Chapter 10 – Analysis of Governmental Financial Performance
10-1
CHAPTER 10: ANALYSIS OF GOVERNMENTAL FINANCIAL
PERFORMANCE
OUTLINE
Number
Topic
Type/Task
Status
(re: 16/e)
Questions:
10-1
Causes of municipal financial crises
Explain
Same
10-2
Economic condition
Identify, define
Same
10-3
Financial condition
Identify, explain
Same
10-4
Financial Trend Monitoring System and citizens
Identify, explain
Same
10-5
Economic condition and ratio analysis
Explain, relate
New
10-6
Organizational factors in the FTMS
Explain
10-7
10-7
Pension plan funding
Explain
10-8
10-8
Financial position
Explain, relate
New
10-9
Electronic Municipal Market Access
Define, explain
New
10-10
Credit rating agencies
Identify, explain
New
Cases:
10-11
Electronic Municipal Market Access
Research
New
10-12
Financial analysis
Analyze
New
10-13
Financial analysis
Analyze
New
10-14
Financial trends
Analyze
10-3
Exercises/Problems:
10-15
Examine the CAFR
Analyze
10-1 revised
10-16
Various
Multiple Choice
10-2 revised
10-17
Financial condition
Matching
10-3 revised
10-18
Financial Trends
Evaluate
10-4
10-19
Financial Trend Monitoring System
Analyze
10-5 revised
10-20
City of Arborland financial ratios
Calculate
10-8
Chapter 10 – Analysis of Governmental Financial Performance
10-2
CHAPTER 10: EVALUATION OF GOVERNMENTAL FINANCIAL
PERFORMANCE
Answers to Questions
10-1. The primary cause of municipal financial crises is the failure of management to revise
management practices appropriately in response to adverse environmental factors (see
Illustration 10-1). Although adverse environmental factors, such as a declining economy,
a natural disaster, or politicians who are unwilling to make politically unpopular
Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry
Level of Difficulty: Medium
10-2. The GASB identifies economic condition as a composite measure that comprises three
components: financial position, fiscal capacity, and service capacity. Financial position is
the status of the items on the government’s balance sheets and statements of financial
position. It relates to questions such as fiWhat is the value of the government’s assets or
Chapter 10 – Analysis of Governmental Financial Performance
10-3
Ch. 10, Answers (Cont’d)
10-3. The four types of solvency the ICMA describes are: cash solvency, budgetary solvency,
long-run solvency, and service-level solvency. If a government does not have cash
solvency it will not have enough cash over a 30- or 60-day period to pay its current
liabilities. A government that does not have budget solvency cannot generate enough
revenue over its normal budgetary period to meet its expenditures. Long-run solvency is
important because the government must be able to pay all the costs of doing business—
those that are due in the current year and beyond. If service-level solvency does not
exist, then the government is unable to provide public services at the level and quality
that its citizens demand and expect.
General Problem Information: Financial condition
Learning Objective: 10-2
Topic: Government Financial Reporting Concepts
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry
Level of Difficulty: Medium
10-4. As part of community needs and resources in Illustration 10-4 of the chapter several
citizen characteristics are identified that can impact the government’s financial condition.
Some of the characteristics include age, income, employment, and home
ownership/property values. These characteristics can impact both the demand for
Topic: Internal Financial Trend Monitoring
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry
Level of Difficulty: Medium
10-4
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Ch. 10, Answers (Cont’d)
10-5. Ratios constructed from governmental fund financial statement information would reflect
the modified accrual basis of accounting. Modified accrual focuses on the current sources
and uses of funds. Since the focus is on cash and near-cash resources that will be
available to expend in the current period, ratios constructed using the governmental fund
10-6. Organizational factors, such as management practices and legislative policies, play a
crucial role in determining fiscal policy. If sound management policies are in place, then
the financial problems that might arise from economic downturns or natural disasters can
10-7. Yes, citizens should consider a decrease in the ratio of actuarial value of pension plan
assets to the actuarial accrued liability from year to year to be a warning sign. Generally
accepted accounting principles require display and disclosure of pension information, but
do not prescribe the funding levels, so a decrease in the pension plan funding measure
10-5
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Ch. 10, Answers, 10-7(Cont’d)
General Problem Information: Pension plan funding
Learning Objective: 10-4
Topic: Internal Financial Trend Monitoring
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
10-8. The GASB defines financial position as the status of the government’s assets, deferred
outflows, liabilities, deferred inflows, and net position, which are all displayed on the
balance sheet and/or the statement of net position. Thus, all of the ratios displayed under
Financial Position on Illustration 10-4 would be related to the definition. A review of the
10-9. EMMA is the Electronic Municipal Market Access, which is operated by the Municipal
Securities Rulemaking Board. EMMA is a free online service that is available to
investors or other users who are interested in learning more about the municipal securities
10-6
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Ch. 10, Answers, 10-9(Cont’d)
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry
Level of Difficulty: Medium
10-10. The three municipal bond rating agencies each have established criteria to conduct a bond
rating analysis. Although there is some difference in the criteria, they all give
considerable weight to the economy. Other factors that are common in the rating process
are management, debt, and some aspect of finance (this could include liquidity, budget,
and other more specific items). The factor over which management has the least control
is the economy. Although management cannot control the economy its ability to plan
and adapt to changes in the economy is important. Changes in the economy can impact
both the government’s ability to generate revenues and its expenditure levels. As the
recent recession has shown, revenues derived from underlying transactions (e.g., sales
and income taxes) can be severely depressed. Additionally, as unemployment increases
in a recession there is an increased demand for services driving up expenditures. This
combines with decreased revenues, putting a strain on the government’s ability to provide
the resources needed to meet the increased expenditure demand of its citizens. Thus,
government planning to ensure the existence of adequate firainy day” funds becomes
important.
