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Financial Financial Monitoring Monitoring A Guide to Projecting and A Guide to Projecting and Protecting Your Communities Protecting Your Communities Financial Stability Financial Stability

Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

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Page 1: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Financial MonitoringFinancial Monitoring

A Guide to Projecting and Protecting A Guide to Projecting and Protecting Your Communities Financial StabilityYour Communities Financial Stability

Page 2: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Financial Condition Financial Condition MeasurementMeasurement

Cash SolvencyCash Solvency– Government’s ability to generate Government’s ability to generate

sufficient cash to pay its obligations over sufficient cash to pay its obligations over a 30-60 day period.a 30-60 day period.

Budgetary SolvencyBudgetary Solvency– Government’s ability to generate Government’s ability to generate

sufficient revenue over its normal sufficient revenue over its normal budgetary period to meet expenditures budgetary period to meet expenditures and not incur deficits.and not incur deficits.

Page 3: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Financial Condition Financial Condition MeasurementMeasurement

Long Term SolvencyLong Term Solvency– Government’s ability over the long term to pay Government’s ability over the long term to pay

all costs of doing business, including all costs of doing business, including expenditures that appear in each annual expenditures that appear in each annual budget.budget.

Service Level SolvencyService Level Solvency– Government’s ability to provide revenue over Government’s ability to provide revenue over

its normal budgetary period to meet its normal budgetary period to meet expenditures and not incur deficits.expenditures and not incur deficits.

Page 4: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

ComparisonsComparisons

Private SectorPrivate Sector– Profit MotiveProfit Motive

Public SectorPublic Sector– ObjectivesObjectives

Health, Safety & Welfare of CitizensHealth, Safety & Welfare of CitizensEfficiencyEfficiencyPolitical SatisfactionPolitical Satisfaction

Page 5: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Popular Methods of EstimatingPopular Methods of EstimatingRevenue & ExpendituresRevenue & Expenditures

Crystal Ball MethodCrystal Ball Method

1-800-Tell Me 1-800-Tell Me MethodMethod

Hoping to Find a Hoping to Find a Pot of Gold MethodPot of Gold Method

Palm Reading MethodPalm Reading Method

Page 6: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

MeasurementsMeasurements

Subject to reliability/age of Subject to reliability/age of information.information.

Accurate economic/demographic Accurate economic/demographic data difficult to collect.data difficult to collect.

No accepted theory to explain No accepted theory to explain linkage between economic base and linkage between economic base and governmental revenues.governmental revenues.

No specific standards.No specific standards.

Page 7: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

What Will Financial Trend What Will Financial Trend Monitoring Provide?Monitoring Provide?

Make sense of many factors that Make sense of many factors that affect financial condition.affect financial condition.

Provide flags to identifying problems.Provide flags to identifying problems. Provide clues to cause of problem.Provide clues to cause of problem. Provide time to respond/take action.Provide time to respond/take action. Develop quantifiable indicators for Develop quantifiable indicators for

your municipality.your municipality.

Page 8: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Uses of a Financial Trend Uses of a Financial Trend Monitoring SystemMonitoring System

Gain better understanding of your Gain better understanding of your municipality’s financial condition.municipality’s financial condition.

Identify emerging problems before Identify emerging problems before they reach a crisis point.they reach a crisis point.

Identify/highlight existing problems Identify/highlight existing problems local officials may not be aware of.local officials may not be aware of.

Page 9: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Uses of a Financial Trend Uses of a Financial Trend Monitoring SystemMonitoring System

Present straightforward picture of Present straightforward picture of municipality’s financial strengths/ municipality’s financial strengths/ weaknesses to elected official, credit weaknesses to elected official, credit rating firms, citizens. rating firms, citizens.

Introduce multi-year considerations Introduce multi-year considerations into the budgeting process.into the budgeting process.

Provide starting point for priorities.Provide starting point for priorities.

