations of government • “Liberal” or “conservative” citizen view as to role of government • Relations with other governments (e.g., those of surrounding and overlapping entities) 14 APIPA 2009

  15. SOCIAL ENVIRONMENT • Crime rates • Percentage of citizens requiring public assistance • Percentage of residents owning their own homes • Health!!! 15 APIPA 2009

  16. STEP TWO: KEY FACTORS • Identify and consider key factors that affect the environment 16 APIPA 2009

  17. POPULATION • Growing? Shrinking? Aging? • How? e.g. immigration • Effect on geographical boundaries? 17 APIPA 2009

  18. POPULATION • Impact on infrastructure • Highways and streets • Utilities • Impact on operating revenues • Impact on operating expenses 18 APIPA 2009

  19. NATURE AND SCOPE • Nature and scope of government services to be performed • Nature and scope of enterprise activities carried out (e.g., future of electric utility) • Pressure to privatize • Mandated services 19 APIPA 2009

  20. POLITICS AND ORGANIZATION • Political climate (e.g., pro- or anti-growth, pro- or anti-business) • Form and organization of government (e.g., possibility of single-member election districts) 20 APIPA 2009

  21. POLITICAL ATTITUDES AND INTERGOVERNMENTAL RELATIONSHIPS • Changing views toward the role of government • Relations with legislature • Extent of state and federal assistance • Additional costs imposed by overlapping governments (e.g., school districts) 21 APIPA 2009

  22. TECHNOLOGY AND SOCIAL SYSTEM • Technological changes • Increased use of computers • May reduce operating costs • Requires large capital investment • Increased efforts to conserve? • Social changes • Changes in family structure resulting in need for more government facilities to care for the elderly 22 APIPA 2009

  23. COMMERCE AND INDUSTRY • Major employers (including stability and likelihood of relocating) • Impact on revenues (e.g., property taxes) and expenditures (e.g., infrastructure improvements) 23 APIPA 2009

  24. OTHER • Wealth and income of population • Other economic changes (e.g., those affecting the electrical power and health care industries) 24 APIPA 2009

  25. STEP THREE: CURRENT STATUS • Assess the government’s current financial condition 25 APIPA 2009

  26. CURRENT FINANCIAL CONDITION • Overall quality of disclosure • Auditor’s opinion • GFOA certificate • Letter of transmittal 26 APIPA 2009

  27. KEY ACCOUNTING POLICIES • Reporting entity • Number, type, and character (purpose) of funds • Revenue and expenditure recognition • Accounting changes 27 APIPA 2009

  28. BUDGET- AND ACCOUNTING-RELATED PRACTICES • “One-shot” additions to revenues or reductions in expenditures • Unusual budget-balancing transactions (e.g., interfund transfers) • Changes in budget-related practices (e.g., delaying payments or speeding up tax collections) • Use of “off-balance-sheet” debt (e.g., leases, long-term contracts) and of revenue debt • Use of long-term debt to finance operating expenditures • Increased use of short-term debt to cover temporary cash shortages 28 APIPA 2009

  29. CASH BASIS VERSUS ACCRUAL BASIS • Budgets on cash basis • Financial statements on accrual basis (full or modified) • Easier to manipulate budget than financial statements 29 APIPA 2009

  30. FINANCIAL STATEMENT “TRICKS” • Account for transaction in internal service or proprietary fund instead of in general fund • Finance capital acquisitions by incurring “off-balance-sheet” obligations rather than with general obligation debt • Operating leases, service contracts • Select “liberal” accounting practices that recognize revenues sooner rather than later and delay recognition of expenditures • Lengthen period of “availability” after YE • Reduce estimate of uncollectible 30 APIPA 2009

  31. FINANCIAL STATEMENT “TRICKS” • Make “liberal” actuarial assumptions and estimates in determining required contribution to pension plans • Engage in discretionary transactions which result in FS gains but no substantive economic benefit • Sales of capital assets • Refunding of debt 31 APIPA 2009

  32. FINANCIAL RATIOS – CAUTIONARY NOTES • No reliable “rules of thumb” as to an acceptable or nonacceptable ratio • Governments carry out different functions making it difficult to compare • Accounting for same operation in different ways • Governments may account for functions in different funds, resulting in different accounting 32 APIPA 2009