General Problem Information: Credit rating agencies
Learning Objective: 10-4
Topic: Use of Benchmarks to Aid Interpretation
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry
Level of Difficulty: Medium
10-11.
a. 1. According to the information provided on EMMA, a credit rating is the grade a rating
agency assigns to indicate the risk of default on a debt issue. Default risk is an
2. An official statement, prepared on behalf of the state or local government, is issued
in conjunction with what is referred to as an IPO (initial public offering). An IPO is a
Chapter 10 – Analysis of Governmental Financial Performance
10-7
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Ch. 10, Solutions, 10-11 (Cont’d)
specific requirements regarding the financial information that must appear.
Normally, financial and/or operating data regarding the state or local government
issuing the securities, or any other parties who are principally responsible for
repayment of the bonds, is provided. The information provided ranges from a full set
of GAAP financial statements to financial information prepared on a non-GAAP
basis. Although the official statement does not require specific financial information,
state and local governments with outstanding debt issues do file financial reports as
part of the continuing disclosure requirements.
b. The answers for questions 1-3 will vary widely, depending on the municipality selected
by the student. Information for the three questions is easily available once a debt issue is
selected. The student should keep in mind that not all state and local governments opt to
pay for a credit rating for their debt issue. Students should be able to tell if the initial
issue of a debt maturity was sold at premium or discount by looking at the initial price. If
the value provided is over 1.00 the issue sold at premium; whereas, if the value is below
1.00 the issue sold at discount. Students may not recognize the term CUSIP. CUSIP is a
unique identifier that is assigned to each maturity of a bond issue. Students can find this
definition by going to the EMMA glossary.
10-12.
a. There are several indicators in the limited financial information provided that could
contribute to a downgrading of the debt rating from the time period 2010 to 2012. Using
some of the ratios from Illustrations 10-3 and 10-4 we see the following:
Year Liquidity Revenues over Debt Limit Debt Service
Expenditures Used
2012 7.9% 96.1% 92.7% 15.1%
10-8
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Ch. 10, Solutions, 10-12 (Cont’d)
100% of the governmental expenditures, a review of the years earlier in the 10-year trend
indicate this was not always the case. A review of the General Fund balance indicates
that although total governmental revenues can almost cover the governmental
7.3%. Detroit has also increased the percentage of its expenditures devoted to debt
service, going from 13.4% in 2010 to 15.1% in 2012. Debt is a major factor considered
by credit rating agencies in determining bond ratings.
to 2012. At the time the textbook went to press Detroit had not issued financial
statements for 2013. However, the media and the performance indicators did provide
4th quarter performance indicators for the 2012-2013 fiscal year indicated that General
Fund revenues and cash balance were up; unfortunately, so were expenditures. It would
appear that Detroit has a considerable way to go before it has sound economic condition.
10-9
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Ch. 10, Solutions (Cont’d)
10-13.
a. In a comparison with cities of similar size Harrisburg does not perform well. For ratio 8,
which is the debt to assessed value ratio, Harrisburg’s performance is in the lowest
performing quartile 1. The range for the lowest performing quartile is 1% or more. With
a range from 5.98% in 2008 to 21.85% in 2009, Harrisburg has ratios well above the
Harrisburg does even worse on ratio 9, debt service. For comparable cities the first
quartile is 20.7% or more. As shown in the case, Harrisburg’s debt service for the THA
was never less than 142.9%. The result clearly indicates that the THA is not generating
sufficient revenues to service the debt.
b. It would appear from the information provided that Harrisburg has a way to go before it
agencies. The General Fund appears to be operating at a deficit every year since 2009 as
reflected by the increasingly negative unassigned fund balance. This indicates the city is
still having a problem meeting its operating expenditures with the revenues it is
generating. The poor operating performance is also found at the governmental activities
level, where we see that the unrestricted net position has an increasingly negative position
Topic: Use of Benchmarks to Aid Interpretation
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: BB Critical Thinking
Level of Difficulty: Hard