Page 10: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Municipalities Financial Municipalities Financial Recovery ActRecovery Act

Policy ObjectivesPolicy Objectives– Provide for Health, Safety & WelfareProvide for Health, Safety & Welfare– Meet creditor/debt obligations when dueMeet creditor/debt obligations when due– Provide sound financial management practicesProvide sound financial management practices

Survey of Financial ConditionSurvey of Financial Condition– 11 criteria11 criteria

Early Warning SystemEarly Warning System– 15 criteria15 criteria

Early Intervention EffortsEarly Intervention Efforts

Page 11: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Overview of Financial IndicatorsOverview of Financial Indicators

Financial Trend Monitoring SystemFinancial Trend Monitoring SystemIntergovernmental Cooperation Program (ICP)Intergovernmental Cooperation Program (ICP)Reviewed over 100 factors – 26 chosenReviewed over 100 factors – 26 chosen

• How to use the SystemHow to use the System1.1. First step - Commitment by local officials to First step - Commitment by local officials to

examine the financial and administrative examine the financial and administrative performance of the municipality and performance of the municipality and resolve to work on improving it where resolve to work on improving it where possible.possible.

2.2. Assign staff - In-house - InternsAssign staff - In-house - Interns

Page 12: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

3.3. Determine factors to use/data required. Determine factors to use/data required. Sources include annual audit report, budget Sources include annual audit report, budget report, census data, State Data Center or report, census data, State Data Center or County Planning Commission, payroll County Planning Commission, payroll records, actuarial report.records, actuarial report.

4.4. Factor sheetFactor sheet Description of the factorDescription of the factorHow to calculate itHow to calculate itTrend analysisTrend analysisActionsActions

5.5. Review factor - Complete Calculation Review factor - Complete Calculation Analyze trendAnalyze trendPlot on a graphPlot on a graph

Page 13: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

6.6. QuestionsQuestions• Determine WHY it is happening?Determine WHY it is happening?• Is it important in operation?Is it important in operation?• What can be done about it?What can be done about it?

7.7. Rate each factor trend Rate each factor trend Favorable – GreenFavorable – GreenStable – YellowStable – YellowUnfavorable - Red Unfavorable - Red

8.8. Review unfavorable ratings Review unfavorable ratings

9.9. Develop Action PlanDevelop Action Plan

Page 14: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

1010. Assign Responsibility. Assign Responsibility

11.11. Monitor Action AgendaMonitor Action Agenda

12.12. Involve elected officials, staff and Involve elected officials, staff and citizens.citizens.

13.13. Maintain system over time. Maintain system over time.

14. 14. Coordinate with budget process.Coordinate with budget process.

Page 15: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Comparison with constant dollarsComparison with constant dollars

1.1. Accounts for the effects of inflation. This may Accounts for the effects of inflation. This may be desirable especially if high inflation. be desirable especially if high inflation. Decide whether you feel this is important or Decide whether you feel this is important or more confusing to those using the system.more confusing to those using the system.

2.2. Adjustments made with the use of Consumer Adjustments made with the use of Consumer Price Index (CPI)Price Index (CPI)

Page 16: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Factor 1 – Revenue Per CapitaFactor 1 – Revenue Per CapitaShows whether municipality’s revenues are Shows whether municipality’s revenues are

affected by affected by changes in population and whether they changes in population and whether they are keeping are keeping pace with growth in the communitypace with growth in the community

If revenues per capita are decreasing – may If revenues per capita are decreasing – may not not be able to maintain service levels unless new be able to maintain service levels unless new

sources of revenue are found.sources of revenue are found.

Should be looked at in conjunction with Should be looked at in conjunction with expenditures expenditures per capita. May also calculate on basis of # per capita. May also calculate on basis of # of of households.households.

Total Operating RevenuesTotal Operating Revenues

Population-HouseholdsPopulation-Households

Financial Monitoring System Financial Monitoring System FactorsFactors

Page 17: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Data Sources:Data Sources:

Total Operating Revenue:Total Operating Revenue: Annual Audit and Financial Annual Audit and Financial Report including revenues of the General Fund, State Report including revenues of the General Fund, State Liquid Fuels Fund plus all other funds with operating Liquid Fuels Fund plus all other funds with operating revenues such as special revenue or enterprise funds. revenues such as special revenue or enterprise funds.