  33. FINANCIAL RATIOS – CAUTIONARY NOTES • Preference for higher or lower ratio not clear • Depends on issue and perspective of user • For example: General fund revenues / general fund expenditures • High: Good because government able to generate sufficient revenues to cover its expenditures • High: Bad because government overtaxing and may be less fiscally sound in long-run 33 APIPA 2009

  34. FINANCIAL RATIOS – CAUTIONARY NOTES • Stage of maturity impacts level of ratios • Young governmental entity with high-growth may require rapid expansion of infrastructure and high long-term debt levels • Mature governmental entity in stable situation may have established infrastructure and low debt • Ratios are no better than underlying financial statement numbers 34 APIPA 2009

  35. DETERMINING SCOPE OF A RATIO • Which financial statements do we use? • Government-wide • General fund only • Combination of funds • It depends! • Why measure is being calculated • How it will be interpreted 35 APIPA 2009

  36. ASSESSING FISCAL EFFORT • Fiscal effort = extent to which government is taking advantage of its fiscal capacity • Compare revenues generated from own sources to taxpayer wealth or income • Ratios increase as government uses more of its fiscal capacity • Lower ratio better than higher – why? 36 APIPA 2009

  37. FISCAL EFFORT RATIOS • Per capita revenue from own sources (excluding grants from other government) Median family income • Revenue from own sources Total appraised value of property 37 APIPA 2009

  38. ADEQUACY OF REVENUES • Need to be sufficient to cover expenditures • Trend important, especially compared to growth in expenditures • Revenue adequacy ratio Total revenues Total expenditures 38 APIPA 2009

  39. REVENUE STABILITY • Revenue base • Diverse sources; Linked to population • Trends in adequacy and stability of revenues • Total revenues / total expenditures • Intergovernmental revenues / total operating revenues • Property tax revenues / total operating revenues • Restricted revenues / total operating revenues • One-time revenues / total operating revenues • Uncollected property taxes / total property taxes levied 39 APIPA 2009

  40. REVENUE STABILITY RATIOS • Intergovernmental revenues Total operating revenues • Maximize use of “other peoples’ money” • BUT can be taken away so risky • Low % preferred 40 APIPA 2009

  41. REVENUE STABILITY RATIOS • Restricted revenues Total operating revenues • Decrease flexibility • Can lead to misallocation of resources • Low % preferred 41 APIPA 2009

  42. REVENUE STABILITY RATIOS • Property tax revenues Total operating revenues • Considered to be stable source • High % preferred 42 APIPA 2009

  43. REVENUE STABILITY RATIOS • Uncollected property tax revenues Total property taxes levied • Warning sign of underlying weakness in economy • Could predict future drop in other revenues • Low % preferred 43 APIPA 2009

  44. EXPENDITURE TRENDS • Changes in spending can result from • Price increases • Productivity decreases • Changes in number, quality, or mix of services (e.g., resulting from new housing developments or increases in unemployment) • Bad weather or disaster • Expenditure ratios help to identify changes in spending which may, in turn, require further investigation and action 44 APIPA 2009

  45. EXPENDITURE TREND RATIOS • Number of employees Population • Payroll expenditures Total expenditures • Expenditures for specific functions Total expenditures 45 APIPA 2009

  46. ABILITY TO MEET SHORT-TERM COMMITMENTS • Adequacy of fund balance • Unreserved fund balance Operating revenues • Adequacy of working capital • Cash, short-term investments, and receivables Current liabilities 46 APIPA 2009

  47. ABILITY TO MEET LONG-TERM COMMITMENTS • Debt burden – Debt service costs Total general fund and debt service expenditures • Debt per capita = Total debt outstanding for governmental activities Total population 47 APIPA 2009

  48. FINANCIAL PERFORMANCE CONCEPTS • Financial condition • Ability to maintain existing or provide increasing service levels • Interperiod equity: whether current-year revenues are sufficient to pay for the services provided that year and whether future taxpayers will be required to assume burdens for services previously provided • Excessive shifting of burden to future taxpayers a threat to ability to maintain or provide increasing service levels 48 APIPA 2009

  49. INTERPERIOD EQUITY • Net revenues / Total expenses • Where net revenues = Gross revenues +/- internal transfers/special/extraordinary items • Measure of whether the government has lived within its means for the year • Utilize government-wide Statement of Activities 49 APIPA 2009

  50. STEP FOUR: THE FUTURE • Forecast the future (next five years), taking expected changes and likely responses into account 50 APIPA 2009

More Related