Population:Population: Most recently available population estimate. Most recently available population estimate. Use same source for each year.Use same source for each year.

Households:Households: Most recently available data per utility and Most recently available data per utility and solid waste collection billing records.solid waste collection billing records.

Warning Sign – Decreasing operating revenue per Warning Sign – Decreasing operating revenue per capitacapita

Page 18: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

220

222

224

226

228

230

232

234

236

1998 1999 2000 2001 2002

Rev

enu

e P

er C

apit

a (i

n D

olla

rs)

Year

= Favorable Trend

= Stable Trend

= Unfavorable Trend

19981998 19991999 20002000 20012001 20022002

580,275580,275 596,121596,121 589,865589,865 592,240592,240 585,367585,367

2,5622,562 2,5622,562 2,5622,562 2,6392,639 2,6392,639

$226$226 $230$230 $230$230 $224$224 $222$222

Page 19: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Trends and AnalysisTrends and Analysis

Unfavorable Trend (Color Code = Red)Unfavorable Trend (Color Code = Red)– If trend line is descending, it may be difficult to maintain If trend line is descending, it may be difficult to maintain

services unless new revenues are found or unless expenditures services unless new revenues are found or unless expenditures per capita are declining.per capita are declining.

Stable Trend (Color Code = Yellow)Stable Trend (Color Code = Yellow)– No immediate problem unless the expenditures per capita trend No immediate problem unless the expenditures per capita trend

is climbing.is climbing.

Favorable Trend (Color Code = Green)Favorable Trend (Color Code = Green)– If the trend line is ascending, no problem is apparent unless the If the trend line is ascending, no problem is apparent unless the

expenditure trend is rising faster.expenditure trend is rising faster.

Action ItemsAction ItemsIf revenue per capita (or per household) is decreasing, you may If revenue per capita (or per household) is decreasing, you may want to consider the following:want to consider the following:

– Determine why the decrease has occurred. Evaluate major Determine why the decrease has occurred. Evaluate major sources of revenue.sources of revenue.

What particular revenue items are decreasing relative to What particular revenue items are decreasing relative to population or number of households? population or number of households?

Page 20: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Is change linked to a specific short-term circumstance or Is change linked to a specific short-term circumstance or has the local economy undergone a fundamental has the local economy undergone a fundamental change?change?

Has a component of the revenue base changed?Has a component of the revenue base changed?

Has an unusual portion of the high-wage earning Has an unusual portion of the high-wage earning population recently left the labor force?population recently left the labor force?

Evaluating each of the municipality's principal revenue Evaluating each of the municipality's principal revenue sources may indicate where the changes are occurring.sources may indicate where the changes are occurring.

– A decrease in revenue per capita may result from reaching A decrease in revenue per capita may result from reaching the legal maximum mill rate. A countywide reassessment or the legal maximum mill rate. A countywide reassessment or change to the existing predetermined assessment ratio will change to the existing predetermined assessment ratio will result in each mill being worth substantially more in result in each mill being worth substantially more in revenues. revenues.

Page 21: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Act to maximize currently available local revenues by undertaking Act to maximize currently available local revenues by undertaking programs such as the following:programs such as the following:

1. Aggressively pursue collection of delinquent taxes and fees.1. Aggressively pursue collection of delinquent taxes and fees.

2. Accelerate due dates for property tax collections by issuing the 2. Accelerate due dates for property tax collections by issuing the duplicate to the tax collector earlier in the year.duplicate to the tax collector earlier in the year.

3. Cooperate with neighboring units to form a multi-jurisdictional 3. Cooperate with neighboring units to form a multi-jurisdictional tax collection system to minimize the cost and maximize tax collection system to minimize the cost and maximize effectiveness of earned income tax collection.effectiveness of earned income tax collection.

4. Examine service fee structure to ensure existing user charges 4. Examine service fee structure to ensure existing user charges are supporting the entire cost of providing the service.are supporting the entire cost of providing the service.

5. Develop/implement a cash management and investment plan 5. Develop/implement a cash management and investment plan to earn maximum interest on the municipality's fund balances.to earn maximum interest on the municipality's fund balances.

6. Sell surplus property and equipment.6. Sell surplus property and equipment.

7. Set fines and penalties at the maximum permissible rate.7. Set fines and penalties at the maximum permissible rate.

8. Review tax-exempt parcels to ensure they continue to qualify 8. Review tax-exempt parcels to ensure they continue to qualify for exemption.for exemption.

Page 22: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

If your revenue per capita or per household is increasing, you If your revenue per capita or per household is increasing, you may want to consider the following:may want to consider the following:

– Will increases in revenue levels continue to be available to Will increases in revenue levels continue to be available to support future services? An examination of each of the support future services? An examination of each of the primary sources of local revenue may be instructive. primary sources of local revenue may be instructive.

For instance, if the increase is related to new development or For instance, if the increase is related to new development or redevelopment, is there continued growth potential, or will the redevelopment, is there continued growth potential, or will the municipality soon become fully developed and its growth municipality soon become fully developed and its growth effectively stopped?effectively stopped?

If the increase in revenues will stop at some point, how will the If the increase in revenues will stop at some point, how will the community pay for increased costs in the future?community pay for increased costs in the future?

– An increase in revenue per capita might indicate a decrease in An increase in revenue per capita might indicate a decrease in population without a corresponding decrease in households. If population without a corresponding decrease in households. If so, future difficulties could arise where services are paid for on so, future difficulties could arise where services are paid for on a per household basis.a per household basis.

Page 23: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

– Is the increase in revenues per capita associated with Is the increase in revenues per capita associated with increases in tax and fee rates?increases in tax and fee rates?

Has the local tax burden created higher revenue per capita?Has the local tax burden created higher revenue per capita? Has an increase in revenue per capita caused the Has an increase in revenue per capita caused the

community to become a less attractive or affordable place to community to become a less attractive or affordable place to live or do business?live or do business?

Decreases or increases in inflation can alter the Decreases or increases in inflation can alter the interpretation of this factor. Recalculate the factor using interpretation of this factor. Recalculate the factor using constant dollars, with figures adjusted for inflation.constant dollars, with figures adjusted for inflation.

You may want to establish a policy to annually consider You may want to establish a policy to annually consider the community's revenue structure and its continuing the community's revenue structure and its continuing capacity to support local services with the long-term capacity to support local services with the long-term objective of creating a diverse and consistent revenue objective of creating a diverse and consistent revenue base.base.

Page 24: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Factor 4: Expenditures Per CapitaFactor 4: Expenditures Per Capita

Displays the cost of operating the municipal government on a per Displays the cost of operating the municipal government on a per person basis and reveals the effect of adding or deleting services person basis and reveals the effect of adding or deleting services or changing service levels.or changing service levels.

Increases in expenditures per capita are particularly troublesome Increases in expenditures per capita are particularly troublesome if revenue per capita is stable. Also, if expenditures per capita are if revenue per capita is stable. Also, if expenditures per capita are increasing and no services have been added, then inflation or increasing and no services have been added, then inflation or decreasing productivity may be a problem.decreasing productivity may be a problem.

If the trend for this factor is unfavorable, an examination of each If the trend for this factor is unfavorable, an examination of each major expenditure area—personnel services, contractual services, major expenditure area—personnel services, contractual services, debt service, and materials and supplies—should be made to debt service, and materials and supplies—should be made to determine the reason for the increase.determine the reason for the increase.

Substituting number of households for the population in this Substituting number of households for the population in this calculation may be useful in communities where the total calculation may be useful in communities where the total population is constant or decreasingpopulation is constant or decreasing

Total Operating ExpendituresTotal Operating Expenditures

Population-HouseholdsPopulation-Households

Page 25: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Data Sources:Data Sources:Total Operating Expenditures:Total Operating Expenditures: Annual Audit and Financial Annual Audit and Financial Report inclusive of all general government and enterprise funds.Report inclusive of all general government and enterprise funds.

Population:Population: Most recently available population estimate. Use Most recently available population estimate. Use same source for each year.same source for each year.

Households:Households: Most recently available data per utility or solid Most recently available data per utility or solid waste collection billing records.waste collection billing records.

Warning Signal:Warning Signal: Increasing Operating Expenditures Per CapitaIncreasing Operating Expenditures Per Capita

Annual Calculations

Data 1998 1999 2000 2001 2002

1. Operating Expenditures $725,500 $740,850 $740,625 $739,375 $731,250

2. Population 2,850 2,850 2,850 2,625 2,625

3. Expenditures Per Capita

(Line1 Divided by Line 2)$255 $260 $260 $282 $279

Page 26: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Exp

end

itu

res

Per

Cap

ita

Year

250

255

260

265

270

275

280

285

290

1998 1999 2000 2001 2002

= Stable Trend

= Unfavorable Trend

= Favorable Trend

Trend and AnalysisTrend and Analysis

Unfavorable Trend (Color Code = Red)Unfavorable Trend (Color Code = Red)– Most municipalities see an upward trend due to inflation. Examine Most municipalities see an upward trend due to inflation. Examine

the Revenue Per Capita (Factor 1) and consider options to reduce the Revenue Per Capita (Factor 1) and consider options to reduce overall expenditures.overall expenditures.

Stable Trend (Color Code = Yellow)Stable Trend (Color Code = Yellow)– This trend indicates minor changes and that no immediate This trend indicates minor changes and that no immediate

problem is apparent.problem is apparent.

Page 27: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Favorable Trend (Color Code = Green)Favorable Trend (Color Code = Green) Check your numbers and calculations! If accurate you are Check your numbers and calculations! If accurate you are

holding down costs. Compare against Revenue Per Capita to holding down costs. Compare against Revenue Per Capita to make sure revenues are not decreasing at a faster rate.make sure revenues are not decreasing at a faster rate.

Action Items:Action Items:If expenditures per capita or per household are increasing, If expenditures per capita or per household are increasing, you may want to consider the following:you may want to consider the following:

Determine where increased costs are—new services, wage Determine where increased costs are—new services, wage increases, employee benefits, debt or contractual services.increases, employee benefits, debt or contractual services.

Compare expenditure trend to revenue per capita trend. If Compare expenditure trend to revenue per capita trend. If revenues and expenditures are experiencing the same rate of revenues and expenditures are experiencing the same rate of increase, there may not be a problem. increase, there may not be a problem.

If revenues per capita or per household are stable, increasing If revenues per capita or per household are stable, increasing at a slower rate than expenditures or even decreasing, then at a slower rate than expenditures or even decreasing, then the municipality may need to explore alternative ways of the municipality may need to explore alternative ways of providing basic services.providing basic services.

Page 28: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Factor 6: Cash PositionFactor 6: Cash Position

Any business operation must have sufficient cash on hand to Any business operation must have sufficient cash on hand to pay bills due in the immediate future. Often municipalities pay bills due in the immediate future. Often municipalities accounting for their funds on a cash basis will show a accounting for their funds on a cash basis will show a misleading cash surplus without recognizing expenditures misleading cash surplus without recognizing expenditures obligated, but not yet been billed and/or paid. obligated, but not yet been billed and/or paid.

The cash position factor is designed to give municipal The cash position factor is designed to give municipal officials an idea of exactly how they stand at a given point in officials an idea of exactly how they stand at a given point in time by comparing available cash (bank accounts and short-time by comparing available cash (bank accounts and short-term investments) with current liabilities. This factor term investments) with current liabilities. This factor becomes a healthy sign of the ability of the community to becomes a healthy sign of the ability of the community to meet its current obligationsmeet its current obligations..

Cash and Short-Term InvestmentsCash and Short-Term Investments

Current LiabilitiesCurrent Liabilities

Page 29: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Factor 7: Debt ServiceFactor 7: Debt Service

PProportion of general operating revenue devoted to paying roportion of general operating revenue devoted to paying off outstanding debt—loans, bonds, vendor leases and lease off outstanding debt—loans, bonds, vendor leases and lease rental payments to authorities—each year. Excessive rental payments to authorities—each year. Excessive municipal debt can lead to problems, particularly when the municipal debt can lead to problems, particularly when the tax base is declining or stable.tax base is declining or stable.

This factor compares debt service to general operating This factor compares debt service to general operating revenues. Generally, debt analysts believe that a ratio of up revenues. Generally, debt analysts believe that a ratio of up to 10% debt to operating revenues is acceptable. Debt to 10% debt to operating revenues is acceptable. Debt service in excess of 15% - 20% of operating revenues is service in excess of 15% - 20% of operating revenues is considered a potential problem.considered a potential problem.

Debt Service (Not Including Self-Supporting Debt)Debt Service (Not Including Self-Supporting Debt) Total Operating RevenueTotal Operating Revenue

Page 30: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Factor 10: Operating PositionFactor 10: Operating Position

Operating position is essentially defined as the local Operating position is essentially defined as the local government's ability to (1) balance its budget on an annual government's ability to (1) balance its budget on an annual basis, (2) maintain reserves to cover emergency situations—basis, (2) maintain reserves to cover emergency situations—natural disasters, unexpected and generally expensive natural disasters, unexpected and generally expensive infrastructure repairs, and (3) have sufficient cash available for infrastructure repairs, and (3) have sufficient cash available for timely payment of bills, especially in times when cash flow is timely payment of bills, especially in times when cash flow is not even. This factor indicates whether a municipality is not even. This factor indicates whether a municipality is operating on a break-even basis or is spending down fund operating on a break-even basis or is spending down fund balances from previous years to fund current operations. balances from previous years to fund current operations.

A number more than 1.0 means the community operated A number more than 1.0 means the community operated during the year at a deficit with its current expenses exceeding during the year at a deficit with its current expenses exceeding its revenues. A result of 1.0 means you broke even or expenses its revenues. A result of 1.0 means you broke even or expenses were equal to revenues received. Where the value is less than were equal to revenues received. Where the value is less than 1.0, the municipality's current revenues exceeded its 1.0, the municipality's current revenues exceeded its expenditures resulting in an operating surplus.expenditures resulting in an operating surplus.

Page 31: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Data Source:Data Source:Operating Expenditures and Operating Revenue:Operating Expenditures and Operating Revenue: See See Factors 1 Factors 1

and 4.and 4.

Assessed Valuation:Assessed Valuation: Annual Audit and Financial Report. Annual Audit and Financial Report.

Warning Signal:Warning Signal: Amount of General Fund Operating Deficit as a Amount of General Fund Operating Deficit as a Percentage of Total Operating Revenues IncreasesPercentage of Total Operating Revenues Increases

Annual Calculations

Data 1998 1999 2000 2001 2002

1. Operating Expenditures $565,675 $580,500 $580,750 $569,135 $596,793

2. Operating Revenues $563,275 $580,250 $565,500 $580,750 $615,250

3. Operating Position

(Line1 Divided by Line 2)1.00 1.00 1.27 0.98 0.97

General Fund Operating ExpendituresGeneral Fund Operating Expenditures

General Operating RevenueGeneral Operating Revenue

Page 32: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Trend and AnalysisTrend and Analysis

Unfavorable Trend (Color Code = Red)Unfavorable Trend (Color Code = Red)– If the municipality is operating on previous year's fund balances for If the municipality is operating on previous year's fund balances for

two or more of the past five years, immediate corrective actions are two or more of the past five years, immediate corrective actions are warranted.warranted.

Stable Trend (Color Code = Yellow)Stable Trend (Color Code = Yellow) The municipality is operating in a break-even situation. There should The municipality is operating in a break-even situation. There should

be some effort to keep fund balances at a healthy level.be some effort to keep fund balances at a healthy level.

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1998 1999 2000 2001 2002

Rat

io

Year

= Stable Trend

= Favorable Trend

= Unfavorable Trend

Page 33: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Favorable Trend (Color Code = Green)Favorable Trend (Color Code = Green) Fund balances are being built up for emergencies.Fund balances are being built up for emergencies.

Action Items:Action Items:

If the municipality's operating position is unfavorable, you may want If the municipality's operating position is unfavorable, you may want to consider the following:to consider the following:

– If the municipality is not generating sufficient revenues to pay If the municipality is not generating sufficient revenues to pay for all current expenses (i.e., personnel, materials and supplies, for all current expenses (i.e., personnel, materials and supplies, debt service, etc.), it is borrowing from other funds, using loans debt service, etc.), it is borrowing from other funds, using loans to pay for current expenses or living off prior years' surpluses. to pay for current expenses or living off prior years' surpluses. It’s common to do this to postpone tax increases; however, such It’s common to do this to postpone tax increases; however, such practices practices willwill catch up with you. catch up with you.

– A municipality developing patterns of negative (less than 1.0) A municipality developing patterns of negative (less than 1.0) operating positions will be considered as financially weak. operating positions will be considered as financially weak. Patterns include: two successive years of an operating deficit, a Patterns include: two successive years of an operating deficit, a current year deficit greater than that of the prior year, operating current year deficit greater than that of the prior year, operating deficits in two of the past five years, and a deficit greater than 5 deficits in two of the past five years, and a deficit greater than 5 - 10% of the annual operating budget. Operating at a deficit - 10% of the annual operating budget. Operating at a deficit could cause borrowing at higher interest rates when seeking to could cause borrowing at higher interest rates when seeking to finance major capital projects.finance major capital projects.

Page 34: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

– Financial analysts advocate maintaining an unreserved fund Financial analysts advocate maintaining an unreserved fund balance equivalent to at least 5% of the general operating balance equivalent to at least 5% of the general operating budget. Surpluses in excess of 5% - 10% should be used for budget. Surpluses in excess of 5% - 10% should be used for one-time expenses or to fund capital improvements. If the one-time expenses or to fund capital improvements. If the surplus is used to artificially balance next year’s budget, the surplus is used to artificially balance next year’s budget, the municipality will be forced to raise taxes and other revenue municipality will be forced to raise taxes and other revenue sources, or cut basic services when the surpluses run out. sources, or cut basic services when the surpluses run out. Moderate fund balances, though sometimes difficult to Moderate fund balances, though sometimes difficult to achieve, are good insurance. achieve, are good insurance.

– Municipalities not portrayed in the first action item need to Municipalities not portrayed in the first action item need to determine why a negative position has occurred.determine why a negative position has occurred.

Were actual expenditures in excess of those budgeted?Were actual expenditures in excess of those budgeted? Were revenues received short of those estimated?Were revenues received short of those estimated? Were the differences due to poor budgetary practices or Were the differences due to poor budgetary practices or

unforeseen, emergency circumstances?unforeseen, emergency circumstances? If current financial management practices are the cause of the If current financial management practices are the cause of the

problem, revise the procedures for budget preparation or problem, revise the procedures for budget preparation or monitoring of the budget throughout the fiscal year.monitoring of the budget throughout the fiscal year.

If the situation arose as a result of an emergency, consider If the situation arose as a result of an emergency, consider developing a reserve to finance emergency expenses or projects to developing a reserve to finance emergency expenses or projects to alleviate their potential future impact. alleviate their potential future impact.

Page 35: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

– Avoid borrowing for a period greater than one year to fund Avoid borrowing for a period greater than one year to fund operating expenses and rolling over short-term debt to fund operating expenses and rolling over short-term debt to fund operating expenses. Both mechanisms cause municipal operating expenses. Both mechanisms cause municipal officials to put off facing the reality of either cutting services or officials to put off facing the reality of either cutting services or raising sufficient revenues to pay for current services. raising sufficient revenues to pay for current services.

Page 36: Financial Monitoring A Guide to Projecting and Protecting Your Communities Financial Stability

Financial Trend MonitoringFinancial Trend Monitoring

A Guide to Projecting and Protecting A Guide to Projecting and Protecting Your Communities Financial StabilityYour Communities Financial Stability